Air Departure Tax: A Post-Brexit Analysis

Ben Wray

Report comes a day after revelation that no independent economic assessment for planned Scottish Government cut to Air Departure Tax has been made 

COMMON WEAL’S submission to the the inquiry of the Scottish Parliament’s Finance Committee into the proposed Air Departure Tax has revealed serious economic flaws in the case.

‘Air Departure Tax: A Post-Brexit Analysis’ is authored by Dr Craig Dalzell, Common Weal’s Head of Research, and can be read in full here.

The report comes a day after the Scottish Government’s Finance Secretary, Derek Mackay, revealed that the Scottish Government has made no independent economic assessment of the economic case for an Air Departure Tax cut commissioned by lobbyists for the airline industry.

The Scottish Government has planned to initially cut ADT by 50%, with the aim of eventually scrapping it all together.

In its submission to the Finance Committee’s inquiry, Common Weal looked at the basis of the claims being made. It’s conclusions are:

– This tax cut will almost certainly result in a permanent reduction in the Scottish Government’s budget which would therefore result in cuts elsewhere, potentially to public services.

– It is accepted by all sides that about £50m of the cut will have no effect at all because business flights are not price-sensitive.

– Because of the differential impact on outgoing and incoming tourism, the cut could potentially reduce the volume of tourism in Scotland and reduce total economic activity. Any benefits are undoubtedly overstated.

– Any impact this cut would have is dwarfed by the impact of Brexit.

A version of this paper was first published last year and was submitted to the Scottish Government’s initial inquiry. It has now been updated in light of the changed economic situation post-Brexit.

Report author Craig Dalzell said:

“It is perhaps no surprise that those most interested in the proposal to cut and abolish the Air Departure Tax are those whose industry is mostly closely linked to it but the response from this group is revealing and should serve as a warning. Of the 22 submissions published, only two groups – Common Weal and the RSPB – came out as strongly against cutting the tax and 12 of the submissions are from groups which are directly involved with airlines and airports (all of which are in favour of the tax cut). 

“Common Weal’s submission pointed out significant shortcomings in the economic analysis presented by the Scottish government. The measure of this policy must look beyond a nebulous count of “GDP growth”. It is vital that the Scottish Government look closely at this evidence and widen their consultation process to other sectors otherwise it may appear as if this policy will become one written by the airport lobby, for the airport lobby.”

Director of Common Weal Robin McAlpine said:

“It’s not that there has been no independent assessment of the case airline lobbyists are making. We’ve done a detailed assessment and unfortunately the case just doesn’t stand up. The airlines have simply omitted crucial information which is inconvenient for them and have glossed over things like the fact that even they accept £50m of this tax cut will be entirely wasted. It’s also of real concern that the economic impact of this proposal has not been tested against the economic impact that could achieved if this money was spent on something else. Now is the time for a substantial rethink on the part of government.”

Key Conclusions

– Even if the most optimistic case on economic growth commissioned by the airline industry is accepted, the cost of cutting APD will never be recovered on the basis of tax growth. This will be a permanent cut in the Scottish Government’s budget.

– At least one in three flights are business-related. Even the airline industry accepts that these are not price-sensitive and so will be unaffected by a tax cut. So even the proponents of the tax cut accept a third or about £50m of the tax cut will have no impact.

– The case from the airlines fails to take into account the impact on outwards flights. Scotland is a comparatively expensive destination so incoming tourism is much less price-sensitive. However, outgoing tourism from Scotland is much more price-sensitive. The economic cost of Scots who would otherwise have spent money in the Scottish economy spending it abroad instead has been omitted from the economic case. This could actually reduce tourism in Scotland because of a substantial fall in domestic tourism.

– The spending of inbound tourists is generally more weakly linked to the economy than the spending of domestic consumers so even if the total volume of tourism remained the same the economic impact could actually decrease.

– The reduction of the value of the pound sterling in the aftermath of “Brexit” is likely to have a substantially greater impact on tourism than the ADT cut is capable of inducing. The tax cut can only partially subsidise this Brexit effect.

– A substantial proportion of any tax recovered from what growth an ADT cut might induce is recovered through corporation tax which does not come to the Scottish Government – and in the case of some multinationals may not even be captured in the UK.

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

– No assessment has been made of what economic impact could be achieved if the same £150m was spent on an alternative economic stimulus. The case for this tax cut has not been tested against any alternative use of this money.