A study commissioned by the UK’s four major airlines on the economic impact of Air Passenger Duty shows that its abolition could bring a lasting boost to the UK economy, generating a net tax gain for the Treasury and creating almost 60,000 new jobs.
The study by PwC, The economic impact of Air Passenger Duty, used a model to simulate how changes in one area of the economy (such as tax policy) affects all the rest. This “dynamic” approach to modelling tax impacts is used by the IMF, World Bank and some national governments, and has been advocated by Chancellor George Osborne.
Applied for the first time to APD, the modelling finds that:
- Abolishing APD could boost UK GDP by 0.46 per cent in the first year, with continuing benefits to 2020.
- The GDP boost to the UK economy would amount to at least £16 billion in the first three years and result in almost 60,000 extra jobs in the UK over the longer term.
- Abolishing APD would pay for itself by increasing revenues from other sources such as income tax and VAT. This net benefit, even after allowing for the loss of APD revenue, would be almost £500m in the first year.
The modelling suggests this boost to GDP would come from three main sources:
- Extra investment by airlines to expand their networks, and investment by other aviation businesses to support this growth;
- A net increase in inbound tourism, which constitutes an export for the UK economy;
- Over the medium term, higher business productivity resulting from increased business travel, which improves international business connections and creates employment.
Per cent increase in GDP from abolition of APD – Source: PwC
Using cautious assumptions, PwC’s analysis shows that receipts from other taxes would rise as a result of APD’s abolition, primarily because of business growth, leading to a net revenue gain for the Government of about £500m in each of the first two years and averaging £250m annually over the period to 2020.
Fiscal Impact of APD abolition, £billions - Source: PwC
The study describes APD as a “substantial business cost”, equating to about £500m a year for UK businesses overall. It adds: “Abolishing APD has the potential to reduce the cost of flying, making it cheaper for businesses to maintain relationships with overseas customers. In this sense APD could be regarded as a tax on exports.”
The report ranks major UK taxes by how much additional GDP results from a £1 cut in tax revenue – a good guide to how much individual taxes can distort production decisions leading to inefficiencies in business decision making.
How much extra GDP results from a £1 tax cut (median value over 30 years) - Source: PwC
|VAT||Income Tax||NICs||Corporation Tax||APD||Fuel Duty|
Comparing the impact of a variety of taxes, the analysis goes on: “APD is at least as damaging to the UK economy, and probably more so, than corporation tax or fuel duty.” It ranks major UK taxes by how much additional GDP results from a £1 cut in tax revenue – a good guide to how much individual taxes distort business decisions and consumer behaviour.
In recent Budgets, action has been taken to stem rises in fuel Duty and reduce corporation tax, while APD has risen continually. Since January 2007, APD has increased by up to 260 per cent for short-haul flights and up to 360 per cent for long-haul.
The study further indicates that APD is regressive. For families in the bottom income decile, the APD cost for a family of four travelling to a European destination is some 28 per cent of weekly household expenditure. About 45 per cent of APD-liable leisure trips in 2010 were made by passengers with below-average household income.
NOTES TO EDITORS:
See attached report:
1. The study, The economic impact of Air Passenger Duty, was commissioned by British Airways, easyJet, Ryanair and Virgin Atlantic, and is the first to be based on a net dynamic analysis of APD’s impact, using a model that simulates how changes in one area of the economy (such as tax policy) affects all the rest.
2. Assumptions in the study about the size of consumer and business responses to changes in ticket costs reflect the average of a range of academic, governmental and industry estimates. The study’s assumed productivity gains from increased business air travel, which suggests that every 10 per cent increase in business air travel translates to a 0.2 per cent increase in productivity, is at the lower end of the range suggested by other studies.
3. The study examined comparative aviation taxes worldwide, benchmarking APD against the various air passenger taxes levied in the UK’s main comparator countries (and against a wider range of countries). In the view of the airlines which commissioned the report, other European countries are not exposed to such high aviation taxes, airlines operating primarily from these countries pay a much smaller amount of tax as a proportion of their turnover than UK airlines do. This means UK airlines are at a clear disadvantage in making new routes relative to their European and international competitors.
4. Since January 2007, APD has increased by up to 260 per cent for short haul flights (from £5 to £13) and up to 360per cent for long haul flights (from £20 to £65 to destinations in the US, £81 to the Caribbean and £92 to Australia). These are economy-class rates. APD is double in premium cabins. The tax is charged on all passengers starting their journey in the UK. The Treasury expects to raise £2.9bn from APD this year, and plans future rate increases, taking revenue to £3.9bn by 2016/17.
5. The impact of APD is doubly felt by customers on return domestic UK flights, as they pay APD on each leg of the journey. The combined tax of £26 is frequently a substantial proportion of the total fare.
6. George Osborne voiced his support for dynamic modelling to MPs on March 27, 2012: “I think the Treasury can, and I have asked for this to happen, start undertaking some real research into dynamic scoring and what the broader-economy effects are of changes to taxation.”
7. In 2009 the Netherlands followed Belgium by abandoning its equivalent of APD because, although the tax raised about £270m in one year, the loss to the wider economy from the tax was calculated to be more than £950m.
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