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APD Cut: A Flighty Economic Case

Overview —

The case for the Scottish Government’s proposal to half and then eliminate Air Passenger Duty with the stated goal of boosting tourism in Scotland is examined and found to be counter-productive.

Credits—

Dr Craig Dalzell

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An analysis of the SNP’s proposal to half and then eliminate Air Passenger Duty – to be renamed the Air Departure Tax when it is devolved – finds that the economic evidence used to justify the tax cut omits the impact of an increase in outgoing passengers. Once this impact is factored in it is found that cutting the tax may act to reduce the total number of tourists in Scotland and reduce the overall GVA of Scotland and will thus not be able to re-coup the lost tax revenue through increased economic activity.

Other impacts such as the beneficiaries of the tax cut mainly being concentrated in the aviation sector (particularly those Scottish airports which both rely on tourist traffic and have the capacity to expand to cater for extra demand).

This paper has been superseded by a later publication which can be found here.

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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