Air Passenger Duty

Lord Morris of Handsworth Excerpts

Monday 28th January 2013 Lords Chamber

[Lord Morris of Handsworth]

My Lords, on behalf of the humble and proud people of the Caribbean region, I thank the noble Lord, Lord Palmer, for securing this important debate. As someone born in Jamaica, I have more than a passing interest in this debate, which I declare. I will therefore address my remarks not to the APD tax in general, but to its specific impact on the Caribbean region. However, let me make it clear from the outset that the Governments and people of the Caribbean region do not seek favours from the Government. All they seek is fairness. As we have heard, APD was introduced in 1994. It was argued then that the duty would make a contribution to the overall cost of carbon emissions. It was a green tax. So let me say why the current banding system is unfair and offer a few words about its impact on the economies of the Caribbean.

As we have heard, the tax was originally introduced as a flat-rate charge for flights, but in 2009 it was changed to a four-band system, calculated on the distance between the capital city of the country of departure and the capital city of the country of destination. Let me remind the House of the anomalies of the banding system, which have already been given in this debate. Caribbean capitals, which are just over 4,000 miles from London, are in band C. The capital of the USA and London are less than 4,000 miles apart; consequently, every city in the United States is in band B. That includes Los Angeles, which is more than 5,300 miles from London and 1,300 miles further than any Caribbean-location flight—hardly a green tax.

The outcome of the rebanding means that the APD cost for a family of four flying to the Caribbean is £324. As we have already heard, for an equivalent family flying to the US it is £260. This unfairness will get worse when the inflationary increases announced in the 2012 Budget are introduced. They will not be applied evenly, which emphasises that the APD structure has no logic and discriminates against long-haul flights, particularly to the Caribbean region. The Governments of the Caribbean do not seek to challenge the right of the UK Government to impose this tax. What they seek is an equitable structure, a level playing field and a fair application of the tax.

It cannot be fair that the banding system discriminates against the Caribbean, the most tourism-dependent region in the world. It is not fair that the APD banding system favours the United States, which is a competitor destination. It cannot be fair that the UK takes no account of the impact that the tax has on the Caribbean economies which are still in transition towards being service-based economies. It is not fair, as suggested, that the APD will now be increased annually by the rate of inflation. Let us be clear: this is not a tax without victims. Data from the CAA make it clear that there was a 10.7% decrease in passenger traffic between the UK and countries in the Caribbean region. This is having a devastating effect on local economies, but it is not just having an effect abroad; it is having an effect here, at home, particularly among people in the aviation industry.

No wonder, British Airways has reduced its flights to the Caribbean due to APD and has switched its holiday focus from the Caribbean to the United States. The impact of APD can be felt by small travel operators up and down the high streets in London, Birmingham, Manchester and many of our cities in the UK. Above all, the APD is now becoming a barrier to inward investment in the Caribbean. No one intended that.

When the policies of one country knowingly damage the economy of another, it becomes a question not just of economics but of morality. That is why the review being asked for in this debate is largely supported in the Caribbean and elsewhere. Lest we forget, the Caribbean countries are not seeking favours; they seek only fairness.

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[Lord Newby]

My Lords, I join all other noble Lords in thanking the noble Lord, Lord Palmer, for securing this debate. I should perhaps declare a former interest as a former adviser to the Caribbean Banana Exporters Association. In addition, until I took this job, I was a regular traveller to the Caribbean in connection with the Sport for Life international educational programme, so I was a regular payer of APD to the Caribbean.

I will begin by acknowledging the important contribution that the aviation and tourism industries make to the economy. The United Kingdom’s aviation sector connects millions of consumers and businesses with international markets. The five airports that serve London offer at least weekly direct services to more than 360 destinations worldwide. That is more than Paris, Frankfurt or Amsterdam. Overall, the United Kingdom has the third-largest aviation network in the world, after the United States of America and China.

Tourism is our fifth-biggest industry and our third-highest export earner, worth around £116 billion to the economy, or roughly 9% of GDP. Despite the tough economic conditions, the UK’s tourism sector is growing at around 3% per year. As the noble Lord, Lord Lee, pointed out, we are seeking to promote tourism as part of the GREAT campaign—one of the most ambitious and far-reaching marketing campaigns ever undertaken by the UK. We have also, as he mentioned, made changes to the rules for Chinese visitors to make it easier for them to obtain visas for travelling to the UK.

Turning to APD itself, I would like to reiterate some of the history, which I know a number of noble Lords have already done to a certain extent. APD was introduced in 1994 as a pure revenue-raising tax. It was introduced in recognition of the fact that air travel was otherwise undertaxed compared to other sectors of the economy. Air travel is zero-rated for VAT, and the fuel used in air travel and in nearly all domestic flights is entirely free of tax. The initial rates of the duty were £5 for flights to destinations within the European Economic Area, and £10 for flights to other destinations.

In 2008, the previous Government announced a restructuring of APD, increasing the number of bands from two to four. The reason given was that this would improve the environmental signal given by the tax. As a result of that restructuring, the highest rate was increased to £170. These changes were enacted in the final Finance Act before the 2010 election.

In the period since the election, the Government have limited increases in air passenger duty to inflation only. During this time, rates have increased by only £1 for the majority of passengers. Budget 2012 set out rates from April 2013, which will also rise only by inflation. The real burden of the duty will therefore remain unchanged for at least a further year. Therefore, the fears of the BCC are, frankly, greatly exaggerated.

I will respond to the point made by the noble Lord, Lord Monks, that this is a regressive tax. This is not a regressive tax. In terms of its impact on deciles of income-earners, households in the highest decile pay more passenger duty as a proportion of their income than those in the bottom income decile. As the noble Lord, Lord Palmer, pointed out, to improve the fairness of the tax overall the Budget 2012 also confirmed the extension of air passenger duty to business jets from April this year.

Concern has been raised by virtually all speakers—I suspect it was every speaker—about the impact of APD on the competitiveness of the United Kingdom. There have been widespread calls for a cut in the level of the tax or for its abolition. The noble Lord, Lord Palmer, was kind enough to mention my interest in cricket. My boyhood cricketing hero was Geoffrey Boycott. I hope that the noble Lord will not be too disappointed if I proceed more in the manner of Boycott playing an innings on a troublesome Headingley wicket than Brian Lara at the Antigua Recreation Ground.

The Government’s view is that there can be a sustainable platform for economic growth only if we are willing to tackle our overspending. Demands for cuts in air passenger duty must therefore be balanced against the Government’s general revenue requirement and the need for a fair contribution from the sector towards reducing the deficit. Air passenger duty is forecast to raise about £2.9 billion in 2013-14. This revenue is essential if we are to maintain progress toward our goal of deficit reduction. If APD were reduced or abolished, other taxes would have to be increased or public expenditure cut by an equivalent amount.

The noble Lord, Lord Palmer, and many other noble Lords have asked the Treasury to undertake a study into the macroeconomic impact of air passenger duty. The Treasury keeps all taxes under review and considers them in the round. This is not the only tax that many people would like to see abolished. In fact, it is almost impossible to find a tax whose abolition would not be cheered to the rafters, so the fact that people would like this tax abolished is not in itself a good reason to abolish it. I am afraid that I must reiterate the context in which we are working. Our central goal as a Government remains tackling the fiscal deficit. This requires the aviation sector to make a fair contribution, which is what we believe APD does.

[Lord Morris of Handsworth]

The Caribbean Governments are not asking for the APD tax to be abolished. What they are asking for is equity of application.

[Lord Newby]

My Lords, the noble Lord, Lord Morris, anticipates me. I was just coming to the Caribbean but a number of noble Lords have called for the tax to be abolished tout court. There have been strong arguments—