Facing the reality of choices

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I’ve posted before on the debate about devolution of Air Passenger Duty (APD) to Wales, and the fact that many of those supporting its devolution are confusing the means and the ends.  As an independentista, I’m always going to support the devolution of more taxation powers to Wales (although I tend to the view that it’s more about claiming our right to levy taxes than having part of the power graciously devolved back to us), but that isn’t the same as supporting the immediate reduction of those taxes as soon as they are devolved, which is the real objective of many of those arguing the particular case for APD.  It is for the Welsh Government and the Assembly, once in control of taxes, to decide how to set the level of those taxes and rebalance the raising of revenue between them, and the interests of the state-owned Cardiff airport aren’t the only interests to be considered.

Given the emphasis being placed on climate change by so many Welsh politicians, one has to seriously question whether encouraging an increase in air travel (which is the deliberately planned outcome of a reduction in APD) is in any way in line with the demands for the declaration of a climate emergency.  It will be interesting to see how those making that demand respond – but I’m not going to hold my breath on that.  Interestingly, one devolved administration in the UK has already faced up to that contradiction, with the Scottish Government announcing this week that its planned cuts to APD will not now go forward.  It’s a bold move, breaking a clear pledge given in the past, but who can honestly disagree with the assessment by the Finance Minister that reducing the tax is “no longer compatible” with its climate targets.  It’s the sort of change in policy which governments need to be making, rather than simply declaring symbolic emergencies.

The decision to change tack was greeted with the inevitable criticism by those involved in the aviation industry who remain committed to growth regardless of impact, but there was one comment by the Chief Executive of AGS Airports which struck me as a good illustration of very different understandings of economics.  He said that, “Over the course of the past year alone, we have seen the withdrawal by airlines of almost 30 routes from Aberdeen and Glasgow airports because of Air Passenger Duty".  I’m not in a position to dispute whether that number of 30 is correct or not, but he’s probably in a better position than me to judge.  But whether it’s a bad thing as he claims or actually a positive thing that fewer flights are taking place is surely a matter of opinion rather than fact. 

And the idea that it’s “because of Air Passenger Duty” is a complete nonsense.  The truth is that the number of people travelling at the price at which tickets are being sold is inadequate to cover the costs of providing that service (and tax is one of those costs) and return a profit.  The abolition of APD might be enough to fix that mismatch, but that isn’t the same thing as saying that the tax causes that mismatch.  It’s ideology, not economics, which drives the idea that taxes are somehow a special sort of operating cost which ought to be dismissed from consideration in determining profitability and abolished if profitability is otherwise marginal.

Confusing ends and means

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As an independentista, I am of course wholly supportive of devolving more tax powers – indeed, all tax powers – from London to Cardiff.  I don’t really need anyone to make the argument separately for any individual tax.  But the argument being made earlier this week for devolution of long-haul air passenger duty (APD) isn’t an argument about devolution at all; it’s an argument for abolition of the tax for certain airports.  Devolving the tax is presented as being simply a means to an end.

The core of the argument is that abolition of the tax would enable Cardiff to compete more effectively with other UK airports, and to expand the number of flights and destinations.  I’m not at all convinced that those are worthy objectives, and I’m conscious that the original objective of APD was, if not exactly to deter people from flying, then at least to make sure that the cost of doing so covered at least some of the environmental cost, particularly in a context where fuel for road traffic is heavily taxed and aviation fuel is not.  Whether APD is effective in that respect, or whether that aim is better achieved in another way is an issue on which I’m open to persuasion; but simple abolition with no replacement policy looks like a backward step to me.  However, I’d still support the devolution of that tax power, even if I were convinced that any conceivable government in Cardiff were likely to use it in a way which I don’t like.

That goes to the heart of my concern about the argument being put forward by those running Cardiff Airport.  Choosing where to place power over a particular tax on the basis of who is most likely to use that power in the way that a particular interest group wants looks to me like encouraging a ‘race to the bottom’.  It puts different tax authorities in a position of competing to see who can offer the lowest taxation regime.  That doesn’t look like a sound basis for deciding who should wield the power.

Does a small tax really make so much difference?

Tweet Last week, a cross-party group of MPs urged the UK Government not to devolve Air Passenger Duty (APD).  No real surprise there – most MPs seem to be as strongly against devolving anything as I am in favour of devolving everything.  Taken in isolation, though, I find it hard to get as excited about APD as some do.  It’s a tiny part of total taxation revenue in the grand scheme of things, and the ability to vary it has little impact on total budget.  Insofar as it is a policy lever worth having, its value depends less on its revenue-raising ability than on its alleged impact on the success or otherwise of Cardiff airport.

On that point, I’m something of a sceptic. I’m simply not convinced that reducing the tax at one airport is going to result in the flow of business from elsewhere which others are predicting.

In a highly unusual show of unity by organisations which are usually at each other throats, four airlines joined forces a few months ago and commissioned a report from PricewaterhouseCoopers which argues that abolition of APD would benefit the UK economy.  It would also, of course, be of no small benefit to the airlines concerned. 

The argument put was that abolition of the tax would have a number of effects, including:

• making it cheaper for companies to physically visit their customers more often, thereby maintaining better relationships and selling more product
• making it cheaper for all of us as consumers to fly abroad on holiday and therefore encouraging us to fly more often
• encouraging airlines to invest in new and bigger aeroplanes and to open new routes.

The net effect, the report argues, would be to increase the U.K.’s GDP by around 0.45% in year one and by an average of 0.3% over three years.  Are they right? 

It’s an argument which has more than a little relevance for Wales given the suggestion that APD could be devolved.  (Although abolition of APD at UK level, should the airlines be successful with their proposal, would mean that Wales would have to set a negative air passenger duty if it wanted to use this tax for competitive advantage – in short, the government would have to pay us to fly.)

I don’t disagree entirely with the methodology used by the report.  There are however a number of caveats and unstated assumptions which are open to challenge, and which may affect the claimed benefits.  And I rather suspect that advocates of devolution of APD and subsequent slashing of the tax for flights from Cardiff are making very similar assumptions.

Firstly, it is effectively taken as read that globalisation is the way forward and that our economic model for the future should be based increasingly on travelling the world to sell our wares, rather than on a more localised approach to business.  And that, in turn, is based on the unstated assumption that fuel costs for transportation will remain at a low proportion of total costs.  In the short to medium term that may even be true; I’m far from convinced that it will be true in the longer term.

Secondly there is a question in my mind about the extent to which GDP really grows or is simply moved from one place to another.  If the sales made by jet-setting business people are truly “extra” then the overall world GDP does indeed grow; but if they simply replace goods currently being supplied from elsewhere, then we’re merely shifting someone else’s GDP to the UK.

Which brings me onto the third point – there is an implicit assumption that action by one country (or airport, in the case of the Cardiff proposals) to improve its competitive position at the expense of others does not provoke similar moves elsewhere.  It’s another example of the way in which tax reductions can simply lead to a race to the bottom.  And it’s a question which is equally valid in the case of any comparison between, say, Cardiff and Bristol airports.

The report also makes the point that air passenger duty is a regressive tax, which “impacts disproportionately on poorer households”, because the cost of an annual holiday in the sun represents a greater proportion of the disposable income of the lowest paid decile than of the income of the highest paid decile.  It’s true of course - in theory at least.  At a practical level I wonder how many people in that lowest paid decile can afford to fly anywhere anyway – with or without APD.  It also neatly skips over the corollary, which is that abolition of APD disproportionately favours those who can afford to fly off on holiday several times a year.

And somehow I rather doubt that the executives of the airlines commissioning this report would really support the abolition of all “regressive” taxes and their replacement with a more progressive income tax regime.  I suspect that their opposition to regressive taxes is confined to those taxes which are perceived to be limiting their own profits and salaries.

More generally, how desirable, in any event, is the expansion of air travel in policy terms?  Even if it does lead to a significant increase in GDP, is that enough of a justification?  Not all GDP is “good”; there are lots of things which are good for GDP but not necessarily desirable otherwise.  That’s a question which this report seems not even to ask.  And it's a question which those advocating a cut-price tax regime for Cardiff airport also seem not to be asking.