Air Departure Tax (Update)

– in the Scottish Parliament on 5th October 2017.

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Photo of Kenneth Macintosh Kenneth Macintosh Labour

The first item of business this afternoon is a statement by Derek Mackay on the air departure tax update.

Photo of James Kelly James Kelly Labour

On a point order, Presiding Officer. The cabinet secretary is about to give a statement on air departure tax, but the details of the statement are revealed extensively on BBC online and were discussed by Glenn Campbell on “Good Morning Scotland” this morning. In addition, the implications of the statement are reported in

The Scotsman online and it is clear from the Twitter feed of

The Scotsman

’s transport correspondent, Alastair Dalton, that he has been in discussion with Scottish Government officials about the issue.

I submit that the Parliament has been disrespected. The point of a parliamentary statement is to inform members of the Scottish Parliament and the public first and foremost—not the media. Presiding Officer, I ask you to investigate whether Mr Mackay has broken parliamentary rules and what action can be taken.

The Presiding Officer:

Thank you for that point of order, Mr Kelly, and for notifying me in advance of your intention to make it.

As members are aware, I take the issue very seriously indeed. I recently revised the good practice guidance on announcements to make it clear that Government announcements should be made to the Parliament in the first instance.

I note that there has been speculation on the contents of the statement in advance and I draw the cabinet secretary’s attention to the guidance. However, I am sure that all members will welcome the opportunity to question the cabinet secretary on the detailed contents of his statement, which he can now make.

Photo of Derek Mackay Derek Mackay Scottish National Party

Thank you, Presiding Officer.

The Scottish Government has made a strong case over many years for powers over air passenger taxation to be devolved to the Scottish Parliament. We have set out a clear aim to reduce the burden of air passenger taxation by 50 per cent and to abolish the tax altogether when resources permit. That commitment will help both to boost international connectivity and to generate sustainable growth—priorities that are even more pressing as a result of the European Union referendum.

In 2014, the Smith commission recommended devolution of powers over air passenger duty to the Scottish Parliament. The Scotland Act 2016 made provision for that devolution. Following extensive engagement with stakeholders, we introduced the Air Departure Tax (Scotland) Bill to Parliament; the act gained royal assent in July 2017. Under terms agreed between the Scottish and United Kingdom Governments in the fiscal framework, APD is due to be fully devolved in April 2018 and Revenue Scotland has work well in hand to begin collection.

If the UK Government were handing over the tax in a fit state, Parliament would now be considering regulations setting out tax bands and rate amounts. However, that is not the case. During stage 1 consideration of the bill, I alerted the Parliament to an important matter that had arisen concerning our plans to replicate the current APD exemption for passengers who fly from Highlands and Islands airports. The Highlands and Islands exemption has applied under APD since 2001. The exemption is a feature of air passenger duty and should be a feature of air departure tax, supporting not just residents but businesses and tourism in the area.

As members know, the Government and the Parliament cannot act in a way that is contrary to EU law. After very careful consideration, we have concluded that in order for the Highlands and Islands exemption to be compliant with EU law and state-aid regulations, it must now be notified for approval to the European Commission. As the UK is the member state, only the UK Government can do that.

It is not a technical argument. Aviation is critical to the Highlands and Islands, helping to support a diverse range of businesses and enabling residents from the more remote regions to access essential services that cannot be provided in their areas. Without it, there is a real risk that the Highlands and Islands will suffer economic detriment.

Since informing Parliament of the position in April, I have had a series of discussions and exchanges of correspondence with UK Treasury ministers, most recently with the Financial Secretary to the Treasury on 25 September. Throughout the conversations and correspondence, I have been clear that although we remain committed to working with the UK Government to secure an acceptable resolution, it is for the UK Government to resolve the issue and, as the EU member state, only the UK can take forward any notification.

The response, thus far, from the UK Government has been disappointing. The Financial Secretary to the Treasury made it clear in July that the UK Government has serious concerns about making an approach to the Commission; in correspondence, he stated that before the UK Government will agree to do so, the Scottish Government will need to accept full liability for all risks, including the potential for knock-on effects on Highlands and Islands business. As I will explain, those risks would include liability for the historical operation of the tax; acceptance of the financial consequences back to 2001 if the Commission does not approve the exemption; and the cost of avoiding detriment to the Highlands and Islands during the length of time that notification would take.

I am clear that, with its transferring responsibility for the tax, the obligation was on the UK Government to ensure that it could be operated fully. The conditions that the UK Government has sought to impose are clearly not acceptable, and it is patently unfair that, having got us into this mess, the UK Government is willing to fix it only if the Scottish Government agrees to pay the costs of any mistakes made. Let me be clear: this Government will not put at risk the economy of the Highlands and Islands, and it is not for this Government to bear the cost of actions that the UK has taken, if they are found not to be compliant.

This Government therefore finds itself placed in a deeply unsatisfactory position. We could choose not to introduce the exemption for Highlands and Islands flights, ensuring that ADT remains within EU state-aid rules and avoiding the need for notification. However, that would bring an unacceptable cost to the fragile economies of the Highlands and Islands. We could also seek an alternative approach that would deliver the same outcome as the exemption, and I and my officials have left no stone unturned in investigating ways of delivering the same or better outcomes for the Highlands and Islands without a notification process. However, although there are solutions within state aid that would support the residents of islands and sparsely populated areas, we have no legal viable exemption that would support businesses and tourists and provide the good connectivity that is vital to the city of Inverness on the same terms that are currently available. The UK Government also suggested that it would consider alternatives, but it has yet to present any options that we have not already considered or which meet the requirements of the Highlands and Islands and would not also require notification to the Commission.

The only option identified by the Scottish Government that does not require notification to the Commission and which could be in place for April 2018, securing the benefits of the exemption for the Highlands and Islands, would be through the use of rates and bands and in a way not exclusive to the Highlands and Islands. That would involve setting all bands at a zero rate to cover direct and connected flights from Highlands and Islands airports. Doing that would involve the Scottish Government forgoing substantial revenues not to deliver any additional benefit but simply to deliver the tax to the same standard for the Highlands and Islands as currently operates. To match the exemption for all Highlands and Islands flights, including connecting flights, would require the Scottish Government to forgo revenues of more than £320 million, and to do so simply for band A flights would mean forgoing revenues of around half of that.

Although under the terms of the fiscal framework this Government would, of course, bear the cost of any policy changes made by this Parliament, such as reducing rates to deliver economic growth, it should not cost this Government financially simply to deliver the tax as it currently is. That is the principle of no detriment that was set out by the Smith commission and which underpins the fiscal framework accompanying the devolution of powers. That principle is central to the operation of the block grant adjustment. However, the block grant adjustment mechanism for ADT does not take account of this potential flaw in the Highlands and Islands exemption. Currently, the block grant adjustment will see Scotland’s block grant reduced by an amount forecast on the delivery of the tax as it currently operates. As a result of the position we have now been placed in, I have not yet been able to set the exemptions, reliefs and rates that I propose for ADT in the coming year.

The UK Government has suggested that, instead of going ahead with notification or facing removing the exemption, we could defer implementation of the tax for an unspecified time period. A change to the timetable is certainly feasible—the UK Government must switch off the tax before ADT can be introduced in Scotland—and it might be unavoidable if a solution is not found. However, that is not our preference.

I have therefore written to the UK Government again today to set out my position. I remain supportive of notifying the Commission, but not of the Scottish Government taking on the risk of the UK Government’s operation of the policy. I am very aware that the European Commission will need time to consider any case that is made, so it is already unlikely that we could get a decision from the Commission in time for ADT to begin in April 2018.

Instead, I have suggested that the UK Government agree to amend the block grant adjustment to enable the Scottish Government to deliver support for the Highlands and Islands in a way that ensures neither the Highlands and Islands nor Scotland’s public finances suffer as a result of this apparent defect in air passenger duty.

That amendment could be made while notification is pursued, on the understanding that the UK Government accepts the risks inherent in such a notification, or on a permanent basis if the UK Government remains unwilling to make such a notification. It is the only solution that either Government has tabled that would enable ADT to be implemented on time and in a way that protects the economy and the communities of the Highlands and Islands and the devolution of powers under the Scotland Act 2016, and which is consistent with the no-detriment principle of the Smith commission.

To determine our approach, we require clarity from the UK Government by the time of the UK budget at the very latest. We urge all stakeholders and interested parties to encourage the UK Government to reach a sensible solution.

Given the severity of this issue, the potential impact on the economy of the Highlands and Islands and the risks to the devolution of powers as agreed by this Parliament, I felt that it was incumbent on the Government to air these issues in Parliament and to be clear to the region and to industry where we stand on the introduction of ADT. I hope that all members will support the action that we are taking. I know that some members do not support our general position on reducing ADT, but this is a different issue—it is about our ability to deliver the tax as it stands today.

A delay is not my preferred option—I could agree that only as a last resort—but ADT cannot be put into operation while significant uncertainty hangs over the Highlands and Islands. I therefore urge the UK Government to step up to the plate, recognise its responsibilities and support our proposal, which would enable ADT to go forward as planned without causing harm to Highlands and Islands communities.

The Presiding Officer:

The cabinet secretary will now take questions on his statement for about 20 minutes. I urge members who wish to ask a question to press their request-to-speak buttons now.

Photo of Murdo Fraser Murdo Fraser Conservative

I thank the cabinet secretary for advance sight of his statement.

The Scottish Government’s policy of reducing air departure tax is a long-standing one, and our tourism industry has eagerly awaited its delivery. As the cabinet secretary knows, the policy has the support of the Scottish Conservatives, so there is a clear majority in the Parliament to deliver it. It is therefore disappointing to hear that the Scottish Government seems to be trying to weasel out of its manifesto commitment to deliver the policy, which means that we might miss out on the boost that it would give the Scottish economy. Many in Scotland’s tourism sector will feel badly let down by the announcement, which a cynic might conclude has more to do with politics and with the Scottish National Party’s desire to pally up with the Greens again to get its budget through Parliament than with any legal technicalities.

I will ask the cabinet secretary two questions. First, as the Highlands and Islands APD exemption has existed without challenge for the past 16 years, why does the Scottish Government believe that there is suddenly, at this convenient point, an insurmountable legal problem that means that devolution of the tax might have to be delayed? Secondly, will he confirm for the record that it remains the Scottish Government’s policy to deliver an ADT cut as a matter of principle, to help to grow the economy, even if he has today started to make excuses for why he cannot deliver it on time?

Photo of Derek Mackay Derek Mackay Scottish National Party

Of all the bizarre accusations that Murdo Fraser has made about the Scottish Government, that—accusing the UK Government of conspiring with the Scottish Government not to deliver an SNP policy—is one of the most bewildering. I am surprised that even he is willing to make it.

The issue is of the UK Government’s making. The issue concerns the defective state of the function and the taxation proposition. The question—

Photo of James Kelly James Kelly Labour

You brought forward the legislation.

Photo of Derek Mackay Derek Mackay Scottish National Party

Well, Labour is partly complicit, too—its activity probably was not compliant, either.

I am surprised that a member of Murdo Fraser’s standing is not aware that the Scottish Parliament cannot pass acts or orders that contravene EU law and regulations. I am so surprised that Murdo Fraser, as a front-bench spokesperson, does not know that simple fact about the function and operation of this Parliament and the parameters in which we have to operate.

On the question about principle, SNP policy—Government policy—remains the same, but what we have been asked to do—[

Interruption.

] I am surprised to hear heckling from the Labour Party. I know that many Labour members with an interest in the Highlands and Islands want us to protect that region as we deliver air departure tax. I am surprised by the Labour Party’s opposition on the issue.

We have said that the power is in a defective state and that we will co-operate with the UK Government to resolve the issue, but it is for the UK Government to resolve. It, not the Scottish Government, created the potential non-compliance issue. We believe in the outcome of the Smith commission—the principle of there being no detriment to the people of Scotland—and we are trying to protect that.

Protecting the Highlands and Islands also includes ensuring that there is a like-for-like exemption and that we protect the devolution of powers, but in a competent fashion and not in the typical bombastic, chaotic and incompetent fashion that the Tories have followed recently.

We will try to find a resolution. The principle remains the same, but it must be implemented competently.

Photo of Neil Bibby Neil Bibby Labour

For years, passengers in the Highlands and Islands have received an exemption, and that must continue. The devolution of APD was agreed by the Smith commission three years ago and was SNP policy for many years before that. Today, however, the cabinet secretary tells us that he cannot switch on the air departure tax policy, despite the Parliament passing a piece of legislation to agree to do so. Today, the SNP is using a convenient opportunity to kick a bad policy into the long grass. Let me be clear: the SNP’s ADT cut is bad policy and, instead of being delayed, it should be cancelled.

Will the cabinet secretary confirm that he still intends to cut £190 million from public services, or will he rule out cutting ADT in the lifetime of this session of Parliament? In any event, how can the cabinet secretary justify a multimillion-pound tax cut for the frequent-flying few at a time of hardship and austerity for the people of this country? Is it not the case that the Scottish Government supports a tax cut that was rejected in its own consultation, which would increase aviation emissions and which would strip hundreds of millions of pounds out of our public services?

Photo of Derek Mackay Derek Mackay Scottish National Party

The most important point in that commentary or question was in the first sentence, when Neil Bibby stated that the exemption must continue. The exemption as it stands cannot continue, and the UK Government has not found a solution to that issue, other than to propose that the Scottish Parliament, the Scottish Government and, therefore, the people of Scotland should bear the risk of liability for the historical lack of compliance because of the lack of notification. That was the doing not of the Scottish Government but of the UK Government. No wonder it wrote to me to suggest notification, but only if the Scottish Government took the risk of that. That is in clear breach of the no-detriment principle of the Smith commission and the enhancement of powers under devolution.

I agree with Neil Bibby about trying to ensure that the exemption continues. I raised the matter in Parliament when we introduced the bill at stage 1, and I have repeatedly said that I would try to find a resolution through working with the UK Government. However, it is for the UK Government to resolve any lack of compliance, because of the reason that I shared earlier, which is about how this Parliament and this Government conduct their business in accordance with EU law and regulations.

In principle, we stand by our position on air departure tax and the economic benefits that would come from reducing it. However, we will not land on the people of Scotland—pardon the pun—a defective power that might cost them dearly if it is found not to be compliant when the issue is considered.

Looking after the economy, supporting tourism, protecting the Highlands and Islands and ensuring that there is a competent transfer of powers are important issues for the Government. However, if the key ask from the Labour Party is that the exemption must continue, I say that that is exactly what I have been trying to achieve.

Photo of Patrick Harvie Patrick Harvie Green

The policy has not exactly had the smoothest of take-offs, has it? Under scrutiny, it has been clear that the Government has not even bothered building an economic case for the policy, that there is no environmental or social justice justification for the policy and that there is no political support for it, other than from the Conservatives, who want to cut every tax going and spend, spend, spend from the magic money tree. Now, the policy is stuck in a legal quagmire that the cabinet secretary must have known lay ahead of him. I understand if he needs a technical pretext to spare his blushes, but would it not be simpler and cleaner just to acknowledge today that he will not be cutting aviation taxes in the coming year?

Photo of Derek Mackay Derek Mackay Scottish National Party

In accordance with my statement, the timetable for what we can do is in the hands of the UK Government, which must consider the proposition that I have put to it in advance of the budget. It can do that and respond by the time of its next budget speech at the latest, which will help to inform the Scottish budget.

Unless it can find a legal remedy or a fiscal remedy, the UK Government has a responsibility to address the issue. I know that it would be difficult ever to convince Patrick Harvie or the Greens of the policy, but the principle that we all agree on is the successful and competent delivery of devolution. In this defective state, the tax cannot be delivered in Scotland; that is for the UK Government to resolve in the fashion that I have described.

Photo of Willie Rennie Willie Rennie Liberal Democrat

The Liberal Democrats are pleased that the APD cuts have been stopped. Does the cabinet secretary think that today’s statement will force the European Commission to take action to close down the Highlands and Islands exemption? He has described the scheme as “defective” and not compliant with EU law. To provide himself with political cover, is he recklessly risking the discount’s future?

Photo of Derek Mackay Derek Mackay Scottish National Party

I can imagine what those champions of transparency, the Liberal Democrats, would have said if I had kept secret from Parliament the complications, the lack of compliance and the reason why we could not pursue the like-for-like exemption. The Parliament has to be fair; I raised the matter at stage 1, I raised it in committee and I raised it when being pursued by Conservatives as to why the exemptions were not in the bill.

I have been transparent with Parliament.

It is important to tell the truth to Parliament about the condition of legislation, the arrangements around the Smith commission, the no-detriment principle and what the bill would mean to the very important region that is the Highlands and Islands. That would be sacrificed if we did not address the issue in the correct way. I have kept Parliament up to speed and been transparent, and I have engaged with the UK Government to try to find a solution. However, it is for the UK Government to resolve the issue.

Of course, being so transparent creates a risk in how the EU could respond to the issue, but the request from the UK Government was that the Scottish people should take the risk of the UK Government’s lack of compliance over the years. The UK Government should bear that burden when resolving the issue, so that we can deliver the powers in a competent fashion that protects every part of Scotland.

The Presiding Officer:

I gave some time for the opening questions and answers to explore the issue. We now have less than nine minutes for 10 questioners, so I ask for progress, please—no preambles, no statements, just straight to the question.

Photo of Maree Todd Maree Todd Scottish National Party

The cabinet secretary mentioned that state-aid solutions would not apply to Inverness airport. The UK Government stated that it would consider alternatives, but it has not presented sufficient options. Does the cabinet secretary agree that the UK Government forgetting to flag the Highlands and Islands exemption to the EU is symptomatic of the UK Government forgetting the Highlands and Islands for centuries?

Photo of Derek Mackay Derek Mackay Scottish National Party

In outlining this statement, the Scottish Government is clearly not sacrificing the Highlands and Islands and I encourage the UK Government not to do so either.

Photo of Bill Bowman Bill Bowman Conservative

Has the cabinet secretary considered devolving the tax to Highland Council, in which case the exemption would not come under state-aid rules? If so, why has he ruled it out?

Photo of Derek Mackay Derek Mackay Scottish National Party

That approach has not been put to us in a state that would appear to comply with state-aid regulations and EU law. As with many other matters, we could consider that further, but there are a range of complexities in that and other propositions that may be put to us. If that is now the position of the UK Government, I do not believe that it would be compliant. I am happy—[

Interruption

.] I hear the Conservative shout that it is a suggestion. I have said that I will look seriously at any proposition that is put to the Scottish Government to deliver this power and this tax in a competent way. It strikes me that the suggestion as put by Bill Bowman would not be compliant, but I will take all helpful suggestions into account. Equally, I hope that the UK Government will seriously consider the suggestion that I have put to it today.

Photo of Kate Forbes Kate Forbes Scottish National Party

Will the cabinet secretary provide an unequivocal assurance to the communities of the

Highlands and Islands, who are most affected by this, that he will continue in his unwavering efforts to protect the Highlands and Islands and to create a like-for-like replacement of the current exemption that covers residents, businesses and tourist visitors?

Photo of Derek Mackay Derek Mackay Scottish National Party

Yes, I will provide that assurance, and I hope that the statement makes clear that that is exactly what I am endeavouring to do.

Photo of James Kelly James Kelly Labour

Does the cabinet secretary accept that, week after week, we hear in the chamber from members who have issues with cuts in the health service, education services and local councils? Does he not therefore accept that it is time to dump this discredited policy that would strip £190 million from the Scottish budget every year?

Photo of Derek Mackay Derek Mackay Scottish National Party

I am sure that, having seen my statement and realised that it was not quite what he had read about in the press—which probably removes the need for his complaint at the start—James Kelly will now understand that that is not what the statement is about. It is about the compliance of the regime to ensure that the power can function competently in Scotland, in keeping with the Smith commission’s recommendations and the agreement—to which all parties signed up—to enhance devolution, but in a way that does not bring detriment to the people of Scotland. Surely the Labour Party has not given up on that as well.

Photo of Richard Lyle Richard Lyle Scottish National Party

Does the cabinet secretary agree that it is an absurd situation that the UK Government can effectively block the implementation of Scottish Government policy by refusing to notify the European Commission?

Photo of Derek Mackay Derek Mackay Scottish National Party

It is true to say that the UK Government will not go through the notification procedure unless the Scottish Government bears the risks of doing so. That means that it is Scottish taxpayers who will bear the risks from the operation of a historical policy of the UK Government. That is the difference, and that is what I am trying to point out to members. It is an absurd position, but it is to be hoped that the UK Government will work constructively with us so that we are able to proceed.

Photo of Rachael Hamilton Rachael Hamilton Conservative

I draw members’ attention to my entry in the register of members’ interests.

What will the cost of the cabinet secretary’s U-turn on air departure tax be to the tourism industry and the wider Scottish economy.

Photo of Derek Mackay Derek Mackay Scottish National Party

Of course, it was the Tories who did a U-turn on tax reduction.

Let me be clear to Rachael Hamilton and others. We are trying to proceed, but we need the UK Government to give us the mechanism to deliver the tax competently. It is now back to the UK Government to resolve the power, which is currently in a defective state. If we want to talk about cost to the economy—before we even mention Brexit—it would be wise for Rachael Hamilton to turn her attention to the UK Government to find a resolution to the issue.

Photo of Ivan McKee Ivan McKee Scottish National Party

Does the cabinet secretary have any information on why the UK Government failed to notify the European Commission of the exemption for 16 years? Was there not a requirement on the UK Government to do so, and was it not aware of that requirement?

Photo of Derek Mackay Derek Mackay Scottish National Party

Members will be able to tell from my statement and from the correspondence that I have had with the UK Government that it is very reluctant to seek notification. That suggests to me that it is concerned about compliance, which is why it is trying to pass the cost to the people of Scotland. That is a sacrifice that we should not be willing to make.

Photo of Jamie Greene Jamie Greene Conservative

Contrary to what was in the cabinet secretary’s statement today, my understanding is that the UK Government has bent over backwards to work with the Scottish Government to find a solution, so I cannot be the only person who is deeply suspicious about the motivation behind the statement. Does he really believe that the Parliament will be fooled by his faux concern over the devolution of the tax? Why does he not admit that it has nothing to do with the EU and everything to do with backtracking on his promise in return for support from the Greens?

Photo of Derek Mackay Derek Mackay Scottish National Party

So should I ignore all the advice that I have had from officials and all the engagement that I have had with successive UK Treasury ministers and instead believe that a Tory minister, or someone in the Tory party, told Jamie Greene that it is all okay and that I am just making this up? I assure Mr Greene that my correspondence and engagement with UK Government ministers will show that they accept that there are issues, which is why—to be fair to them—they want to find a solution, although so far they have failed to do that.

Photo of Bruce Crawford Bruce Crawford Scottish National Party

In his statement, the cabinet secretary recognised the cross-party Smith agreement that helped to deliver the devolution of APD. The Smith agreement was also very clear on the principle of there being no detriment as a result of the further powers to be devolved under the Scotland Act 2016. Does he agree that failure to replicate the Highlands and Islands exemption as a result of the UK Government’s negligence would be a significant instance of detriment and therefore contrary to the intent and purpose behind the Smith commission proposals? I say to Mr Greene that the issue has nothing to do with the EU and everything to do with the UK Government.

Photo of Derek Mackay Derek Mackay Scottish National Party

That is right. This is about the competent devolution of powers, as agreed by the Smith commission. In fairness, the issue was not raised over the course of those negotiations. As far as I understand it, the UK Government did not say that there was an issue with compliance. The principles that all parties signed up to for successful further devolution, the fiscal framework and how that relates to the block grant adjustment are a political agreement, and to proceed in the way that the UK Government proposes would be a breach of that political agreement.

Photo of David Stewart David Stewart Labour

What assessment has the cabinet secretary made of the effect on the airports and economy of the Highlands and Islands if the exemption does not continue?

Photo of Derek Mackay Derek Mackay Scottish National Party

David Stewart will know—as will the other members who have been lobbying me on the exemption—that many involved in the sector say that its discontinuation would have a catastrophic impact on the fragile connectivity economy. We have looked at legal and fiscal remedies to try to prevent that, but I have no doubt that, for the reasons that I gave in my statement, it would have a profound impact on the Highlands and Islands. That is why together we must endeavour to replicate the exemption. The UK Government has failed to give me a competent alternative, so today I have put a further proposition to the UK Government for it to consider. I hope that it will respond in good time, so that I can take the matter forward.

Photo of Kate Forbes Kate Forbes Scottish National Party

For the record, Presiding Officer, I remind you and the chamber that I am the parliamentary liaison officer to the cabinet secretary.