Finance and Constitution Committee

Meeting date: Wednesday, February 8, 2017

Official Report 662KB pdf

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Air Departure Tax (Scotland) Bill: Stage 1

The next item is evidence on the Air Departure Tax (Scotland) Bill at stage 1. I warmly welcome to the meeting Stephen Leckie, the chair of the Scottish Tourism Alliance; Gareth Williams, the head of policy at the Scottish Council for Development and Industry; and Garry Clark, head of policy and research at Scottish Chambers of Commerce. Members will have received copies of the written submissions from all three witnesses, so we will go straight to questions.

I will begin with a general question. The three submissions speak of the potential economic benefits for Scotland should the air departure tax be reduced. How have those anticipated benefits been quantified, and what assessment has been made of them in the context of the impact of other external factors, such as the current weakness of sterling? Who wants to take that on first?

We have long been supporters of the devolution and reduction of air passenger duty, which is to become the air departure tax in Scotland. Our support for that dates back to before the 2014 Smith commission. Throughout that time, we have encouraged both the UK Government and the Scottish Government to take a stand on air passenger duty and aviation taxes in general because, historically, the UK has been one of the highest-taxed countries in the world when it comes to air travel. We believe that APD is a tax on connectivity, and we do not believe that the nation should tax activities that it seeks to promote.

We have called for a fairer, lower tax on air travel. A number of studies on the issue have been undertaken over the years. For example, a couple of studies by York Aviation and one, at a UK level, by PricewaterhouseCoopers a few years ago suggested that there would be a net economic benefit from reducing or eliminating air passenger duty. That has been the consistent view of such reports over a period of time, and we have no reason to doubt them. We have no evidence to contribute in terms of the veracity of the reports, other than to say that they are consistent in their view and that they were published by a number of sources over the years. I think that, as the legislation goes forward, we would all welcome additional scrutiny of the Government’s plans for reductions in APD, or ADT in Scotland. I presume that any economic impact assessment would contain some analysis of the expected effects of the tax and its reduction.

I agree with much of what Garry Clark has just said. We would point to the experience of countries—Ireland, the Netherlands and Germany, for example—that had similar taxes and compare the effects that those taxes had on connectivity, on the behaviour of people flying from those countries and on their tourism industries with what happened once the taxes were either reduced or taken away.

I underline the point that the current tax is uncompetitive in international terms. We cannot see the sense in that, given our geographical position and the needs of the economy in relation to internationalisation. Having taken into account the international experience and the reports that Garry Clark highlighted, we support both the bill and the reduction in APD.

I can add a real-life example that is covered in the submissions. The Republic of Ireland abolished its air travel tax in 2014, resulting in a 7 per cent growth in passenger numbers and 21 new Ryanair routes. Abolishing such taxes makes a direct difference, and the industry will be able to move quickly if air departure tax is abolished.

Liam Kerr has some questions on the quality of the assessments that have already been made.

First I have a question on the point that has just been made.

As Mr Leckie just said, and as Mr Clark mentioned in his written submission, the Republic of Ireland has had a 7 per cent growth in passenger numbers and 21 new routes. What is the evidence around that, and does that evidence show a concrete correlation between removing the tax and those positive outcomes?

We have not done any specific analysis of that. However, in addition to the new routes that were established following the elimination of the tax in the Republic of Ireland, increased capacity on services was announced, and frequency of services increased, too. There seems to be a cause and effect there, although as an organisation we have not done any analysis of that.

Is that not a little concerning? One assumes a correlation, but surely showing an actual cause and effect ought to be the next stage: removing tax means increasing routes and the number of flights.

The reaction from the aviation industry to the changes in tax that were made was pretty much instantaneous. You can draw a strong correlation from that. There have also been strong commitments from some of Scotland’s largest airlines on how they would respond to a reduction in tax in Scotland. Those are on public record, and we can expect those airlines to be held to them.

I will come back to that.

Was the Irish experience limited to international routes, or did the response to the change—the 7 per cent growth in passenger numbers and the 21 new routes—affect the national picture and the international picture?

My understanding is that it applied to international and domestic routes, and that it was not just limited to Dublin. The figures were spread across a range of Irish airports, and all parts of Ireland benefited from that connectivity.

I just wonder whether that data will prove to be productive. We will be asked at some point to make a decision based on something that seems to show cause and effect but perhaps does not.

Mr Williams, you said that you have commitments. This is an interesting point. Has Ryanair, for example, said, “If you abolish passenger duty or cut it by 50 per cent, this”—whatever “this” might be—“is what we will do”? Do you have that in writing? Is there an absolute guarantee in your mind that that would happen if changes were to be made?

The verbal and written commitments that have been made to the Scottish Government have been reiterated to us directly—by easyJet, for example, and I know from the Scottish Tourism Alliance’s evidence that it has had a similar commitment from easyJet. From what we have heard, Ryanair is equally committed to increasing capacity.

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Do those commitments apply to a 50 per cent reduction or to a 100 per cent reduction? Are there any caveats to those commitments?

I would need to go back and look at exactly what was said.

A blanket commitment would be too broad brush. I think that the companies would want to know what was proposed for the international, domestic and European markets, whether the reductions were for 50 or 100 per cent, the timescales within which reductions would take place and when any reductions would be announced. It is not as simple as getting a commitment in writing from those guys saying that they are going to create new routes. We know that they would create new routes; the question is how much they would do and when they would do it, and that would all depend on when the bill is passed, when they are told about the proposals and what the implications might be for the three different sectors.

Does Patrick Harvie have a supplementary question on that?

I want to get into the economic impact analysis generally, but I was particularly keen to follow up the points about Ireland.

Okay.

I ask Garry Clark to unpack for me how exactly he subtracted the background level of aviation growth from what happened in Ireland in order to identify the impact of the tax changes.

I am not sure that we have undertaken those calculations. We would welcome any analysis of the impact in other nations of any reduction in aviation taxation.

So you do not know what the impact of the tax changes was.

I am not aware of any study that measured one against the other. However, after the tax was cut, there was a measurable response.

Hang on. If you are saying that there was a measurable response, that suggests that you know what the impact of the tax changes was, as opposed to the normal background growth in aviation, which we have also seen in Scotland.

Let me clarify. There was a response, which is something that can be measured. However, I would not necessarily say that you can attribute all of that to the cut in tax.

It is not necessarily a response to the tax changes.

No.

We probably should not call it that then.

We would certainly welcome analysis.

What does it say about the situation that Ireland is now considering reintroducing aviation taxation? I have here a recent article from The Irish Times, in which the finance minister, Michael Noonan, raises the prospect of reintroducing the tax,

“claiming the aviation industry is under-taxed.”

He says that restoring the tax would be a

“useful tool for raising revenue and paying for externalities associated with air tax such as emissions, noise pollution, etc”.

I am not aware of that comment.

To go back to the point about the response, there was a Government study that estimated that aviation tax in the Netherlands had cost the Dutch economy €1.3 billion. Given that that study was produced by the Government, we can presume that it was strongly evidence based. That study led to the abolition of the tax, and I am not aware that the Dutch are planning to reintroduce it.

Are you no longer relying on the Irish example that was cited earlier?

We are relying on a range of different examples, including Ireland, the Netherlands and Germany.

You are including Ireland, and I am asking what it says about the proposition that, in the Irish experience, abolishing taxes is an overwhelmingly positive thing given that the Irish are considering reversing that?

It is also important to recognise that the previous tax rate in Ireland was somewhere in the region of €3 across the board, rather than the well over £100 that it is for some categories of travel from the UK. That would need to be factored into any calculations.

It remains the case that the Irish finance minister now regards aviation tax as a

“useful tool for raising revenue and paying for externalities”.

Those are things that we would be unable to do if we pursued the advice that you are giving us.

The proposal is for a 50 per cent cut over this session of Parliament. We would want to see that reduction made as quickly as possible. As Garry Clark articulated, even if the Irish were to reintroduce taxes, the rates would still be lower.

Are we able to get into the wider economic impact now, convener?

I will come back to that. I promised Ash Denham that she could come in.

That is fine.

Edinburgh airport is Scotland’s largest airport. I am interested in getting more visitors into Edinburgh to visit attractions, to stay in hotels and to eat in restaurants in the city—and to visit Scotland more widely as well, of course.

You will be aware that we took evidence on the bill last week. It seemed to come across strongly in that evidence that the airports in Scotland, and perhaps Edinburgh airport in particular, are competing against other airports—Copenhagen was mentioned quite a lot—for new routes. If we can get new routes into Scotland, we will obviously increase passenger and visitor numbers. Do we have any analysis of the types of visitor we might expect to come and which types of visitor might be key drivers of the economic impact?

Other than anecdotal chat about who we know arrives at Edinburgh airport, for example, we do not have a breakdown of domestic, European or international visitors. We know that Europeans want to come and visit Scotland; we also know that they recognise that Scotland is an expensive place to come to, like for like, given the value of the euro and so on. A reduction in air departure tax would help that position. Of course, we have the second-highest rate of VAT in Europe, so a reduction in VAT would help, too. I will use Ireland as an example again. Ireland reduced VAT from 13.5 to 9 per cent, which has made a difference to Irish tourism operators. Indeed, we have spoken to them about that.

On the international front, having more international visitors and business tourism at the Edinburgh International Conference Centre, the Scottish Exhibition and Conference Centre and the SSE Hydro arena—three of the biggest event-managed places in Scotland—would also make a big difference. However, we should not discount the massive market from London to Edinburgh and Scotland, which pours money into our economy up here. People can get to London easily, but that does not apply to Bristol, for example. The easiest way to get to Bristol is by air, so if aviation tax was reduced domestically, that would help to persuade business folk from Bristol, for example, to travel up to Edinburgh and Scotland.

In addition to the tourism impact, the statistics show that the largest percentage of long-haul traffic that comes through Edinburgh on business is from the education sector. That traffic includes researchers, staff, students and people going to and coming back from conferences. If we want to develop a knowledge economy, we must take account of the strong correlation between connectivity and the knowledge economy globally. We are competing with other countries and other airports for such business, so we should not disadvantage ourselves by having some of the highest tax rates.

I agree with that. In recent years, we have seen healthy growth at Glasgow and Edinburgh airports—less so at Aberdeen airport, given the current circumstances. Both Glasgow and Edinburgh airports have told us that they might have grown services even more if the taxation burden on air travel had been lower. They would certainly underline their capacity to win new routes and to get more people to come to Scotland and to spend money here.

We also need to ensure that, as we look to increase our international trade, we are able to access more destinations across the globe in order to sell our goods and services on a wider scale. In a changing world environment, that is more important than ever.

Will any of you take a view on which category of traveller—long haul, European or business—a tax reduction would impact the most?

We think that the biggest immediate economic impact will be on European travel. As for long haul, the China market is coming our way, in time. Are we ready for the Chinese market today? No, we are not. On the domestic market, it is about not just London but Bristol and other peripheral airports. Europe will take the biggest immediate hit.

I agree. There are still gaps in connectivity between Scotland and Europe. Given Brexit, we want to maintain links and take advantage of opportunities. The priorities in relation to long haul are China, obviously, and west coast United States, particularly in the context of the tech sector. Could we also develop links with South America in due course?

As Garry Clark said, domestic routes remain important. Traffic has declined by 25 per cent at Aberdeen over the past couple of years, and the airport does not have long-haul routes, so if we want to maintain connectivity for the north-east—particularly for the oil and gas services supply chain and the international exports that it generates for the economy—we need to ensure that there is no further loss of services.

We agree. There are broad opportunities to expand Scotland’s connectivity. Long haul is important, but some airlines that serve European and domestic destinations, including Ryanair and easyJet, have suggested that they might be able to offer additional services if there were a cut in aviation taxes. If we are to take advantage of that opportunity, we will need a cut that is fairly broad in scope.

Thank you.

Mr Williams, in response to Ash Denham’s question about Edinburgh airport, you mentioned the education sector and in your written submission you said:

“Education is the single biggest reason for long haul travel via Edinburgh Airport.”

I understand the links between aviation taxation and innovation, internationalisation and connectivity. However, in your written evidence you went further and said that there is also a link with productivity. You said that

“The OECD’s work on ‘The Future of Productivity’ has highlighted the importance of participation in and integration into”

something that you called “global value chains”, and you then cited education and Edinburgh airport in that context. Can you help me to understand a little better how you perceive the relationship specifically between aviation taxation and productivity?

Innovation and internationalisation are key drivers of productivity; they are inputs into national productivity.

On global value chains, businesses are increasingly disaggregated around the world and there is a strong need for connectivity between different parts of the value chain. Figures that came out last week showed, for example, the strength of professional services in Scotland as an international export. Such services form part of the value chain for many international businesses. That is what I had in mind in relation to productivity.

Thank you.

Ash Denham asked about Edinburgh airport, and I know that Willie Coffey has a specific interest in Ayrshire, so I will bring him in before I widen out the discussion.

I was interested in Patrick Harvie’s point about what Michael Noonan, the Irish finance minister, said. It was Michael Noonan who abolished the levy years ago, so I will be really interested if he is changing his mind. Frankly, I do not think that he will do—

I think that he has done.

Last week, witnesses told the committee that there is evidence from Ireland that the regional airports benefited from the abolition of the tax. My interest is in Ayrshire and in particular in Prestwick airport.

We heard last week from Mr Hinkles that traffic levels at Dublin grew by 40 per cent and that there were clear additional benefits to regional airports such as the one in Cork. Do you have a sense of how regional airports in Scotland might benefit from the tax being reduced by 50 per cent and, ultimately, I hope, abolished altogether in Scotland?

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The tourism industry involves 20,000-odd businesses throughout Scotland and represents something like 10 per cent of the economy. There is a huge capacity for growth in the sector. The tourism strategy 2020 was led and developed by the industry in 2012 and we have had a mid-term review of it. A new insight that came out of the 2012 production concerned connectivity and transport and the ease with which we can pour visitors and customers into Scotland, not just in the principal airports but the length and breadth of Scotland, in the Highlands and Islands, the north and the south.

Your point is well made. It is fundamental to the success of all the industries that are attached to the local airports. We know how keen Skye is to have some sort of airport of its own reinstated. We know how well the airports elsewhere work. As I said, the issue is that Scotland is seen as expensive to get to and to get around. If we can reduce the air departure tax, it will make a difference to that perception and, therefore, the money will be spent elsewhere.

It is important to stress that regional airports are sensitive to price changes and anything that would affect the viability of services to them. In the earlier part of the previous decade, there was quite a bit of expansion in regional airports as a result of the air route development fund. Prestwick was a significant beneficiary, as was Dundee airport. It is important to recognise that there is a sensitivity around the cost of travel, from which regional airports may be able to benefit under the bill.

Mr Williams, do you have any comments?

I have nothing to add.

How do we get a handle on the figures for the likely impact? Do we just wait until it happens and examine what happened or is there any way that we could extrapolate from the Irish experience and assume that the beneficial effects for regional airports in Ireland will be reflected in Scotland? Should we be doing that work now and, if so, who should do it?

We said last year in our response to the consultation that we would welcome some analysis that builds on what York Aviation, PWC and Edinburgh Airport have produced. We also said that, if that analysis was felt to be necessary for the Parliament to understand the issues and the potential benefits, the Scottish Government should lead and commission it as soon as possible. That is still our position.

I understand that Liam Kerr has a question specifically about Aberdeen airport.

It is to an extent.

Is it or is it not?

It is, and it is about air passenger duty.

Other people want to raise the wider issues but, if it is about Aberdeen, on you go.

Thank you, convener.

Mr Williams, you just mentioned Aberdeen airport and, in your written submission, you talked about how it has been affected by the economic slowdown. All the witnesses have referred to the fact that passenger numbers dropped. I have a JCDecaux report that says that passengers who fly through Aberdeen airport are affluent, 40 per cent of them work in the oil and gas industry and 53 per cent of them travel on business. Would a cut of 50 per cent to the duty—let us call it £7, give or take a little—impact on Aberdeen airport, at least in relation to the domestic market?

Will you let everyone else know what JCDecaux is? Certainly, I am unaware of that organisation.

It is a report that profiles the various airports, as I understand it. The chaps on the panel will probably tell you better than I can.

Aberdeen airport has been clear that a number of routes are vulnerable to being removed because of the slowdown in traffic and that the proposed reduction would be one way of taking action to try to prevent that from happening.

I accept the argument about the international market but, on the local market, does it follow that a £7 reduction in duty for passengers who apparently will predominantly be expensing it will drive passenger numbers back up?

I understand what you are saying about the profile of passengers, but that does not apply to everyone. I have forgotten the figure that you cited but, when we look at the market as a whole, there will be a significant number of people to whom that does not apply. The policy also sends a signal to the aviation industry about Scotland being a good place to base aircraft and to fly services from, and that positive signal will influence marginal decisions.

On the specific example of passenger number increases at Aberdeen airport, the bigger word that I would like to use is “stimulation”. It is not just about the £7 reduction per passenger going to Aberdeen and how relevant that is if they are expensing it; it is about persuading the airlines to pour a lot of new routes into Scotland—for example, for a family of four or six who are travelling to Scotland or a business that is paying fares to get folk here for a conference. It is about providing stimulation to persuade the airlines to provide more routes to pour more visitors into Scotland.

We will widen out the debate to the wider economic issues.

I thank the panel for coming. There are a couple of things that I want to touch on. The committee papers refer to an analysis by Edinburgh Airport. Are you familiar with that? Have you looked at the key data in it? Specifically, there are numbers for the economic impact of an extra 1 million passengers—I assume that that is based on growth in gross domestic product—and the jobs that would be created. Are you familiar with those numbers from an economic development point of view? Do they look right to you? Have you done any analysis of those numbers?

Edinburgh Airport produced those numbers as an update on work that was carried out by York Aviation, which I think has done two or three reports over a number of years on the impacts of APD cuts in Scotland. A wider PWC study at UK level in 2015 or thereabouts indicated long-term gains for the Exchequer from the elimination of APD in the UK. We would say that there has been a consistent pattern of evidence of the economic impact.

You are comfortable with where the airport has got those numbers from. Could you tell me where those numbers have come from?

I did not undertake the report.

You have not looked into how it did the calculations.

I have not looked at the methodology; I have looked at the context of the reports.

You are just taking the headline figures and saying that they are okay.

The figures have been verified by Biggar Economics. They have been independently—

But you have not done any number crunching to say whether they look right or wrong, in the ball park or whatever.

From our perspective, they accord with the figures in other reports and international experience. We are not resourced to undertake that kind of work ourselves, but we have consistently asked others, such as the Scottish Government, to look at it.

Taking another angle, you guys are getting a free hit when you come here. We are asking, “Do you want a tax cut?” and you are saying, “Yes, please.” Let me make the question a wee bit harder. I understand that there are a lot of segments in the market, such as inbound tourism, outbound tourism, business, long haul, domestic, short haul and European. Assuming that we are going for a 50 per cent reduction and given that the stated objective is to generate economic activity, if you had that money to spend, would you go for an across-the-board 50 per cent reduction, would you target a 100 per cent reduction in certain areas and have no change in other areas or would you want a combination of those in order to generate the biggest increase in economic activity? Where would you target the 50 per cent reduction if you had that money to spend?

We have consistently said on behalf of the members in our network that the point of a reduction in APD would be to send out a clear signal about Scotland being open for business and to increase Scotland’s connectivity and the number of air services with the rest of the world. We want a reduction to be implemented in as simple a way as possible and to have the maximum impact, and we said in our submission that a straight 50 per cent cut in APD across the board is probably the best way of doing that. That said, we are mindful of issues that have been raised regarding, for example, cross-border connectivity between Glasgow and Edinburgh and London. That is certainly a valid concern, although it is less of a concern in relation to Aberdeen airport, for example. However, the system should be as simple as possible and it should send a clear and strong message about Scotland’s direction of travel.

Just to drill into that a bit more, it is clear, I think, that outbound tourism can potentially have a negative effect on the economy because people are spending their tourist money elsewhere rather than in Scotland. That is at one end of the scale, and there could be other areas at the other end of the scale. You are saying that the most important thing is to send a clear signal rather than to understand the specific economic impact of cutting the tax for different categories of travellers.

I am not saying that we should not try to understand the economics. As the bill goes forward and measures are introduced to undertake the commitment that the Government has made, that needs to be backed by evidence. We would be as keen to see such evidence as we would be to see that for any other tax change that the Government chose to implement.

Do the other panel members have views on where they would like the benefit to fall?

Our interest is connectivity, which requires a mix of outbound and inbound journeys and is what airlines will look at, but it is hard to separate those out. Any work in that area would have to take into account how difficult it would be to administer the kind of differentiations that you described, particularly if the objective is eventually to abolish the tax.

As to our priorities, we think that simplicity is important. As I have said previously, the internationalisation of the economy is one of our highest priorities, and routes to Europe and beyond are a top priority. However, we would not want to ignore the fact that domestic connectivity is still important and that it is not all about connectivity with London, as there are lots of other important routes. We have to bear in mind the particular issues for the north of Scotland.

If we were to stipulate the answer that we think that we would get from the airlines that pour visitors into Scotland, it would be that the reduction has to be across all three areas. That would make the biggest impact and send out the message that we want Scotland to increase its visitor numbers. It is then for the industry to figure out a way in which to look after them. We might talk about the expense of going to Europe, for example, but the value of the euro for Britain at the moment means that it is more expensive to go to Europe, which is good for us in Scotland. The way in which to capitalise on that is to react right now with the air departure tax.

Good morning, gentlemen. I want to raise two issues, the first of which follows on neatly from Ivan McKee’s questions and is about the balance between inbound and outbound journeys. One of the arguments that you will hear from people who are against reducing APD is that, if we make flights out of Scotland easier, we will just encourage more Scots to go overseas on holiday rather than taking holidays at home. Do you have any sense of what the balance is between inbound and outbound travel? How do you think reducing APD would encourage a net increase in holidays in Scotland?

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We would point to the opportunity that exists in the billions of people out there who could come to Scotland compared with the size of the Scottish market. In Scotland, we have a strong presence of people from all parts of the world. I am sure that Stephen Leckie can talk more about particular opportunities, but we look at the number of international students and note that countries such as New Zealand are specifically targeting as one of their highest priorities the tourism opportunities that come from the presence of international students in their country. We intrinsically have the opportunity to bring in many more people than can go out on outbound flights.

Stephen Leckie is the expert on tourism but, before he comes in, I would like to widen the question out slightly. I understand where Murdo Fraser is coming from on a net balance of tourists coming in and out of the country and what impact a reduction in air departure tax might have on that. However, it is equally important that we get businesspeople, including those from small and medium-sized enterprises, out of the country in order to forge alliances and enable trading in markets that we are targeting around the globe. It is difficult to put a boundary between a tourist leaving the country to spend money abroad and a businessperson leaving the country to generate more wealth for our country. We certainly encourage further growth in connectivity, and reducing ADT is a means of doing that, but for us it is as much about businesspeople going out there and forging those alliances as it is about tourists.

The airlines are going to chase routes that they believe to be profitable, and that works in our favour as they pull more visitors into Scotland. It is up to us in tourism to figure out the best ways to look after those visitors and maximise the revenue growth from them. It is as simple as that.

I will address my second question to Mr Leckie first. I want to put the debate into a wider context, if I can. We know about some of the pressures on tourism. I do not know whether you were here earlier when the Cabinet Secretary for Finance and the Constitution was here, but one issue that came up was the rates revaluation, which is affecting the tourism and hospitality sector quite severely. If the policy of reducing air departure tax proceeds, what impact will it have in balancing out some of the other concerns in the industry about the cost pressures that are coming through?

The convener warned me before we started that this is about air departure tax and not about—

Murdo Fraser’s question is a fair one in the context of air departure tax.

Right. I do not think that the industry has ever faced such an extreme challenge as it faces today with the significant rises in business rates, energy costs and food and drink costs. Some tourism businesses are telling me that they have a 20 per cent uplift in food and drink costs alone. We also need to consider the impacts of the living wage and the apprenticeship levy. The industry has never faced such tough times in terms of costs.

Revenue growth is our big challenge. In 2012, the “Tourism Scotland 2020” strategy reckoned on putting £1 billion of revenue on to tourism in Scotland. This time last year, we were looking at being £300 million short of that. The chief executive of Edinburgh Airport indicated that, if a decision was made to reduce air departure tax by 50 per cent, it would soak that up by 2020.

The massive uplift in costs for the industry might mean that some tourism businesses close because they just cannot afford to keep their doors open—it is as blunt and simple as that. Part of the potential rescue package might be that, if we pour more visitors into Scotland, we can increase our yield and our revenue, as that might be enough to save and rescue some businesses.

I hope that I have not gone away from the point, convener.

Not at all. It is entirely in context. Does anyone else have a question? Patrick Harvie, is yours a supplementary question to that one?

It is not a supplementary to that specific question, but it is on the economic impact.

I need to bring Maree Todd in—we need to create a fair balance here, because she did not have a lot of time to contribute in the previous session either.

Thank you, convener.

You were going to talk about issues to do with the Highlands and Islands but also bring in rail issues.

Yes. I represent the Highlands and Islands, which is an area with pretty poor connectivity. Connectivity is the key to life in the Highlands and Islands. People living on islands have a lack of alternatives to flights. The same can be said of some of the mainland airports, such as Wick. Last week, we talked about the alternative to flying between Edinburgh and Wick as being an eight-hour train journey, which is not an attractive proposition for any businessperson or tourist. I want to ask about that.

Tourism undoubtedly contributes a huge amount to the Highlands and Islands economy—proportionally more so than in the rest of the country—and we have a very vibrant sector. It also sustains some fairly fragile parts of Scotland. How might the tax reduction make a difference to that?

To kick off on that point, APD is a tax that is not currently levied on departures from the Highlands and Islands, as I am sure you are well aware, but it is charged when people come from other airports to the Highlands and Islands. Certainly, any moves to reduce the cost burden of travelling to the Highlands and Islands have to be positive. For example, over the past few months, we have seen some of the costs being reduced for flights from Heathrow airport and the reintroduction of the Inverness to Heathrow service, which colleagues at Inverness Chamber of Commerce tell me is a very well-used service and one of the most popular services there; it has been a cost reduction that has helped to bring that about. If we can reduce the costs of connectivity within the UK, and of accessing the Highlands and Islands, that has to be positive.

I absolutely agree. Aviation and connectivity are essential for the Highlands and Islands. They are very important to the life sciences sector, for example, in addition to tourism, food and drink and lots of other sectors. As a minimum, we want to see the current position for the Highlands and Islands preserved with ADT.

There are some concerns about the relative position between the Highlands and Islands and the rest of Scotland changing, which might make it more attractive for people from the Highlands to fly from other airports in Scotland. That is an issue that we think has to be considered. I saw the evidence that Loganair gave last week, including its thoughts on how services could be further improved. I have not had the opportunity to discuss that with Loganair, but I thought that it made some interesting points.

There are two aspects to Maree Todd’s very well-made point: the Highlands and the islands. In the Highlands, where we run three hotels on the west coast—in Glencoe and Ballachulish and on the west Highland way—there is huge latent and unprecedented demand for hotel accommodation for groups and tours, leisure operators, couples and families. However, it is easy to get there—it is a nice drive to Glencoe from Edinburgh or Glasgow.

You would not say the same if you were asked to drive to Shetland, Orkney or Stornoway. You could not do it. If you were to take the ferry, it would take you a day to get to Shetland. Therefore the only option is to fly there, as I was privileged to do last year—and what a wonderful experience it is to fly to those areas.

In the Scottish Tourism Alliance, we are very conscious of those areas in the Highlands and Islands that are away out further and beyond, and their impact on the economy. They are very much part of Scotland and we are proud to say that. Skye is a much easier place to get to—with the Skye bridge, you can drive there. We would like to be able to fly to Skye as well.

I would undoubtedly like us to be able to fly to Skye as well.

I want to ask you about the number that you quoted at the end of your report. You said that the UK is currently ranked at 140 out of 141 in the world for holiday costs. As I represent an area for which tourism is an important part of the economy, that statistic concerns me. Could you give me a little bit more detail on how that statistic was arrived at? Does it take into account aspects other than taxation, such as currency exchange, and which country is 141st?

VAT is the biggest indicator in that particular bit of research. I have looked up the country that sits in last place, but I cannot remember what it is. I think that it was a country that we might not ordinarily recognise.

I will come back at the end to wider economic questions and to Scottish budget issues. Now is a good chance for Neil Bibby to talk about rail.

Yes, I have a question on that and I will come back in on the budget later.

We have heard that passenger numbers are increasing and we discussed last week how rail travel between Edinburgh and London—or between Glasgow and London—is often more expensive than air travel. We know that train travel is less damaging to the environment than air travel—obviously you do not represent the airlines or the airports—so should we not make rail travel in the UK more affordable with our domestic travel policies?

If you book rail travel in advance online, it is amazingly cheap, but if you were to phone today to book a train ticket for tomorrow from Edinburgh to London, it would be expensive. It is about educating folk who wish to use that form of transport that it is cheap online and in advance.

I cited an example last week of booking for a couple of weeks’ time and finding that it was far more expensive to travel by rail than by air, so it is not just about educating people. I appreciate that there are deals from time to time, but rail travel is consistently more expensive. Do you think that rail travel is affordable?

Yes, I absolutely do. If we take some specific examples, anything with a time and a space in this industry should be yield managed. The yield is maximised by charging the most when the demand is greatest, so it might have been the case, in the particular moment that you picked your sample flight to London—if it was London—that there was high demand for that flight so there was a high price, and that the rail option was cheaper.

Are there any other comments on that?

There is an issue of comparability. As a result of the lack of competition for flights between Glasgow and Heathrow, for example, if you book at the last minute, it can be very difficult to get a seat or it can be fairly expensive, because of demand.

We recognise that there is a potential issue over APD and that there might be an impact on modal competition between rail and air for cross-border travel, which needs to be looked at. It is less of an issue for the Invernesses, the Fort Williams and the Aberdeens than it is for Glasgow and Edinburgh. Equally, as Stephen Leckie mentioned, it is perhaps less of an issue for services to the likes of Bristol and other regional airports than it is for services to London. There is an issue because, when the east coast franchise was awarded, the effect of a reduction in APD for domestic services was probably not a material consideration.

For us, it is about connectivity, so we want good air links and good rail links. There is competition for city centre to city centre travel but, if you are flying internationally from Scotland via Heathrow, rail is not a particularly attractive option. For domestic connectivity, there are lots of issues to unpack, but we agree that that needs to be thought about further as part of the general mix of improvements that we would like to see. There have been journey time reductions on rail that have made rail more attractive, but if rail is really going to become dominant from central Scotland to London, we need to push those journey times down further in addition to considering price issues and so on.

11:30  

James Kelly is next. We will try to wrap up the economic impact and the impact on the budget in one bit.

Looking at the financial memorandum, I note that the impact of a 50 per cent cut could be a reduction of up to £200 million in the Scottish budget. Is that a fair sacrifice to make in order to introduce the changes that have been proposed in the bill?

We think that Government taxation policy in general should be aimed at growing the Scottish economy. If we are serious about funding public services in the long term, we ought to be pursuing tax policies that will grow our economy and ensure a better return for the taxpayer.

I mentioned the PWC report earlier. It suggested that, certainly at a UK level—it considered the UK situation only—the elimination of APD could ultimately result in a net benefit to the Exchequer as a result of the impacts on other elements of tax. Any decisions on tax need to be taken in the context of the priority of growing the Scottish economy.

We have a similar perspective on that. We have had a couple of years with quite weak growth in the Scottish economy. If we are going to be able to afford the public services that we all want in years to come, particularly with the new fiscal framework, we must have higher rates of growth, and internationalisation of the economy is key to that.

The export stats that came out recently showed reasonable progress, but they also indicated that the value of exports from SMEs has declined, in contrast with those of larger businesses. There is evidence that fewer SMEs have been engaged in exporting recently. We have to make it attractive to SMEs to start to explore markets and to make connections if we are going to have a diverse, resilient economy that will generate wealth for the country.

Gareth Williams has mentioned export figures. One of the stories that those figures tell is that the most significant growth in Scottish exports over the past 15 years has been to markets outside the UK and the European Union. Those have grown by about 83 per cent. Enabling connectivity to those markets will help that opportunity to grow even further.

The issue is about the stimulation factor and persuading airlines and visitors—including those on business tourism, those travelling for education purposes and folk coming here for both big and small events—to come not just to the main airports but to the regional airports. It is about persuading them that Scotland is a great place to come and visit—and it costs a bit less.

The ostensible figure of a £200 million drop in tax income will largely be offset. In fact, as I understand it from all the papers and the other stuff that has been written before, it will be more than compensated for over the next few years.

There remains a real question as to whether the Scottish budget will in fact be compensated to the tune of £200 million.

The Finance and Constitution Committee and MSPs in general will have to decide how best to allocate the moneys in the budget for supporting transport. I was interested in Mr Leckie’s comment that rail travel is “amazingly cheap”. Does he think that it is fair, for example, that the cost of a monthly ticket for an 18-year-old student doubles from £30 to £60 when they turn 19? That is for travel between Cambuslang and Glasgow Central—a distance of 4 miles—using a monthly ticket. Do you think that that is right? Would it be right for a couple on a joint income of £60,000 to enjoy reductions in their air fares, while people struggle to pay for their daily train journeys?

I do not work in that sector. I thought that I was being asked about a comparison between the cost of air travel to London and the cost of rail travel to London, rather than a comparison with a trip from Cambuslang to Glasgow.

If we are talking about a 50 per cent reduction in air tax, do you think that it is right that people at the top of the income brackets, for example a couple with a joint income of £60,000, should enjoy reductions in the cost of their air travel, whereas someone on the living wage, for example, will not see any reduction in the cost of their train travel?

That feels like an awfully leading question and one that is closed. It is not a question that I am comfortable answering. That is not why I am here today.

It is one of the issues that we will have to decide on in relation to the implications of the bill.

I am a little sorry that there was not much appetite to explore that issue. I hope that the witnesses would agree that if we are to approve a course of action, we should have a good degree of confidence in the economic impact as well as the social and environmental impacts, compared with other courses of action that we might choose to pursue with the same resource. That comparison was a fair one to make.

There seems to be some confusion around the economic impact. We heard in a previous evidence session from Edinburgh Airport about the work that it was citing. There seems to be some variance between the Edinburgh Airport position and the figures from, for example, the Scottish Tourism Alliance. Edinburgh Airport claims that, at the top end, the job creation figures by 2021 would be 9,484, whereas the STA claims 10,609. What Edinburgh Airport claims about employment tax—by which I assume it means income tax—would be at most £2.3 million by 2021, whereas the STA claims that it will be £12.7 million. Finally, Edinburgh Airport says that, at most, the saving in social security benefits paid would be £52.2 million, whereas the STA says that they would be £106.1 million. Why is there such confusion around the figures?

I would need to look into all those figures to understand exactly. For the first figure, the difference seems so little that I suggest that it is splitting hairs. The difference between the second and third figures might be to do with the comparison between the overnight stays and day visitors, for example. I cannot be certain without looking over the figures and understanding where they came from.

Regarding the second figure on employment tax, I assume that you know where the STA’s figure of £12.7 million came from. Do you have any greater confidence than Edinburgh Airport did on that figure being based on up-to-date information on changes in taxation, for example, given that the personal allowance has increased since 2013—that is when Edinburgh Airport’s figures date from—which will clearly reduce the income tax paid by any additional employment that is generated? Are your figures up to date?

As far as I am concerned, they are up to date.

Are you saying that they are based on the income tax that would be generated, given the current personal allowance limits that have just been changed?

No. I cannot answer that question.

So you do not know whether they are up to date.

No. I cannot answer the question that you are asking.

Okay. Let us turn to the analysis of savings to the social security system that you have presented. You have chosen to use a website called entitledto.co.uk to calculate the benefit saving per job created and you have given us a figure of £10,000. Is that figure per year or during the lifetime of the employment?

Can you direct me to the page that you are looking at?

It is at the end of your written submission. The first bullet point on the final text page says:

“In our analysis this would result in a net BENEFIT to the government purse.”

The page after that includes the figures that you have given us. Towards the bottom right-hand corner, it says

“Benefit savings per Job Created - £10,000”

and it cites entitledto.co.uk as a source.

I am really sorry, but I cannot answer that. It feels like you are trying to trip me up, so I will need to go away and look at that.

No—I am just trying to understand the information that you have given us. Do you know, for example, whether that includes devolved benefits such as the council tax benefit or only reserved benefits?

The numbers were submitted by the STA and the questions are fair, but obviously Stephen Leckie cannot answer them today. Therefore, it would be fair for him to reflect on them and for us to ask the STA to write to the committee with a response.

It would be helpful to understand why the STA chose to use the figures that it has given rather than, for example, information from HMRC, the Department for Work and Pensions or the Office for National Statistics, which would be more accurate.

Can any of the witnesses tell us what percentage of the fiscal benefit would come to the Scottish Government as opposed to the UK Government? They talk about additional tax being paid or savings through the social security system. Obviously, the Scottish Government will take the hit from reduced revenue from the aviation tax.

I cannot tell you the percentages. We look at the benefits for the economy as a whole and for public finances as a whole. That includes Scotland and the UK.

But we do not know the extent of the benefits.

No.

Okay. Perhaps we could make a comparison with countries that are introducing or reintroducing aviation taxes, such as Sweden and Norway. Both Sweden and Norway have concluded that there will be a net benefit to the public purse from the introduction of aviation taxes. A recent assessment of the German Parliament concluded that there was a net gain of €800 million from Germany’s aviation tax. That was based on looking at both the revenues and the economic impact.

Are you gentlemen aware of those studies?

No.

Not specifically.

It seems to me that we do not have any certainty about the economic impact, job creation, the fiscal impact on the public purse or, indeed, the extent to which tax changes have generated changes in aviation levels in other countries. Should we not have competent answers to such questions before we approve a course of action?

Any economic analysis of those issues would be hugely helpful, but our organisations are not necessarily the ones that would undertake that analysis. It is still fair to point out—we mentioned this in our submission—that, even with a 50 per cent discount, we would still have the fourth-highest level of domestic and short-haul air taxes in Europe and the second-highest level of long-haul taxes. England and Wales are at the top.

Aviation is growing despite that.

The more it grows, the more connected we will be.

Patrick, I understand why you are asking those questions, which are now on the record. However, we have heard from witnesses a number of times that the in-depth analysis that is required is a job for somebody else—specifically the Scottish Government—to do.

I have asked about information that is in the witnesses’ written submissions.

I know that you have.

I also have a question about the environmental impact, if it would be appropriate to move on to that now.

We had better move on to it now or it will not be covered at all. On you go.

I have not been convinced that the Scottish Government or anybody else is giving us a clear indication of what the environmental impact of the policy will be, either. The Scottish Government does not appear to have made a decision yet on whether it supports stabilising aviation industry emissions or reducing them over time—that is what the global aviation industry figure is doing. Do any of the witnesses have a view on how important a factor a reduction in aviation emissions is in Parliament’s decision on the bill?

Do the witnesses think that that is a question for them or for other organisations?

11:45  

The bill and the rates are addressed separately. We support the bill in enabling the tax to be introduced in Scotland. As far as the rates are concerned, we have commented on the economic aspects, and Transport Scotland and others have done some work on the environmental issues. If there is a feeling that the rates must be looked at again, we would be perfectly content for that to happen.

Scottish Chambers of Commerce’s submission says that the fact that

“The efficiency of modern aircraft is ... improving rapidly”

should be seen as an opportunity to reduce emissions. Are you confident about that statement?

We looked at work that the Committee on Climate Change undertook, which suggested that, during a period of passenger growth in UK aviation, emissions had largely fallen.

The International Civil Aviation Organization takes the view that the industry is some 12 years behind its own targets for reducing emissions through efficiency. If we were to conclude that that was a more reliable assessment of the state of play, would we not be well advised to call for a pause on a policy that might lead to significant increases in aviation, based on the projected increase in passenger numbers?

I do not think that we are in a position to choose one analysis over another.

Sure—I am not asking you to—but if we were to conclude that the ICAO was correct, would it not be appropriate to pause the policy and to figure out how we can get a reduction in aviation emissions rather than to allow an increase?

The UK Government has made it clear that it does not regard APD as an environmental tax. Indeed, there is evidence that the way in which it has been applied leads to behaviour that increases emissions. The fact that people fly less directly to avoid paying APD has a negative impact on emissions.

The aviation sector has made strong progress and given strong commitments on reducing emissions in the future. If we take into account the fact that the Parliament will look at the rates on a regular basis and has some statutory commitments to meet on climate change, there seems to be plenty of opportunity to monitor progress.

I think that the comment that APD, if it is seen as an environmental tax, is an ineffective tax is probably a fair judgment—you seem to be suggesting that the way in which it operates increases emissions. However, that is very much at odds with the Scottish Government’s analysis, which shows that the impact of its policy will be to increase emissions.

The Scottish Government has looked at the totality. My point was that, on particular routes, APD can have a negative impact because it encourages people to fly less directly—for example, by going via Dublin or Amsterdam.

Do you accept the Scottish Government’s view that its proposal will increase emissions? Is that just something that we should live with?

I have no reason to doubt that view. I note that the increase is very modest and, as I suggested in our submission, there are other ways in which reductions in the emissions associated with aviation could be achieved—the provision of public transport links to airports is an example.

I think that you have had a fair kick at the ball, Patrick.

I was listening to the discussion, so I do not know whether anyone else indicated that they would like to ask a final question. Neil Bibby has one. This will be the last question, unless there is a supplementary.

This week, the former Edinburgh MSP and minister Kenny MacAskill said that it was

“hard to see a credible argument”

for the proposed reduction in APD, which would only enrich airlines and airport operators. I think that he has a fair point, particularly when passenger numbers are increasing.

I want to follow up on James Kelly’s point about budget priorities. We know that if there is a 50 per cent cut in APD, there will be a loss of at least £120 million in Government revenues. Do your organisations have a view on what services should be cut? The cabinet secretary often asks Opposition parties for views on what services should be cut when we propose particular policies, and I am sure that we will ask him the same question in relation to this proposal. I understand the economic growth argument that you make for reducing the tax, but a decision will have to be made about where that £120 million cut should be made. Should that money come from the national health service or education?

I understand why you asked that, but I do not think that it is a fair question to ask the panel.

I think that it is a fair question to ask.

Well, I do not, because our witnesses are not here to make a judgment across the whole portfolio. It is a fair question for a Government minister.

Surely we ask organisations where money should be saved and where it should be spent. I think that it is legitimate to ask that, but if you do not think so, that is fine.

If any of the witnesses feel that the question is a legitimate one that they would like to answer, please feel free to do so.

I understand the fiscal position for the Parliament. I respectfully suggest that the question that needs to be asked is about the situation in five to 10 years’ time. I go back to the point that was made about people on the living wage. We must ask ourselves how we are going to get a stronger Scottish economy and generate more wealth that can be shared fairly. To do that, we must have stronger international links, grow our tourism sector and increase our exports. I understand the short-term challenges, but I think that on such issues—as with everything—we must take a long-term perspective.

I thank the witnesses for coming along to give evidence.

Meeting closed at 11:51.