Air Passenger Duty and Developing Economies

Baroness Benjamin Excerpts

Wednesday 18th May 2011 Lords Chamber

Asked By

[Baroness Benjamin]

To ask Her Majesty’s Government what assessment they have made of the impact of air passenger duty banding on the Caribbean and other developing economies.

[Lord Taylor of Holbeach]

My Lords, it may be for the convenience of the House if I remind noble Lords that, for the dinner-hour debate, speeches are limited to four minutes. It is a time-limited debate and I hope noble Lords will respect that so that everybody can have a say. When the Clock says that four minutes are up, you are into the fifth minute.

[Baroness Benjamin]

My Lords, since I requested this debate some six months ago the Government have announced a consultation on air passenger duty, which is most welcome. I will address some of the key points of the consultation in my speech. I am aware that the question of APD and its impact on the Caribbean has been raised in this House in the past by the noble Baroness, Lady Howells, and the noble Lord, Lord Palmer. Nevertheless, I want to put this debate in context by talking about the present impact of APD on the Caribbean and its community here in the UK, the economic importance of tourism to that region and the environmental concerns of the region.

In 2010, following meetings with the Treasury and other Ministers, the Caribbean Tourism Organisation produced a concise review of the relationship between aviation taxation and the arrival of Caribbean visitors, with a specific focus on the value of tourism to the Caribbean; the projected impact of increases in the cost of flights as a result of taxation; and evidence about the impact of APD on the Caribbean community in the UK. The CTO report showed that Caribbean Governments recognise that it is not easy to separate out figures for declining tourism arrivals in relation to APD, given the global financial climate and other economic factors. However, it is possible to demonstrate in other ways the negative impact that APD is having on the economies of the region.

The report also demonstrated that the UK Treasury had created a banding system that discriminated against the Caribbean and its diaspora here in the UK. It also noted that the APD banding system favoured the USA, a major competitor of the Caribbean, and that it was inconsistent as it divided Russia into two zones but regarded all of the US as one. The banding system also takes no account of the impact that taxes have on Caribbean nations as they change from agriculture to largely tourism-based economies. The report made it clear that the large increases to APD last year would be particularly damaging as hotels and airlines were reaching a point at which they could not continue to absorb the costs through discounting. The result of this would be that, once jobs were lost and hotels closed, it would not be easy to get them back. Tourism is important to the Caribbean. Globally, the tourist industry is the 13th largest. It is the largest in its relative contribution to national economies, and 10th largest in its contribution to long-term national growth. The Caribbean is by far the most tourism-dependent region in the world.

Last year the Prime Minister, David Cameron, confirmed that tourism was the third-largest contributor to the UK’s economy and should be integrated into all aspects of government policy. He said that it was fundamental to the rebuilding of Britain’s economy, and that it was the best and fastest way to generate jobs. However, ironically, APD is a tax on Caribbean development, as well as on other developing countries around the world, particularly in Africa and the British Overseas Territories.

It is only in recent years that the Caribbean has become so dependent on tourism, as agriculture—in the form of bananas and sugar—previously underwrote many Caribbean economies because of their historical link with the UK and Europe. However, when Europe cut those preferential arrangements the Caribbean turned to tourism to replace lost income, with the encouragement of the UK and Europe. Caribbean Governments now raise income through tourism taxation from hotels, their support services, transport, tourist shops, food suppliers, entertainment and restaurants. It is clear that any negative impact on tourism in the Caribbean will have far-reaching consequences. If jobs are lost and alternative employment is not available, we all know that this will have a cost for Governments in supplying welfare, as well as from the potential increase in crime.

The UK, as a hub, plays a vital role in growing tourism in developing nations. London acts as a transit point for visitors from China, India, central Europe and Russia. Gatwick Airport is the start of the main route to the Caribbean and annually provides 5,600 flights to the region. This supports 23,000 jobs, so APD will have an impact here too. This link is also important to the Caribbean for business and investment because, without sufficient airlift, investors will not put their money into Caribbean projects. Travel agents who specialise in Caribbean travel are reporting a decrease in bookings, and APD has been cited as a reason for this.

The UK is home to around 800,000 members of the Caribbean diaspora, and they view APD with a huge sense of injustice. Many of these citizens were encouraged to come to the UK in the 1950s and 1960s and have spent their lives working in public service. Now in retirement, the money they have saved to pay for visits, often for funerals, weddings or to see sick relatives, suddenly does not go as far, as many of them have been low-income earners. Some are also concerned that their families and friends who work in the tourism industry back home may lose their jobs, and at this time of recession they are less able to send money to help them. It seems that the impact on this section of our society has not been given any consideration. There was no consultation about the introduction of the four-band system, no impact assessment and no sense of partnership. I understand that the Department for Transport has provided the Treasury with its assessment of the impact of APD, so I would be interested to hear from the Minister what its advice is.

It was positive news when the Chancellor announced a consultation on APD in the Budget and proposed two options for reform of it—a two-band and a three-band system. A two-band system was proposed in a report issued last year. The report said that if all short-haul economy flights saw an APD increase of just a few pounds, the rest of the world could be grouped together into what is currently band B, at the current rate of £60 in economy. This would seem a simple solution as it not only addresses the unfairness of the current banding system but, if it allowed APD for long-haul destinations to be fixed at the current band B rate, would address the concerns of developing countries about competition and the damaging impact of the tax, even though the long-haul band would remain high and still have an effect on developing nations’ economies. Some feel that the three-band system put forward by the Treasury consultation retains the current distance banding structure and does nothing to address the concerns of the Caribbean about discrimination vis-à-vis the USA—the very issue the Chancellor referred to in his Budget Statement.

I turn to the environmental issues. Some believe that there was an environmental reason behind the introduction of the four-band system. Others believe that it was a means of raising taxes. But surely if we are concerned about the environment, we should consider the fact that 70 per cent of flights from the UK are to short-haul destinations, which, interestingly, are the only flights that can realistically be substituted with other means of transport, unlike those to the Caribbean. From 2012, carbon emissions from aviation will be covered by the EU Emissions Trading Scheme, which is a market-based approach. A recent report produced by Standard & Poor’s suggests that passengers could face a rise in fares of up to €40 per ticket once it is introduced. The Government have confirmed that this would be on top of APD, resulting in charges for flights departing from the UK to long-haul destinations exceeding £100, taking into account the current APD rates. That would deliver another blow to the Caribbean tourism industry. Changes in sea levels are of real environmental concern to Caribbean Governments, who have fully supported global climate change initiatives. Yet now they feel that they are likely to have to pay the price for the UK’s concern about climate change through an unfair tourism tax.

I shall sum up. Tourism is a highly competitive industry and the consultation, which includes a review of the issue of competition, is welcome. It is hoped that the Treasury will not keep the anti-competitive system in place. If our Government recognise the value of tourism to the UK, surely they should consider the impact of our domestic tax measures on the Caribbean and other developing economies. I believe that APD was not intended to damage Caribbean tourism, but the law of unintended consequences has come into play. We must consider how government policy, and proposed reforms to it, impact on developing countries. It is our duty to do so.