Mr.
Jeremy Browne: The hon. Gentleman is talking about his
maths O-level. Is he absolutely sure that it was 28 years ago? I think
he is the same age as me and O-levels were less than 28 years
ago.
Mr.
Hands: I have to inform the hon. Gentleman that I am
somewhat older than him. I think he was born in 1970. I shall not say
precisely how old I am, but I sat my maths O-level in 1981. I would
have been a Ruth-Lawrence-style child prodigy had I been the same age
as the hon. Gentleman and sitting my maths O-level aged 11. The head of
maths at the London Oratory school told me that one of the questions in
the maths GCSE was to draw a line 7 cm long, which is more of an
instruction than a question. I think we should go back to the days when
we studied great circles rather than having to draw lines 7 cm
long—but that is enough on maths
exams. The
first option used great circles. The second used banding as a proxy for
distance, based on global geography which, as we know, has been
something which the Government have more or less amended and kept with
us. The link to the proposals before us today jumps out. The
consultation only proposed three bands. However, this is how the
response was recorded in the Government’s own document in
November:
“There
was a great deal of concern that both a banding system or the use of
GCD could create a strong incentive for passengers and freight with
long-haul destinations to hub outside the
UK”. Returning
to the points raised by my hon. Friend the Member for Cities of London
and Westminster and by the hon. Member for Taunton about the incentive
that passengers will now potentially have to transfer in places such as
Amsterdam, that danger was acknowledged by the Government in their
original consultation. Put simply, the more costs that are loaded on to
distance, the greater the incentive there is for people to jump on a
short-haul flight over the channel to complete their journey from
there, so that they can profit from a lower tax regime operating in
some of our rival aviation hubs. The Government noted the risk of
having three bands, only to exacerbate that risk by having a fourth
band.
The impact
assessment, published alongside the Budget, included this summary of
the problem:
“Currently
some passengers may take commercial decisions which reduce their APD
liability by buying separate (i.e. non-connecting) air tickets, where
this is possible. This will remain an option under the APD
changes.” Despite
having highlighted that risk of that practice occurring, however, the
impact assessment then dismisses the possibility of its occurring on a
wider scale. It says:
“in these cases,
there can be significant time penalties involved, since passengers not
on connecting tickets must retrieve their luggage and re-check in at
the European hub. There could also be higher airport charges and other
costs. The added time and inconvenience will significantly limit the
extent to which people choose to buy separate air tickets to avoid
paying a modest
increase”— I
stress those words, “a modest
increase”— “in
APD on longer distance
flights.” The
proposed increases are not a “modest increase” at all.
They reduce the competitiveness of airlines operating out of the UK and
may well cause a significant loss of business to airlines operating out
of cities such as Amsterdam, Frankfurt and Paris. Ironically, the
effect would also be, of course, to increase emissions. Not only will
we have people avoiding the tax regime, but there will be an increase
in emissions due to all of the additional flights required to cover a
route that could be covered directly by one plane.
The
Government’s document, “Aviation duty: response to
consultation”, listed the other problems with banding. It
noted: “Many
respondents agreed that banding was a simple system but there was
concern that such a system would not reflect the true environmental
cost of emissions and environmental
impact.” That
is precisely the point that we are making, and it was made in the
document in the context of banding for a per-plane tax. It applies all
the more strongly to APD, which is levied on passengers.
The
Government’s document also brought out the other major flaw, by
highlighting the concern
that “a
system based on capital cities could be blunt, placing all of the US
and all of Russia within one band despite the great distances between
their capital cities and the farthest destinations in each of these
countries.” We
have already looked at Russia. It has been split into
bands—rather imperfectly, if I may say so, but the point about
dividing it up remains good none the less. Within the US, of course,
the distances are massive, but the US is far easier to define in terms
of where in the US one could be based—for example, in any of the
50 states. It is much easier to define than Russia, which is one
continuous country. Although Russia is a federation, most of the
component parts are very small republics. However, a flight from London
to Boston will attract the same APD as one to Honolulu, despite
covering less than half the distance. Can it be right that a flight
from London to Honolulu, which might be competing with the flights to
the Caribbean that I talked about earlier, will be subject to
significantly less APD than a flight to Jamaica? I think that the
schedule is somewhat flawed in that regard.
I know that
the Government maintain that using actual distances would have too many
disadvantages, but I fail to see why they make that argument. Anybody
who flies often and is a member of a frequent flier club will know that
the airline tells them instantly how miles they have flown. I do not
know whether that is on a great circle basis or an “as the crow
flies” basis, but it seems to be incredibly easy to calculate
the distance. The Government claim that that would have too many
disadvantages, so perhaps the Minister could explain why they believe
that using the actual distance would somehow be too difficult or
disadvantageous, despite the fact that great circle distance was widely
favoured among the 170 responses they received in the
consultation.
11.15
am However
one accounts for distance, the avoidance problem will increase the
higher the charges applied. The Government’s U-turn has left
them exposed to a revenue shortfall—because they wanted to
extend aviation duty beyond the commercial passenger sector, they
pencilled in the extra revenue that would raise. Even with the
increases before us, the Red Book shows that the Government will be
down £70 million on its projection this financial year, and
£190 million next year, because of their failed attempt to
introduce the reforms they had flagged so widely. That is why the
increases in APD are so steep: they have to be steep to offset some of
the cost of the U-turn, never mind that it is passengers who will
suffer under an already discredited system.
A per-plane
tax makes sense, but a per-passenger tax does not. The purpose of the
tax, we are told, is to tackle emissions, but it is not the passengers
who are making the emissions, but the planes. Even if it were limited
to commercial passenger airline flights, a per-plane tax would
represent a fundamental improvement on the measures before us. It could
still be done, but the present Government have exhausted their ability
to manoeuvre.
In
conclusion, in the 2007 pre-Budget report, the Chancellor announced a
new per-plane duty. In the 2008 pre-Budget report, he withdrew it. At
the end of this debate, the Minister will no doubt say that the huge
new tax increases of up to 113 per cent. are a model of good sense, but
the Opposition beg to
differ.
Mr.
Jeremy Browne: I congratulate the hon. Gentleman on a
characteristically rigorous speech.
Mr.
Browne: I certainly do not wish to speak so briefly on so
important an issue. The only issue the hon. Gentleman did not cover was
the classification of newly formed volcanic islands for the purposes of
the clause. I now regret having been born only in 1970 and not having
the advantage of studying great circles in my maths O-level. I was in
the penultimate year for O-levels and do not recall having had any
questions that required me to draw a straight line of a certain
distance, but I would clearly have benefited from more study of great
circles. It was an excellent speech, and had the exciting proposals put
forward by the right hon. Member for Witney (Mr. Cameron)
for free votes in Committees applied today, I would hope that many
Labour Members, having heard the speech, would be tempted to vote
against the
Government. Getting
back to the nub of the matter, it was helpful to have it clarified that
it was in the early 1990s, the last time the public finances were in a
ruinous state, that a Chancellor of the Exchequer initially introduced
this form of
taxation.
Mr.
Hands: I follow the hon. Gentleman’s logic, but it
is not fair to compare the condition of the public finances in the
early 1990s with their current condition. The maximum budget deficit
then was around 7 per cent., but I believe that the current figure is
north of 13 per cent. It is not quite the same
scenario—there is a quantitative
difference.
Mr.
Browne: I do not wish to go too far off the beaten track,
but I accept the hon. Gentleman’s point. The public finances are
in a more ruinous state now than they were in the 1990s, and certainly
the budget deficit, as a percentage of GDP, is higher now than it was
then. Nevertheless, there was a significant revenue shortfall, and
although we were coming out of recession by that period, the Government
needed to plug the gap. I remember that at the time the Government were
keen to sell the initiative as being environmental, but there was a
revenue-raising motivation, as I am sure there is now. I also remember
critics of the measure saying that it was a tax on holidays and that,
just when one was fed up with every aspect of life under the Government
in 1994, they were charging to escape from it. However, we have gone
full circle and it is now part of the tax regime, which I
welcome.
There is an
environmental rationale for taxing air flight. After all, if one has to
tax something, the intellectual rationale for taxing air flights is
probably stronger than the rationale for taxing work. Work seems to be
the sort of activity we should be seeking to incentivise, yet we have a
large amount of revenue raised through income tax. If we are to have a
component of revenue-raising that seeks to effect a degree of
behavioural change, but which also brings in necessary money to the
Treasury, a tax on flying seems to have some
merit.
Mr.
Field: Although I do not disagree broadly with what the
hon. Gentleman has to say, does he recognise that there is a question
of certainty? One reason why there is an increasing move towards ever
higher property taxes—and taxes on work, as he puts it—is
that they at least provide a degree of certainty. One of the
difficulties of trying to encourage or discourage particular behaviour
is, of course, that the tax base dissipates—which is in some
cases the very aim of bringing in the tax in the first
place.
Mr.
Browne: Indeed, and we have had some
interesting discussions about tobacco duty and fuel duty with regard to
predictability of elasticity when it comes to
revenue raising, as opposed to
disincentivising behaviour.
The
Conservative spokesman anticipated that the effect on behaviour would
be marginal to non-existent. On that basis, I suppose that there would
be a degree of certainty, although the environmental benefits would not
then accrue. However, the point I was making is that tax has to come
from somewhere, and taxes that have an environmental component in the
motivation for levying them seem to be sensible. Although total
CO2 emissions from aircraft constitute a fairly small
percentage in the grand scheme of things, that percentage is
increasing. One does not need to have a particularly fantastical
imagination to see that that increase will get bigger and bigger and
will account for a larger proportion of our country’s
CO2 emissions.
There is a
much bigger global aspect. At present, the vast majority of the people
in the world cannot afford to fly. Although increased prosperity in
countries such as China and India is very welcome, it threatens
potentially grave environmental consequences. To have an environmental
component to taxation, and to make the effort to tax flying, seems to
be a sensible measure.
That is our
starting point: we are not hostile to the concept. However, I am very
pleased that the Conservative party has seen the wisdom of the Liberal
Democrats’ proposals to levy such taxes on aircraft, rather than
on passengers. Levying a tax on passengers is a rather blunt and crude
instrument. For a start, it gives airlines no tax incentive, beyond
their commercial incentive, to run planes at full capacity. A further
tax incentive to do so would clearly be beneficial to the environment.
We even have the situation, which has been reported in the media, where
so-called phantom planes fly around to make sure that the airlines have
their planes in the right places for all of their flights. There is no
incentive, apart from the obvious commercial incentive, to put
passengers on those flights. Given the environmental impact of flying,
it seems sensible to my party to incentivise airlines to carry
passengers. That would be more easily achieved by taxing the flights
themselves, rather than the passengers who are travelling on those
flights. The
final point I wish to raise—a lot of the ground was
comprehensively and skilfully covered by the hon. Member for
Hammersmith and Fulham—relates to extra incentives given to
introduce new aircraft. That point was touched on by the hon. Gentleman
and it is not directly relevant to the clause, so I will only touch on
it as well. One of the great benefits of new technology, whether in the
making of cars or in the creation of aeroplanes, is that it increases
fuel efficiency. The Government’s measure is rather crude,
because is does not differentiate between people who travel on
fuel-inefficient aircraft and those who travel on newer, more
fuel-efficient
aircraft. Airliners
have an incentive to reduce costs and there is a big up-front capital
cost in buying an aircraft, but there are potential benefits in terms
of fuel savings once that aircraft has been purchased. Much more could
be done, however, to allow airliners to make claims against the
depreciation of new aircraft to incentivise them further to buy such
aircraft where possible. That could be skewed towards certain types of
flights or aircraft if they are thought to be environmentally
beneficial. Our
view is that the motivation behind this form of taxation is broadly
laudable. However, the Government’s approach is ill advised: a
system based on aircraft rather than on passengers would be
better.
Mr.
Syms: This is the first speech I have made on the Finance
Bill; it may not be the last. I declare an interest, as outlined in the
Register of Members’ Interests, as a director of a building and
property company. I hope that having that on record will be sufficient
for the Bill’s
proceedings. I
hate to disagree with my Front Bench colleague, but the original
proposal, as crafted by the Government, to tax per plane, was barking.
The impact that the proposal would have had on the aviation industry
meant that it was not very sensible. It is good that the Government
changed their minds, because we would have been in a worse situation
had they not stuck with
APD. I
will give a few examples. Our aviation industry is very
successful—the second largest in the world, I think. That
requires us to have competitive airlines operating from our airports.
Furthermore, the number of jobs generated by successful airports at
both the main hubs and the regional airports, which are terribly
important
to our economy, means that it is important that the airline industry
remains competitive for the sake of a successful economy. We have also
seen the successful growth of the freight industry in the UK. East
Midlands airport and many other regional airports are examples of the
creation of freight transport. The per-plane proposals would have given
a major disadvantage to our air freight industry, which would have
found itself undermined by its European
competitors. Bournemouth
international airport, near my constituency, provides aircraft repairs.
A Boeing, for example, can fly in and the engineering services at the
airport, which is situated in Hurn, will repair it. Inevitably, planes
fly in empty because they are being repaired, but, if there was a tax
per plane, they could well be charged £8,000 or £9,000
just to fly into Hurn for repairs. Those are perverse incentives, and
the proposal as originally crafted by the Government would not have
done the
job.
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