Published on : Monday, February 4, 2013
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 PricewaterhouseCoopers (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.
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.
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.”
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.
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