Henry Smith MP: George Osborne can kickstart growth by abolishing Air Passenger Duty

Henry Smith is Member of Parliament for Crawley.

At the Autumn Statement in December the Chancellor re-affirmed the Government’s economic strategy - to focus on reducing the deficit, restoring stability, rebalancing the economy and equipping the UK to compete in the global race. With over one million new private sector jobs created and the deficit reduced by a quarter since the General Election, it is clear that Great Britain is on the right track.

At the same time both the Chancellor and the Prime Minister have acknowledged that restoring growth is proving to be an even tougher challenge than expected. The damage to the UK economy caused by the previous Government was deeper than anyone predicted and persistent problems in the Eurozone continue to cause us difficulties.

Businesses create growth, not governments, but governments can create the right fiscal and regulatory environment that allows business to flourish. So as the Budget approaches, it is vital that we consider what more can be done to increase competitiveness and encourage businesses to trade, invest and grow, whilst maintaining discipline in the public finances.

I believe that tackling the severe inherited levels of Air Passenger Duty (APD) offers a unique opportunity to increase UK competitiveness, reduce the cost of business travel to stimulate trade and investment, and help hard-working families who want to visit family or friends or take a well-earned holiday.

The last Labour Government inherited a very modest APD and over time significantly increased the rates, particularly for long-haul travel. The Chancellor recognised this problem by delivering a temporary one year freeze and limiting rate increases to inflation since taking office. While this action has been very welcome, the time has now come to undo Labour’s damage.

Most countries do not tax international air travel at all, but of the handful of countries that do, the UK has the highest tax (more than double the next highest in Europe levied by Germany). Having the world’s highest air passenger tax is not a sustainable position for an island nation seeking to increase international trade and attract millions of new inbound visitors.

Last year over 200,000 people contacted their Member of Parliament to complain about APD, but public concern has not, until now, been supported by credible evidence. A new report by PwC provides this missing analysis. The report’s key findings make for interesting reading.

• APD is the highest tax of its type in the world by some considerable margin;

• UK businesses in aggregate pay around £500 million in APD each year;

• APD is a highly distortive tax on business; and

• abolishing APD could boost UK GDP by 0.45% in the first year (with continuing benefits through to 2020),  increase investment and exports (including earnings from foreign tourism), and pay for itself, with increased business growth leading to higher tax receipts from other sources, outweighing the lost APD revenue.

The report acknowledges that while it is uncommon, but neither implausible nor unprecedented for tax cuts to pay for themselves. It should not surprise Conservatives that lower taxes can lead to higher tax revenues.

The Chancellor is rightly protective of the fiscal credibility he has gained and I am the last person who would want that reputation to be put at risk. This analysis strongly suggests that abolishing APD would be both radical and prudent. It would be a relatively small (£3bn) pro-growth tax cut that would pay for itself through increased tax revenue from other sources. In the pursuit of growth, it would signal clearly to the world that Britain is well and truly open for business and ready to welcome overseas visitors.

The politics of abolition are also attractive. In one move we would cut the cost of an overseas family holiday, reduce a significant burden on business and expose Ed Balls and Labour who stealthily increased this tax in the last years of the Labour Government. I would relish taking that message to the doorstep in 2015.