This study has undertaken an assessment of the economic impact of three variants of ADT (where this new tax is charged at a lower rate than the current APD) each with three different assumptions on the degree to which the cut in tax is ‘passed through’ to passengers in the form of reduced fares and / or used by airlines to develop new connections from Scotland’s airports.
The results of this analysis for the nine possible scenarios we have examined is summarised in the figure below with respect to the ADT tax revenue effects and the estimated GVA impacts over a five-year period from 2018-2022.
Figure 8.1: Summary of GVA & ADT Tax Position (2018-2022)
Whilst it is not a direct comparison, the figures here do give a feel for the potential foregone tax and additional Scotland level GVA. In five of the nine cases, the figure for additional GVA is in excess of the tax foregone, suggesting that the tax cut under these permutations would have a net positive effect on these terms.
In terms of the scenarios developed here, the greatest economic impacts are therefore associated with Scenario 1c – a 100% cut in Band A, which assumes no reduction in fares and a substantial supply side response in the short haul sector. This is turn generates the largest increase in passenger numbers and hence the biggest economic impact. If the tax cut was focussed only on Band B (long haul) the analysis undertaken here suggests that the additional GVA in this initial five-year period would not offset the loss of tax revenue. Note though that in the scenarios where fares are reduced, the benefits will continue to grow year on year beyond this initial five-year period. For scenarios where there is only a supply side response, this is represented as a step change followed by a continuation of underlying trend growth.
Most other studies reviewed as part of this analysis have worked on the premise that the reduction in tax is fed through completely to a reduction in fares. In the context of this study, this relates to Scenarios 1a, 2a and 3a (i.e. full pass-through), and the analysis here suggests that these scenarios produce the smallest GVA / jobs impacts. In this analysis, a supply side response (i.e. new routes) has been assumed where there is a partial or a zero pass-through of the tax cut to fares, and this supply side impact is greater than the fares elasticity effect associated with full pass-through of fares.
The results presented here are therefore sensitive to the assumed supply side response, but it should be noted that the supply side response assumptions used are conservative in the context of the public statements already made by airlines such as easyJet and Ryanair, where figures of 30% or more have been quoted. Nevertheless, there is a high degree of uncertainty surrounding this supply side response, which could be greater or less than that assumed here. Obtaining a substantial supply side response from the airlines would be the prime objective of the policy and source of benefits, and it is noted that this is not something which is under Government control.
The most likely outcome in any of these scenarios is therefore perhaps Variant B which would see a mixture of some reductions in fares and some additional route development. The response is likely to vary by airline type, with e.g. low cost carriers perhaps responding more on the supply side and less on fares (i.e. Scenarios 1c, 2c, 3c) and network carriers perhaps passing on the tax reduction and responding less on the supply side (i.e. Scenarios 1a, 2a, 3a).
The benefits associated with additional inbound tourism are a major component of the economic benefits identified. The figures estimated here relate to additional inbound tourism and we have not attempted to quantify the potentially offsetting negative economic impact of increases in outbound tourism from Scotland’s residents, given the complexities and lack of relevant data. However, this in itself should be offset against the other benefits residents of Scotland gain from overseas leisure travel. Finally, to not pursue a policy on these grounds would be tantamount to advocating reducing international connectivity (or at best stifling it) to enhance domestic economic performance, which would seem perverse in an era where greater connectivity is seen as essential.
Any analysis, such as this, is subject to a wide range of caveats and uncertainties. These have been set out in this report but should be borne in mind when interpreting the results. The key uncertainties here perhaps surround:
- the level of supply side response in the shape of new routes, and the demand response to these supply uplifts, which we have assumed to be perfectly elastic;
- the response of passengers to lower fares (i.e. the elasticities used);
- the underlying growth scenario which may prove too optimistic or pessimistic;
- the degree of ‘leakage’ brought about by additional overseas travel by Scotland’s residents;
- the way in which the tax cut feeds through into responses for airports and airline (aside from new routes);
- the potential for more or fewer additional based aircraft than assumed here, especially in the context of an expansion of the low cost long haul sector;
- developments within aviation, particularly the growth trajectory of low cost long haul and its impact on ‘traditional’ carriers; and
- the wider picture with respect to the UK economy and Brexit.
The impact of any cut in ADT will vary across the air industry, and given the complexities in aviation economics, there is likely to be a transparency issue in terms of the monitoring of its impact. A framework for monitoring and evaluating the impact of ADT has been set out here.
A wider issue with cutting the current rates of APD with the introduction of ADT is that there will be a reduction in tax revenue in 2018-19 and succeeding years, which will presumably be reflected in Government spending. This immediate loss of tax revenue is offset against a range of less tangible and less certain economic benefits as time progresses.