The study by PricewaterhouseCoopers (PwC), The economic impact of Air Passenger Duty, used a model to simulate how changes in one area of the economy (such as tax policy) affects all the rest. This ""dynamic"" approach to modelling tax impacts is used by the IMF, World Bank and some national governments, and has been advocated by Chancellor George Osborne.
Applied for the first time to APD, the modelling finds that:
Abolishing APD could boost UK GDP by 0.46 per cent in the first year, with continuing benefits to 2020.
The GDP boost to the UK economy would amount to at least £16 billion in the first three years and result in almost 60,000 extra jobs in the UK over the longer term.
Abolishing APD would pay for itself by increasing revenues from other sources such as income tax and VAT. This net benefit, even after allowing for the loss of APD revenue, would be almost £500m in the first year.
The modelling suggests this boost to GDP would come from three main sources:
Extra investment by airlines to expand their networks, and investment by other aviation businesses to support this growth;
A net increase in inbound tourism, which constitutes an export for the UK economy;
Over the medium term, higher business productivity resulting from increased business travel, which improves international business connections and creates employment.
Per cent increase in GDP from abolition of APD - Source: PwC
Using cautious assumptions, PwC’s analysis shows that receipts from other taxes would rise as a result of APD’s abolition, primarily because of business growth, leading to a net revenue gain for the Government of about £500m in each of the first two years and averaging £250m annually over the period to 2020.
Fiscal Impact of APD abolition, £billions - Source: PwC
The study describes APD as a ""substantial business cost"", equating to about £500m a year for UK businesses overall. It adds: ""Abolishing APD has the potential to reduce the cost of flying, making it cheaper for businesses to maintain relationships with overseas customers. In this sense APD could be regarded as a tax on exports.""
The report ranks major UK taxes by how much additional GDP results from a £1 cut in tax revenue – a good guide to how much individual taxes can distort production decisions leading to inefficiencies in business decision making.
How much extra GDP results from a £1 tax cut (median value over 30 years) Source: PwC
Comparing the impact of a variety of taxes, the analysis goes on: “APD is at least as damaging to the UK economy, and probably more so, than corporation tax or fuel duty.” It ranks major UK taxes by how much additional GDP results from a £1 cut in tax revenue – a good guide to how much individual taxes distort business decisions and consumer behaviour.
In recent Budgets, action has been taken to stem rises in fuel Duty and reduce corporation tax, while APD has risen continually. Since January 2007, APD has increased by up to 260 per cent for short-haul flights and up to 360 per cent for long-haul.
The study further indicates that APD is regressive. For families in the bottom income decile, the APD cost for a family of four travelling to a European destination is some 28 per cent of weekly household expenditure. About 45 per cent of APD-liable leisure trips in 2010 were made by passengers with below-average household income.
The Economic Impact on Air Passenger Duty - A study by PWC
To view an abridged version of the PWC report: click here
To view the full PWC report: click here
For further information, contact
British Airways: euan.fordyce@ba.com 07789 611614
easyJet: paul.moore@easyjet.com 07860794444
or andrew.mcconnell2@easyjet.com 01582525252
Virgin Atlantic: joanne.foster1@fly.virgin.com 07739 357 547
PwC Disclaimer:
The report has been prepared by PricewaterhouseCoopers LLP for British Airways Plc, Virgin Atlantic Airways Ltd, Ryanair Ltd, and easyJet Airline Company Limited under the terms of our Engagement Letter dated 20th July 2012.
Any person who is not an addressee of this report, by reading this report accepts and agrees to the following terms:
The reader of this report understands that the work performed by PricewaterhouseCoopers LLP was performed in accordance with instructions provided by our addressee clients and was performed exclusively for our addressee clients' sole benefit and use.
The reader of this report acknowledges that this report was prepared at the direction of our addressee clients and may not include all procedures deemed necessary for the purposes of the reader.
The reader agrees that PricewaterhouseCoopers LLP, its partners, principals, employees and agents neither owe nor accept any duty or responsibility to it, whether in contract or in tort (including without limitation, negligence and breach of statutory duty), and shall not be liable in respect of any loss,damage or expense of whatsoever nature which is caused by any use the reader may choose to make of this report, or which is otherwise consequent upon the gaining of access to the report by the reader. Further, the reader agrees that this report is not to be referred to or quoted, in whole or in part, in any prospectus, registration statement, offering circular, public filing, loan, other agreement or document and not to distribute the report without PricewaterhouseCoopers LLP’s prior written consent.
