Scrapping Air Passenger Duty could bring a lasting boost to the UK economy, generating a net tax gain for the Treasury and creating almost 60,000 new jobs, a study for the UK and Ireland’s four major airlines shows.
The study describes APD as a “substantial business cost”, equating to about £500 million 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 says: “APD is at least as damaging to the UK economy, and probably more so, than corporation tax or fuel duty.”
The report by PricewaterhouseCoopers for British Airways, Virgin Atlantic, Ryanair and easyJet uses 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% 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 £500 million in each of the first two years and averaging £250 million a year over the period to 2020.
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 continued to rise. APD has increased by up to 260% for short-haul flights and up to 360% for long-haul since January 2007.
Welcoming the report, Wille Walsh, chief executive of British Airways’ parent company, IAG; easyJet chief executive Carolyn McCall, Ryanair chief executive Michael O’Leary and Virgin Atlantic’s new chief executive Craig Kreeger jointly said: “The PwC report highlights the critical role that aviation plays as an engine of economic growth for both international commerce and tourism.
“It confirms that abolishing APD would provide the UK economy with a much needed boost creating 0.46% GDP in the first year and at least £16 billion in the first three years and would also result in almost 60,000 new jobs in the UK.
“It proves that APD is one of the three most destructive taxes; alongside Corporation Tax and Fuel Duty.
“The Chancellor has taken action on those two taxes in the Autumn Statement and we would encourage him to use the forthcoming Budget to remove APD to stimulate economic growth and create jobs.
“Should APD be abolished the aviation industry would be able to move quickly to add new flights in and out of the UK, or invest in new products and services, creating new opportunities for businesses and much needed jobs across the UK.”