Transport CommitteeWritten evidence submitted by British Airways, easyJet, Ryanair and Virgin Atlantic (AS 122)

Background

Last year, British Airways, easyJet, Ryanair and Virgin Atlantic commissioned PricewaterhouseCoopers (PwC) to provide an evidence-based economic assessment of the role of Air Passenger Duty (APD) in the UK economy. Although the airlines commissioned and financed the work, the final report represents the independent analysis of PwC. The report was published on Monday 4 February 2013.

Conscious that the Committee is examining the impact of APD on the aviation industry as part of its Aviation Strategy inquiry, and that this report is a significant new contribution to the evidence-base, we provide this additional short submission presenting the main findings of the research.1

PwC carried out their assessment within the framework laid out by the Treasury Select Committee in its 2010 review of the fundamental principles of tax policy making. Underpinning the research was a dynamic economic model known formally as a Computable General Equilibrium (CGE) model. The model simulates how changes in one part of the economy affect the rest of the economy. This approach to modelling the impact of tax changes is very similar to that used by HM Treasury and is also widely used by national governments and organisations such as the IMF and World Bank. The analysis is more sophisticated than previous APD studies that have used “static” approaches less able to account for these economic ripple effects. The Chancellor has suggested that consideration should be given to whether tax policy in the UK should be appraised using a dynamic method.2

Key Findings

In considering the nature of APD and its context within the UK economy, the report finds:

APD is the highest tax of its type in the world by some considerable margin;

APD is a regressive tax and impacts disproportionately on poorer households;

APD is a highly distortive tax that is at least as damaging to the economy—and probably more so on a pound for pound basis—than corporation tax, and second only to fuel duty among major UK taxes; and

UK businesses in aggregate pay around £500 million in APD each year.

The main analysis in the report relates to the impact on the economy and Government tax revenues if APD were to be abolished at the 2013 Budget. The modelling suggests that abolishing APD could:

boost UK GDP by 0.45% in the first year, with continuing benefits through to 2020;

increase investment by 6% and exports (including earnings from foreign tourism) by 5% between 2013–15;

lead to the creation of up to 60,000 jobs between now and 2020; and

pay for itself, with increased business growth leading to higher tax receipts from other sources, outweighing the lost APD revenue.

February 2013