Air Passenger Duty: Regional Airports

Alan Brown Excerpts

Tuesday 20th October 2015 Westminster Hall

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

Thank you, Sir David, for letting me speak even though I had not put in a submission to do so. I thank the hon. Member for Solihull (Julian Knight) for bringing this issue forward for debate.

We have had some excellent contributions. I will be relatively brief. First, I want to pick up on the contribution by the right hon. Member for Meriden (Mrs Spelman), who made some excellent points, particularly about APD’s original purpose of changing behaviour and, arguably, getting people to use other forms of transport. Under all Governments of all hues, when a tax is applied, it becomes a revenue stream. It then goes into the big, black hole of revenue and is not used for the purpose it was intended for. There has not therefore been the intended investment in other forms of transport, which would allow greater connectivity.

As we know, APD has had unintended consequences. We have heard from hon. Members about different regional airports that have suffered badly because of APD—none more so than my regional airport, Prestwick, which my hon. Friend the Member for Central Ayrshire (Dr Whitford) discussed. We have heard it argued that taking away APD can create jobs and additional revenue. At Prestwick, APD has cost jobs and cut tourism, so it has clearly cost the Government money. It stands to reason that taking away APD can reverse that harsh reality.

Another issue, which has not been touched on quite as much, is that passengers using regional airports often have to go via the main London airports. They then suffer a double whammy in terms of APD. A family of four from the States—they could be tourists or expats who want to visit family—would have to pay four times £71 in APD for each flight, or about £560 for the round trip. If they took a further flight to a regional airport, they would then have to pay four times £13 each way, so the APD would be more than £600. It is no surprise that that is off-putting and has caused a decline in passenger numbers.

That is why there should be a reduction in APD. I welcome the fact that responsibility for the issue will be devolved to Scotland, and I welcome the Scottish Government’s plans to reduce the duty. If it is reduced, it will give our regional airports a chance to create their own routes, which will then generate competition with, say, the London airports. If we can get away from having to do the double hat on APD—with people flying from one airport to another and then onwards, as I have just outlined—that would give us a better chance of opening up new routes and new connectivity.

For me, that is the nub of the issue on APD: it is off-putting in the first place, and it is doubly off-putting if people have to make another flight from a regional airport. I therefore welcome the Scottish Government’s plans. We have had excellent contributions today, and I hope the Government will take note of them.

--- Later in debate ---

[Rebecca Long Bailey]

I shall come on to my party’s position in due course.

I was saying that the possibility of powers to determine APD being devolved to Wales could lead to an impact on airports in the north of England and the south-west. York Aviation has predicted that, with Cardiff airport no longer subject to air passenger duty, Bristol airport would lose 440,000 passengers, up to 33 routes, 1,500 jobs and more than £800 million from local GDP. That concern has been cemented by a warning from Ryanair’s commercial chief that the company could double its profits per passenger by flying from Cardiff instead, should APD rates be set to zero there. It is therefore clear that the devolution of powers to set air passenger duty will have a profound effect on England’s regional airports, so I am glad that the Conservatives heeded the advice of my colleagues the then shadow Chancellor Ed Balls and my hon. Friends the Members for Streatham (Mr Umunna) and for Barnsley East (Michael Dugher) when they wrote to the Government in September last year, calling on the Treasury to start work on a mechanism to prevent English regional airports from being disadvantaged by devolution to Scotland or anywhere else.

I welcome the Government’s publication of a discussion paper outlining three possible options for tackling the issues affecting our regional airports. I have a few specific concerns about the consultation, on which I am sure the Minister will be able to put me at ease, but first I ask the Minister for an update on the progress of the consultation as a whole. It is my understanding that the closing date for submissions was 8 September, but as yet there has been no published evidence and no conclusions from the Government. Will the Minister say when the Government’s response will be published? More specifically, one solution discussed in the paper is to devolve the power to set rates of air passenger duty to local or combined authorities, either partially or fully. That seems to have implications for our compliance with EU state aid rules. The Labour party supports reform of the EU state aid rules, which would be a much better subject for renegotiation that those chosen by the Prime Minister. None the less, the current rules will apply.

One problem is that the Government cannot vary national tax rates in a way that is more favourable to specific regions. For that reason funding for the relevant local authority would be reduced by the full value of air passenger duty receipts in that area. HMRC research indicates that full devolution to a local authority containing one medium-sized airport would require a staggering reduction in funding of £45 million a year. The point of devolving the powers is to allow regional airports to avoid undercutting by rivals. Can the Minister confirm that under that option a local authority that took that course would receive no extra funding from central Government and would have to deal with a cut of £45 million? He will understand our concern that even the devolution package the Chancellor proposes will not contain much in the way of revenue-raising powers, nor anything like the scope that the devolved Administrations have to make savings elsewhere. Also, does he share my concern that if local authorities are able to set their own levels of APD, it will start a race to the bottom, which, taken to its logical conclusion, would result in an overall loss to the Treasury of £3.2 billion?

[Alan Brown]

The hon. Lady talks about a race to the bottom and says that different regional airports cutting APD could result in a net decrease overall. Does that not run contrary to the argument I have just been making, which is that cutting APD increases passenger numbers, jobs and revenue? Does she therefore agree that her argument could be flawed?

[Rebecca Long Bailey]

I thank the hon. Gentleman for making that important point. Hopefully, when the Minister responds about the progress of the report, he will be able to shed some light on those issues specifically.

The third option outlined in the discussion paper is to provide aid to regional airports that will be particularly affected by the devolution of APD, but I am particularly concerned that that would do little to neutralise the effects at the airports that will feel the greatest impact. Airports such as Manchester and Newcastle would be too large to be eligible for such aid under the proposal, so the measure would be ineffective in tackling the problem where doing so will have the biggest impact. Furthermore, providing direct aid has an obvious fiscal implication for the Exchequer, so it would be helpful to clarify whether that would be provided by the Treasury or would again involve corresponding cuts to other local authority funding.

Finally, it would be helpful if the Minister touched on the environmental implications of air passenger duty generally. I have had a number of queries regarding that, particularly from my own constituents. Aviation is, of course, covered by the EU emissions trading scheme, and we anticipate that the fifth carbon budget will address the sector later this year, but it would be helpful if he were to outline how the proposals under consideration will interact with our obligation to decarbonise, especially if we are moving towards little or no APD, and how a devolved settlement will work alongside nationally set targets.

In conclusion, there is a degree of consensus that this matter must be addressed urgently, and we welcome both the Government’s consultation and today’s debate. There are a number of points on which we would welcome further clarification, and I look forward to hearing the Minister’s response.

--- Later in debate ---

[Mr Gauke]

I refer the hon. Gentleman to the remarks that I made a few moments ago. In accordance with the St David’s day package, we are considering the case and options for devolving air passenger duty to Wales. That consideration is ongoing. Once a conclusion has been reached, I am sure that he will be looking very closely at our response.

If I may, I will respond to some points that have been made in this afternoon’s debate. The hon. Member for Blackley and Broughton (Graham Stringer) raised the issue of whether APD is a good tax or whether we should just scrap it. It is worth bearing in mind that it raises £3.2 billion each year, which is an important part of the Government’s overall revenues. We consider that APD is a fair and efficient tax that ensures that the aviation sector contributes to the public finances. The amount of tax paid by people who can afford business class travel or luxury jets is much more than that paid by a passenger going to the same destination in economy class.

In recent years, we have reduced long-haul rates of APD and frozen short-haul rates for five years, and we are exempting children. APD is the main way in which the aviation sector is taxed. International treaty agreement means that there is no tax on international aviation fuel and no VAT on international flights. Unlike many countries, the UK does not charge VAT on domestic flights. It is also worth pointing out that the aviation sector is performing strongly. Passenger numbers grew by 4% in 2014 compared with 2013.

My hon. Friend the Member for Crawley (Henry Smith) referred in an intervention to a PwC report arguing that abolishing APD would boost GDP, create jobs and pay for itself. We do not agree with the assumptions behind the 2013 and 2015 PwC reports on APD. Our view remains that abolition would have a limited effect on GDP and cause a net loss of tax receipts. As I said, APD makes a contribution towards the public finances. Abolishing it would put pressure on the Government to increase less efficient and more regressive taxes.

[Alan Brown]

The Minister makes the point that APD is one way of taxing the aviation industry and he thinks that it is a fair tax, but will he acknowledge that the UK charges a much higher rate? The UK’s short-haul rate in economy is more than double the EU average; in terms of the medium-haul rate, the UK charges €90, whereas the EU average is €24. The UK is aggressively taxing the aviation industry, and that is what the whole thrust of the debate is about. The Government may want to tax the aviation industry, but we are arguing that our industry is heavily over-taxed compared with those in other countries.

[Mr Gauke]

Our rates are higher than those in many other countries; I am not disputing that. I am arguing that we are not convinced that abolition of APD would pay for itself. Presumably the Scottish Government are also not convinced, because they have not brought forward proposals to abolish APD. It may be an aspiration for the long term—when finances allow—but that does suggest that there would be a loss of revenue.

The hon. Member for Central Ayrshire referred to the experience of Prestwick airport and the effect on tourism—a perfectly legitimate point to raise. As I said, we accept that APD rates are high on an international comparison. However, we think that APD is a very small component of a tourist’s overall spending on a trip to the UK. Some analysis done by Treasury officials over the summer suggests that depending on how long a long-haul passenger stays in the UK, APD probably makes up less than 2% of total spending on travel, hotels and subsistence, so although I accept the point, we have to put it into the context of the wider costs that may apply.