Air Passenger Duty — Question for Short Debate
Lord Palmer (Crossbench)
My Lords, I am grateful for the opportunity to raise an issue that I know vexes many in this House and puts significant burdens both on British business and ordinary families. I must declare my interests. I open my home in Berwickshire to the public and I am a residual beneficiary of a banana plantation on St Lucia.
Air passenger duty has become an increasingly contentious issue over recent years and it is worth reflecting on the reasons. When it was first introduced back in 1994, the maximum that any passenger paid in air passenger taxes on departing a UK airport was just £10, and for those flying short haul it was half that. But, as is often the way with these things, once a tax has been established it is almost impossible for the Treasury not to resist the temptation to find ways to increase it-and what a truly astounding increase we have seen. From that modest beginning, the tax is now generating almost £3 billion each year for the Treasury and costing passengers who pay the highest rate more than £180 in tax alone for a single journey.
Some of the most dramatic increases have been introduced in the past decade. In 2006, a family of four flying to Florida paid £80 in APD-still a significant additional cost on a summer vacation but nothing compared with the £260 they now pay to fly to North America. That is an increase of 225% in just six years. Following the Chancellor's Autumn Statement, we now have confirmation that APD is set to rise again in April. I offer this example because it illustrates just how rapid the increases have been and explains why there is a growing concern about its impact not just on families, but perhaps more importantly, on the UK's business community. Indeed, there is a growing body of evidence that points to the damage the tax is having on jobs, growth and in various regions of the economy with various estimates, for example, that more than 90,000 additional jobs could be created were it to be scrapped.
It is tempting to say that the tax should be significantly scaled down. After all, we levy the highest APD anywhere in the world. We are one of only six EU countries to levy APD, the others having recognised the damage such a tax inflicts on economic growth.
As an island nation we depend on inbound air travel to carry three-quarters of overseas tourists into the United Kingdom. Yet, the World Economic Forum's tourism competitiveness report ranked the UK 134th out of 138 countries for air ticket taxes and airport charges.
I could go on, but today I am merely asking not for the abolition of APD, not for a reduction of APD; not even for it to be frozen. I am simply asking Her Majesty's Government to review the tax: a proper macroeconomic impact assessment into APD across the whole of the UK economy. That is all. No spending commitment implied, just good old-fashioned evidence-based policy-making.
The reason for this is quite simple: there is a growing body of evidence that points to the profoundly damaging impact of APD on our economy. Among the most compelling research that I have seen includes data from the British Chambers of Commerce which estimates that were APD to be increased by 5% in real terms every year-admittedly less than this year's rise-there could be a loss to the economy of £3 billion by 2020. They add that this effect could reach £100 billion by 2030.
The World Travel and Tourism Council has estimated that removing APD altogether would result in an additional 91,000 British jobs being created and £4.2 billion being added to the economy in just 12 months.
Just as compelling is the documented damage that we know the tax is already having on airports and airlines across the UK. To give just one example: the BCC in a recent report states that, following the doubling of APD in 2007 and its subsequent rises, Liverpool's John Lennon Airport has lost six domestic, five European and two long-haul services.
I strongly believe that Her Majesty's Government must take this grave situation into account. It is no wonder that this tax-which started out so modestly-is now one of the most hated indirect taxes that the Government levy, along with capital gains tax and inheritance tax. Indeed, part of the reason I wanted to raise this issue tonight is precisely because of the growing public anger at the tax, with which colleagues in the other place will be much more familiar
Last summer, an incredible 200,000 people wrote to their local MP asking for the Treasury to review the tax-as I am asking now. In addition to this, 100 MPs have publicly stated their support for a comprehensive Treasury review. The APPG on Aviation has also called for a review. Even senior members of the party, such as one of its former leaders, have joined the growing chorus of voices who back this. In other words, this is not the preserve of a few low-tax puritans-it has gained genuine cross-party support.
As expected, this proposal has been supported and championed from the tourism and aviation industry. Indeed, A Fair Tax on Flying, whose research and tireless campaigning have helped bring this issue to the attention of policymakers and the media alike, deserves to be praised for its work. This tide of support is irresistible-or so one would think. The Government have been-I know that the noble Lord, Lord Newby, likes his cricket-playing a rather repetitive game of forward defensive on this, if I am being kind, or stonewalling, if I am being a little more honest.
In almost all their responses to the request for a review-both to constituents and to MPs-the Treasury has, I am afraid, claimed that an impact assessment has already been carried out. Its response to the honourable Member for Crawley on
"Given that we recently completed a comprehensive consultation on the subject, we have no plans for further review".-[Hansard, Commons, 19/10/12; col. 536W.]
There are plenty of other similar responses to very similar inquiries, yet there has never been such a consultation. It is a great phantom that has been created by the Treasury-a wonderful piece of misdirection of which the illusionist Derren Brown would be proud.
The fact is that the oft-cited 2011 consultation was to look at the merits of changing the banding of APD-a completely separate issue-and did absolutely nothing to review the macroeconomic impact of the tax. Indeed, even when they had this opportunity, the Government failed to address the gross unfairness of the banding structure. It is quite ridiculous that APD to the Caribbean-which is 6,000 miles from London-should be considerably more expensive than APD levied on passengers travelling to Hawaii, which is 10,000 miles from the United Kingdom.
I implore the Minister, not to play the forward defensive on this. Perhaps he might consider playing to the stands and pavilion and giving the 200,000 constituents what they have asked for: a comprehensive review of APD.
On a more positive note, I am in fact supportive of one of the Government's increases in APD to finally, at long last, levy the tax on private jets-an omission that was an affront to reason and fairness, and was long overdue. It has taken 19 years since the introduction of APD for this change to be adopted. Can the Minister assure us today we will not have to wait another 19 years before the Government undertake a review of APD?
All the evidence suggests that our economy and the UK's international competitiveness are being strangled by APD. If we want to send the message that the UK is open for business then I can think of no more damaging or perverse policies than year-on-year rises in this tax, making it prohibitively expensive for inbound tourists and overseas business travellers to come to Britain to spend their money and to do business -precisely the things we surely need to help grow our economy.
I urge the Minister to make representations to the Chancellor ahead of this year's Budget. Surely a wise Government would accept that sometimes having money in the Treasury's coffers instead of circulating around the economy has a damaging overall impact. A really comprehensive review would at least provide us with that evidence.
I hope that the noble Lord can offer us more today than his Treasury colleagues in the other place have been able to do thus far, and I look forward to his response.
Lord Howell of Guildford (Conservative)
My Lords, I warmly commend the noble Lord, Lord Palmer, for promoting this debate, because there can be very little doubt at all that the UK air passenger duty at its present rate and in its present form is a damaging tax measure. It is also a tax of fantastic complexity, with pages of detail from HMRC as to which flights are liable, who is a chargeable passenger, how long between connections and so on. Heaven knows how much it truly costs to administer.
The very high levels are the real problem. Six European countries, as the noble Lord, Lord Palmer, has reminded us, levy a form of APD, but the UK level is double that of the next highest, which is Germany, and very probably the highest in the world. We have probably reached the stage where the damage to our national economy well exceeds the gains to the revenue.
The present banding discriminates directly against our Caribbean island friends, to many of whom we owe a special responsibility over and above our general duty as a richer nation to maintain our traditional concern for smaller states and their welfare. It creates a plethora of mad anomalies. First, it drives long-distance passengers from the UK to start from Paris or Amsterdam rather than London. Secondly, when I visited Glasgow last year, to view its dazzling and well on-time preparations for the Commonwealth Games in 2014, I was told that many of the tens of thousands of visitors from all over the world will fly into and out of Belfast and then hop across to Glasgow rather than flying to and from Glasgow direct. The reason is that Northern Ireland is exempt from the APD. Lucky Northern Ireland, but poor old Glasgow, considering that it has made such superb efforts to be the ideal host to the Games, which I hope it will be once visitors get there.
This is Treasury obfuscation and short-termism at its worst. Some claim that the APD is all about curbing aviation carbon emissions. We all know, and the latest BP energy projections confirm, that it will be China and India's performance with their vast increases in coal burning which will determine whether we achieve the CO2 targets we want to see. I doubt whether APD will make a smidgeon of difference in combating global warming or climate volatility.
The only interest I have to declare in this matter is that I am chair of the Council of Commonwealth Societies and therefore very much aware of the vital need for this country to keep friends around the world, large and small. I have no hesitation in saying, after serving for two and a half years as Commonwealth Minister, that APD in its current inflated form is working against our friends, against our foreign policy goals and against the national interest. The alleged revenue loss from minor adjustments to make it less unfair will be far exceeded by the gains to the UK economy as a whole. It was meant to be a modest tax; it is now a massive tax. The damage caused by APD has increased, is increasing and ought to be curtailed.
Lord Monks (Labour)
My Lords, I rise to add my voice to the concerns that have already been expressed by other noble Lords in this debate. In doing so, I declare an interest as president of the British Airline Pilots Association. There can be very little doubt that the APD is an important revenue raiser for the Chancellor and substituting it would be an extremely difficult task. However, the rapid increases that have taken place in recent years make the UK stick out like a sore thumb, in the European airspace in particular, but rather more widely even than that. At present levels, it is unfair and regressive. It is one-tenth of the French level, and the Dutch have abolished this kind of duty at Schiphol, which is perhaps the major competitor to Heathrow. As other noble Lords have said, to fly to Australia via Amsterdam, which is a very viable option for much of provincial Britain, could mean a saving of about £85 in tourist class and more in the premium classes.
Given the other pressures that British aviation is under-particularly the shortage of capacity at Heathrow, as confirmed again by the recent snow, which demonstrates that the airport is always operating at the margin-we are adding further, self-inflicted damage to ourselves with this tax and we risk losing ground against major competitors. Airlines are being disadvantaged, and workers and employees of those airlines are also at risk. I understand that the Flybe redundancies that were announced just last week are being put down to the level of this duty and its effect on the business, which has one or two more marginal routes than perhaps some of the bigger airlines. I also understand that AirAsia recently abandoned the Kuala Lumpur to Gatwick route, citing the level of air passenger duty, as well they might. With those figures, it is difficult to be sceptical.
Civil aviation is a big British success story and we need big British success stories in the UK. Hobbling the industry in the way that this tax does is very unfortunate, and I strongly support the calls that are being made by noble Lords for a review of the tax. I do not think it has a major environmental impact, for reasons already expressed, and the anomalies make it a very difficult tax to defend, except as a valuable source of revenue. Justice demands that this tax is reviewed and that we find other sources of revenue, perhaps from all those whom the Prime Minister accused of aggressive tax avoidance, last week in Davos.
Lord Foulkes of Cumnock (Labour)
My Lords, along with other noble Lords, including the admirable noble Lord, Lord Palmer, I have had representations on the general issue, calling APD a tax on exports, on business, on inbound tourism and on families, and pointing out that it is the highest air passenger tax in the world. However, I want to concentrate on, and say just a few words about, a particular anomaly and to suggest a solution to the Minister.
First, I declare a non-pecuniary interest as president of the Caribbean Council, which is not as exotic as the banana plantation of the noble Lord, Lord Palmer. The Caribbean Council meets regularly with Caribbean high commissioners, and we recently met many of the Tourism Ministers from the Caribbean when they were in London. The unfairness of the APD in general, and the Caribbean anomaly in particular, is top of the agenda of all those meetings. The four bands, A to D, which have been described by the noble Lord, Lord Palmer, are measured by the distance to the capital of the country concerned, so because California is nearer to Washington, the capital of the US, it is cheaper in APD terms than the Caribbean, which is in the dearer band C. Travel to the Caribbean is disproportionately costly, yet the Caribbean is the most tourist-dependent region in the world; in Antigua and Barbuda, for example, 74% of their GNP comes from tourism. The high APD has resulted in British tourists choosing not to visit the Caribbean. Between 2008 and 2011, there was more than a 10% decrease in UK-Caribbean air traffic, in spite of a general increase of 1% in air traffic generally.
One of the groups most affected is the Caribbean diaspora. Agencies have suggested, for example, that the visiting friends and relatives, or VFR, market has been particularly hard hit. That is worrying. The Government have in fact admitted that the banding is arbitrary. The Chancellor-I am sure the noble Lord, Lord Howell, will use all the influence he can in relation to this-said in his 2011 Budget that he was,
"consulting today on how to improve the existing and rather arbitrary bands that appear to believe that the Caribbean is further away than California".-[Hansard, Commons, 23/3/11; col. 963.]
However, by November 2011, the willingness to tackle the anomaly had petered out.
To help the Minister-noble Lords know that I am always keen to help the Government when I can-the Caribbean Council proposal is to reband the Caribbean from band C into band B by designating Bermuda as the capital of the Caribbean, for APD purposes only. There is no reason why that cannot be done; it can be done technically and it has been suggested to the Government. The cost to the Government would be just over £18 million out of a total projected revenue of £3 billion. The benefit to the Caribbean and the resulting benefit to the United Kingdom Government would be enormous. In conclusion, I ask the Minister whether he will say in his reply or give us a pledge-I am not expecting an answer today-that he will take this away, look at it sympathetically, discuss it with the Chancellor, remind him of his pledge in the Budget in 2011 and come back to the House with, I hope, a positive response.
Lord Lee of Trafford (Liberal Democrat)
My Lords, first, I congratulate the noble Lord, Lord Palmer, on securing this debate. I want to focus my brief remarks on the deleterious effect that APD has on UK tourism. I declare an interest as the chairman of the Association of Leading Visitor Attractions. Tourism is our fifth-largest industry and arguably the number one industry in more parliamentary constituencies than any other single industry. In an Oral Question on
"a potential visitor from China must fill in a 30-page visa application form ... and find £650 for a family of four in visa fees and air passenger duty. Is it therefore surprising that mainland Europe gets four times as many visitors from China as we do?".-[Hansard, 12/11/12; col. 1273.]
Thankfully, there has been some improvement on the visa application front, but no give on the APD front.
What is the point of the Government putting an additional £22 million into the GREAT campaign, announced by the Chancellor of the Exchequer in his Autumn Statement, if this is countered by a further rise in APD on long flights and in premium cabins? Since 2007, APD increases have vastly outpaced inflation over the same period, which was 17%. Non-economy visitors in band C from China or India-potentially wealthy spenders-have seen APD increase by no less than 305%. From Australia, it is even worse, with an increase of 360%. In overall terms, the UK levies the highest level of APD of any country in the world. Why is that? Britain's aviation tax is now so high that the Treasury will collect more than twice as much in passenger taxes in 2012-£2.5 billion-than the total of all other European countries combined, which is £1.2 billion.
Other countries have realised the error of deterring passengers. Belgium, Denmark, the Netherlands and Ireland have all introduced APD charges lower than those now being applied in the UK and subsequently reduced or abandoned them, due to the adverse impact on their inbound tourism. In 2011, the Irish Government acknowledged the negative impact of APD on their economy and removed it to stimulate tourism revenue. Happily, our Government woke up the following year, removing APD from flights from Belfast when it was realised that it made those flights uncompetitive, compared with flights from Dublin.
Of course, we all appreciate that tax revenues must be generated, but why clobber tourism, a great world growth industry? Tourism and hospitality have the near-unique distinction of offering rising job opportunities across the range, from the skilled to the unskilled. It is surely madness to stunt their growth by excessive APD. The Manchester Airports Group tells us that in 2010 AirAsia X dropped plans for a Manchester-Kuala Lumpur service in favour of one from Paris Orly, purely because of the high APD. As the noble Lord, Lord Palmer, said in his opening speech, is it not high time that the Treasury instigated a full economic impact assessment of APD, which has not been done for 19 years?
Lord Fowler (Conservative)
My Lords, I congratulate the noble Lord, Lord Palmer, on promoting this debate and on his excellent speech. I make one point, on the impact that air passenger duty has on jobs. All parties are agreed that it is a national priority to bring more people into employment, but we seem to be set on a policy with APD that destroys jobs, not creates them. I declare an interest as a non-executive director of ABTA, but also a past interest as Secretary of State for Employment. When I did that job, tourism was in the brief. My noble friend Lord Lee, who has just spoken, was my excellent Tourism Minister. The reason that tourism was in the Department of Employment was that it had one of the greatest potentials for creating jobs-and still does, particularly for young people.
Inbound tourism creates jobs, but so too, and this is often forgotten, does outbound tourism-the travel companies in the high street, the big internet companies and the aviation industry that is the transport carrier. We would be mad to turn our back on this source of employment. Yet that is precisely what we are doing. By piling more cost on the traveller, we deter people from coming to this country and at the same time price out many people who want to take a holiday abroad. We also hit the aviation industry and business itself. We seem to forget that we are in a competitive international market. There is an increasing demand for travel, which will come from countries such as China, Brazil and India, but it would be all too easy to price ourselves out of the market and lose jobs as a result.
Britain currently has the highest air taxation of all European Union and G20 countries. Britain's aviation tax is now so high that the Treasury will collect more than twice as much in passenger taxes in 2012 than the total of all other European countries combined. What is interesting is that in 2009 the Netherlands followed Belgium by abandoning its equivalent to APD because, although it raised the equivalent of £266 million in one year, the Dutch calculated that the loss to the wider economy from the tax was more than £950 million. So I entirely agree with all those in this debate who have argued for an independent economic assessment of APD. My view is also that this needs to be done quickly, before more damage is done and more jobs are lost.
Lord Morris of Handsworth (Labour)
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.
Baroness Gibson of Market Rasen (Labour)
I thank the noble Lord, Lord Palmer, for instigating this important and timely debate. I declare my interests: I am a member of both the Air League Council and the Air Cadet Council, both of which obviously have an interest in this issue.
Air passenger duty affects every passenger travelling by air from a UK airport. It is a tax that we cannot avoid; it is imposed on us. As we have heard, it is a tax which causes considerable damage to the UK economy and which needs an urgent and thorough review.
I opposed the changes to APD introduced by the Labour Government and I oppose APD under this Government, who seem to be facing in two directions at the same time. There is little point in the Prime Minister saying that he wants more business investment in this country on the one hand and raising APD higher to make it more difficult for business on the other.
As the noble Lord, Lord Palmer, said, when APD was introduced in 1994, each travelling person paid £5 for a short-haul flight and £10 for travelling elsewhere. Passengers can now pay up to £184 on some long-haul flights. What an absolute nonsense.
I am not economist, but even I can see that, at a time when we should be doing all we can to encourage more foreign investment and increasing our efforts to encourage tourists to spend more in the UK, this tax is a barrier to both business and tourism. APD is the highest aviation tax in the European Union and among the G20 countries, thereby placing the UK at a direct disadvantage to its business competitors. Why can the Government not see this? Belgium, the Netherlands, Australia and Germany have all scrapped, or are in the process of scrapping, their own air travel levy. Why not the UK?
All that I have said so far has implications for employment in the aviation industry. A Fair Tax on Flying, a campaign group which consists of 40 leading travel organisations, including airlines, airports and trade associations, estimates that the aviation industry supports 963,000 UK jobs. Of those, 352,000 are directly supported by the sector, 344,000 are supported indirectly through the sector's supply chain and 266,000 are supported by the spending of employees in the sector and its supply chain. The loss of such things as conference business, lost routes from our airports-both short-haul and long-haul-and loss of potential tourism because of APD mean the loss of employment for UK workers.
I support the call for an urgent review of the impact of APD on the UK economy. I support those in the other place and prominent organisations such as A Fair Tax on Flying in asking for a Treasury-led review. Organisations belonging to the campaign know what they are talking about, and I beg the Government to listen to them and to individuals who have written on these matters. How many more people will have to write before notice is taken? The Treasury has never sought fully to understand the impact of APD on economic growth, which speaks volumes. It is time for this anomaly to be rectified.
Viscount Montgomery of Alamein (Crossbench)
My Lords, it is a great pleasure to follow the noble Baroness, Lady Gibson, and I agree entirely with what she said. I thank my noble friend Lord Palmer for introducing this subject very fully and for making such a very cogent speech on it. I am afraid that I am going to join the chorus of opposition to this tax that has been revealed so far in this debate.
As has been pointed out by the noble Lords, Lord Morris and Lord Foulkes, most Caribbean islands live off tourism and earn foreign exchange by so doing. In fact, for some, it is their only foreign exchange earner. As things stand at the moment, it is cheaper to fly to Paris, Frankfurt or Amsterdam and change planes, thus avoiding the high tax in the UK. That has the effect of increasing emissions, which is contrary to EU directives on this subject, and causing further distress all round.
I suggest not only that this is an inefficient tax but that the best way to proceed would be to abolish it altogether, because, as has been said, it does not produce a great deal of revenue and causes a lot of irritation and hard work for the airlines. I therefore propose that the tax be abolished altogether.
Lord Davies of Oldham (Labour)
My Lords, I congratulate the noble Lord, Lord Palmer, on securing this debate and on introducing it in a speech which covered all points at issue. Each subsequent contribution highlighted some of those points with dramatic and significant effect. I thought that I would have a little sympathy for the Minister if most speeches were critical of the position which presently obtains. I am afraid that I have to inform him that every speech has been in that category. When one is on the Front Bench, one always thinks that one may be in a little trouble if one glances over one's shoulder and sees not a soul behind. It is even worse if, as on this occasion, two privy counsellors and members of former Conservative Cabinets join in the criticism.
The Minister has a case to answer and that case has been very effectively deployed. The other place has of course been greatly exercised over this matter in recent months, having responded to a 100,000-signature petition by holding a debate. Again, scarcely a contribution was made there which supported the APD in its present form. It was also pointed out-the Minister would not expect me to ignore this fact-that the coalition agreement and the manifestos of the two contributing parties indicated that they intended to reform radically this tax.
The Minister has to realise that he has a major task ahead. I will make the most obvious point, which is that there clearly needs to be a review of a tax in circumstances where such a ridiculous anomaly as the Caribbean anomaly obtains. Several noble Lords emphasised that point with great force. My noble friend Lord Foulkes fitted into the category of not bringing on this occasion problems for Conservative Ministers but solutions for them with regard to the Caribbean position. We should not underestimate the degree of concern that obtains on that point in all parts of the House. The noble Lord, Lord Morris, who is so familiar with the background of the Caribbean, emphasised how much this anomaly represented.
I hope that when the Minister replies to the debate he does not simply reiterate that matters will be considered. Let us have a review. The case has been established that this tax is not working now in the way in which it was first intended, and it has also become increasingly onerous over the past two years. I therefore urge the Minister to take on board the representations that have been made from all sides of the House that a proper review is necessary and urgent.
Lord Newby (Liberal Democrat)
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 Newby (Liberal Democrat)
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 (Conservative)
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 (Liberal Democrat)
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 (Labour)
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 (Liberal Democrat)
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.