Air Passenger Duty

Lord Newby Excerpts

Monday 28th January 2013 Lords Chamber

[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—

[Lord Howell of Guildford]

We must have accuracy in this debate. I am aware of one calling for abolition; sensibly, none of the rest of us is calling for abolition. For the Minister to pin his arguments on the abolition plea alone really is to distort the debate and not to do justice to this House.

[Lord Newby]

My Lords, I was simply stating that I thought that several noble Lords—at least one—have called for abolition.

[Noble Lords]

One.

[Lord Newby]

Okay, one noble Lord has called for abolition. I am sorry if I exaggerated the opposition but it certainly felt as though a number of noble Lords were calling for the abolition of the tax.

On the Caribbean, there have been strong arguments presented tonight and over the years about the effect of APD there. I am aware of the strength of the arguments because in a former existence I made them myself. In response to these arguments, changes to the structure of APD were considered as part of the 2011 consultation. For a number of reasons, it proved much more difficult to do it than appeared at first sight. One of the main challenges is that if you adopt the pure principle of a distance-based tax, it would be seen— bizarrely, in my view—as a proxy to taxing fuel. That would be illegal under the Chicago Convention on international aviation, so the Government looked at a rather simpler restructuring. However, they found that the only way they could have done it that would have dealt with the disparity of treatment between the US and the Caribbean would have required an increase in the duty for about 90 per cent of passengers, including those flying to Europe and the USA. The Government felt that, in the current economic climate, it would not be fair to ask the majority to pay more to help fund a cut for the minority.

[Lord Foulkes of Cumnock]

I think the Minister has been listening carefully to the debate. He will recall that I gave him a suggestion; my understanding is that it was not considered in the review. It came up very recently from a meeting between the Caribbean Council and Ministers from the Caribbean. I asked the Minister for a very simple pledge to take this new suggestion back now and discuss it with the Chancellor: Bermuda should be designated the capital of the Caribbean for this purpose only. Surely that is the least he can do for the people of the Caribbean, on behalf of whom my noble friend Lord Morris spoke so eloquently.

[Lord Newby]

The noble Lord, Lord Morris, anticipated me two minutes ago and the noble Lord, Lord Foulkes, has anticipated me just now. I was about to say that I had not heard the Caribbean Council’s suggestion of designating Bermuda the capital of the Caribbean. My experience of the Caribbean does not fill me with hope that, when push comes to shove, there would be much agreement to designate anywhere as its capital. I am not sure whether you can designate somewhere as a capital for one purpose but not a capital for every other purpose. However, it is a new suggestion; I will certainly take it back and we will see whether it deals with the problem. My initial thought, not having heard the suggestion before, is that it is probably not quite as simple as that.

The Government recognise the mutual benefit of tourism and trade between the United Kingdom and the Caribbean. We welcome the work of the UK-Caribbean Forum to establish a new and improved strategic partnership to promote prosperity, growth and development within both regions. No doubt this topic can be discussed in that forum.

The noble Lord, Lord Howell, and other noble Lords referred to the devolution of air passenger duty to Northern Ireland. The Finance Act 2012 devolved to the Northern Ireland Assembly the power to set rates on direct long-haul flights leaving from Northern Ireland. The rate on short-haul flights will remain the same as that for the rest of the United Kingdom. In devolving direct long-haul rates to Northern Ireland, the Government responded to the wishes of the Northern Ireland Executive. We also recognised that Northern Ireland is in a unique position within the United Kingdom in that it shares a land border with another EU member state that has a lower rate of aviation tax. Further devolution of air passenger duty to Scotland or Wales is a subject that requires careful continued evaluation before we can be confident of its effects across the UK as a whole.

I return to my initial comment that I thank the noble Lord, Lord Palmer, for securing the debate. The Government want to ensure that aviation and tourism continue to grow to promote economic growth and support jobs across the country more generally. However, we also believe that aviation must bear its fair share of the fiscal burden so that we remain on course to address the record deficit. Air passenger duty makes an essential contribution to the public finances and to this Government’s plans to create a stable platform for growth.