APD Cut: A Flighty Economic Case

My second analysis report on behalf of Common Weal was published today. You can download it here or by clicking the image below:

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The case presented by the Scottish Government for a 50% cut in Air Passenger Duty (and an eventual scrapping of the tax) has been predicated on the additional business and tourism it would bring to Scotland. However, the key pieces of evidence used to come to this conclusion appear to severely downplay the role of outgoing tourism as well as the spending patterns of those tourists. In short, business flights will remain largely unaffected whilst leisure flights may, somewhat counter-intuitively, lead to a drop in tourism within Scotland. The only area which will definitively benefit will be the airlines and airports themselves who will happily serve customers both coming and going (Although even this growth will be limited largely to the Central Belt airports and will be subject to capacity limits).

Instead of clumsily slashing a single tax, we should be taking a holistic approach to policy-making which analyses tourism in the round, takes a realistic attitude towards business travel and considers Scotland and its respective transport needs as a totality.

Key Points:-

• The case for business growth due to an APD cut appears particularly weak as business flights are driven by need and time pressures rather than price.

• The case for an APD cut encouraging more visits to Scotland for the purposes of international trade and business deals is particularly weak as long haul business flights between the UK and the US and Asia is almost entirely price insensitive.

• If an APD cut results in a transfer of revenue from APD to corporation tax there may be deeper implications for the robustness of the Scottish budget under the devolved tax structure. This will be exacerbated in the case of corporate profits transferred outside of the UK entirely.

• The case for increases in tourist traffic is substantially undermined by the impact of cheaper tickets inducing more domestic tourists taking foreign trips instead.

• The spending power of the outbound tourists most likely to take more trips outside of Scotland is greater than the typical spending power of the inbound tourists most likely to take more trips to Scotland.

• The inbound tourists which have a greater spending power than typical domestic tourists are the least likely to be sensitive to airline ticket prices.

• Inbound tourists are generally more weakly linked to the economy than consumers more likely to be induced to leave which may lead to negative economic impacts even in the face of increased tourist numbers.

• Whilst the economy most directly linked to airport traffic will see an increase in activity, this increase will ultimately be capped by the capacity of the airports in question. The seasonal nature of tourist traffic will exacerbate this impact.

• The greater impact on the transport network due to increased traffic needs to be considered in light of this proposal as do the economic imbalances created by the APD cut inducing greater traffic in the Central Belt but little growth elsewhere.

• If the reduction in revenue due to the APD cut is not at least recouped in full then additional cuts in public spending may be required. The negative impacts on the economy of this additional Austerity would then be dependent on precisely where those cuts occurred.

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2 thoughts on “APD Cut: A Flighty Economic Case

  1. Pingback: Are EU In or Out? – Part 3: The Issues – Immigration | The Common Green

  2. Pingback: We Need To Talk About: GERS (2015-16 Edition) | The Common Green

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