Air Passenger Duty and Developing Economies

Lord De Mauley Excerpts

Wednesday 18th May 2011 Lords Chamber

[Lord De Mauley]

My Lords, I join all noble Lords in thanking my noble friend Lady Benjamin for calling this debate on what is a very important issue. She and other noble Lords have made a number of powerful points. I say, first, that the coalition Government more than recognise the importance of the strong ties that exist between the United Kingdom and the Caribbean countries and strongly welcome them. I think we can all agree that the relationship provides real, tangible and important benefits.

More generally, it is worth reflecting on the important role that aviation plays in the economies of developing nations. It enables them to trade more effectively with the rest of the world, attracting foreign investment and stimulating economic development. For many developing nations, too, tourism is a major industry, and it relies on good air links with countries such as ours—a point made by several noble Lords. I take issue with those who claim that air travel is a luxury only to be enjoyed by the better-off. The truth is that for many ordinary people who fly each year to visit family and friends abroad, it is anything but a luxury. Several noble Lords referred to that. As my noble friend said, those who travel home to the Caribbean are among our lowest paid, so we clearly recognise that we need to have regard to the way in which air passenger duty affects them. Furthermore, I agree with my noble friend Lord Bradshaw and the noble Baroness, Lady Howells, that the Government wholeheartedly recognise, and are grateful for, the service that people from the Caribbean have given to this country over very many years.

Before outlining the Government’s plans in this area, I would like to give some context. The first and most obvious point to note is that the APD system we are debating today was, as the noble Lord, Lord Tunnicliffe, generously acknowledged, bequeathed to us in its current shape by the previous Government. My noble friend Lady Benjamin makes the point that the Caribbean diaspora are agreed that they were not consulted and their views were not taken into account before the decision was taken. The Government recognise the deep frustration felt about the way in which the 2009 changes were implemented, without proper consultation. Perhaps I may return to that issue.

However, the problem with air passenger duty is not the only problem that we inherited. I shall not go over old ground this evening but simply reiterate that, having taken some tough budgetary decisions last year, this country still has to raise through borrowing £120 billion more than it will raise through taxes. The noble Lord, Lord Morris of Handsworth, suggested that when the APD was introduced in 1994, it was presented as a green tax. I respectfully suggest to him that it was the previous Government who allowed it to be characterised as a green tax. When it was first introduced in 1994, it was explicitly introduced on the basis of raising much-needed revenues for the Exchequer. That is the fundamental purpose of APD, and the Government’s view is that the debate should be in terms of how to deliver the most fair, simple and efficient APD system possible. Faced with this serious economic challenge we simply cannot afford to reverse some tax rises, such as APD, which were announced by the previous Government. That said, the Government have been and are listening, and they did what they could at the Budget with the announcement of a freeze in APD for the current fiscal year. Fully aware of the wide range of views on this issue, the Chancellor also announced an important consultation on APD at this year’s Budget, as several noble Lords mentioned. This provides a real opportunity to take a fresh look at the tax to see whether we can improve on the current structure.

My noble friend Lady Benjamin referred to the report of the Caribbean Tourism Organisation, and I know that the Economic Secretary was grateful to receive its report before Christmas. The consultation offers a chance to submit further evidence of this kind, which can only help to boost the case for reform.

Your Lordships understandably ask: what is the Government’s approach? Partly in answer to my noble friend’s comments about the importance we place on our own UK tourism industry, and the contradiction she suggests in placing those of other countries at risk, let me first say what the Government’s objectives are for any possible reform of air passenger duty. In three short words, it is fairness, simplicity, and efficiency. We want an APD system that is fair to everyone. This means, in particular, that we will look again to see whether we can modify its structure in a way that avoids the current unfairness for countries like the Caribbean nations which—as my right honourable friend the Chancellor noted, and as several noble Lords have said today—although they are not as far from the UK as California, are subject to a higher rate of APD. But fairness also demands that aviation should contribute to the general finances of the nation. That means that there will be a continuing role for APD as a source of general government revenues in the future. The noble Lord, Lord Tunnicliffe, and my noble friend Lord Newby acknowledged that.

My noble friend Lady Benjamin referred with justification to the encouragement given not that many years ago to the Caribbean nations to invest in tourism, and to the economic effect which is now compounding the downturn with a knock-on impact on employment; crime; drugs, as mentioned by my noble friend Lord Newby; and prostitution. We absolutely recognise that these are not wealthy countries; indeed, their dependence on tourism is clearly acknowledged in the Government’s consultation document published in the Budget. The Government are looking at the matter very seriously and I am confident that we will find a solution that is more just and equitable for countries like the Caribbean nations.

However, we should seek to raise such revenues in a way that has minimum impact on consumer and business decisions. That is why we also want a tax that is relatively simple, both for those who have to pay it and for those who are charged with administering it. In keeping with the Government’s drive for economic growth, it is also right that we look to improve the efficiency of taxes wherever possible.

Let me also touch on another key priority for the Government in this area—the environment. There should be no doubt that the Government are committed to ensuring that aviation bears its responsibilities for reducing harmful emissions, both in terms of global carbon dioxide and local environmental pollutants. However, we need to go about this sensibly. The right approach to tackling CO₂ emissions from aviation is through the EU emissions trading system, which promises to deliver emissions savings in a co-ordinated way and at the least cost to the economies of Europe.

Looking ahead, my noble friend Lady Benjamin pointed out that the ETS will be added on top of an already high air passenger duty. I can say that APD and ETS will be considered in the round, but I will ensure that concerns are reported back to the Treasury. The Department for Transport’s recently announced scoping exercise for developing a sustainable framework for UK aviation will also address the local impact of aviation. The United Kingdom is working closely with it to build consensus for an effective approach to tackling such emissions. My noble friend also mentioned the fact that Caribbean sea levels are already rising, which is having a further effect on tourism. We recognise this as a serious challenge for those nations and for all of us. These issues are being discussed, for example, within the United Nations, and the United Kingdom Government are committed to helping developing countries meet the challenge of climate change, including through appropriate financial support.

The Government’s proposals for APD are set out in considerable detail in the consultation document published at the time of the Budget. This includes more on the Government’s views and specific options for possible reform of the structure of the tax. The key proposals in the document offer a way of simplifying APD and dealing with the problems that have afflicted the previous Government’s changes. In making the system fairer, the Government propose to go further by incorporating flights that currently escape the APD charge entirely. I refer specifically to the Government’s consultation plans to extend APD to private business jet flights, with which the noble Lord, Lord Palmer, among others, takes such issue.

My noble friend Lady Benjamin asked what advice we had taken from the Department for Transport. I am sure that she will be aware that government departments work closely together on these matters, and this issue was discussed in regular meetings and in other discussions between the two departments in the run-up to the Budget. The noble Lord, Lord Pendry, asked about the unfairness specifically on the Crown dependencies. As I have made clear, the Government acknowledge that APD is not that fair. No banded system can be entirely fair to everyone, and the consultation offers an opportunity to look at these important questions again with an open mind.

In conclusion, I again thank my noble friend Lady Benjamin for securing this debate and all noble Lords for their comments. I can assure them that all their contributions will be taken into account in the consultation. Indeed, the Government welcome responses from all those who wish to contribute. The APD consultation runs to Friday 17 June, as the noble Baroness, Lady Dean, pointed out. I trust that noble Lords will study the proposals contained in the Budget document and encourage those with an interest to respond, so that together we can deliver an APD system that is sustainable for the long term.