Can reducing taxes on travel boost Growth?

Tom King, Head of Government and Industry Affairs at British Airways, makes a case for reducing taxes on travel and tourism

As economies across the globe continue to search for sustained growth, the promise of increased export income from inbound tourism has become ever more attractive. In the United Kingdom, the government has set out its ambition to treble the number of Chinese tourists it attracts to Britain – to 500,000 a year by 2015. Growth in tourism forms an important part of the economic strategies of many leading economies and is an important engine for job creation.

Yet many of the same governments which aim to attract more tourists also impose punitive taxes on foreign and domestic visitors. Few industries are currently more affected by this tendency than the UK airline sector.

Customers of British Airways now pay over £500 million a year in Air Passenger Duty (APD), the UK’s airport departure tax, alone. APD is the highest aviation tax of its kind in the world and it will raise about £3 billion for the government this year. We have seen APD increase between 120% and 360% since January 2007, depending on destination and class of travel, and the government intends to continue the increases every year to 2016. It is set without any apparent regard for the taxes on aviation and tourism imposed by other governments. Foreign governments and airlines frequently cite APD as a block on investment that undermines the viability of new long-haul routes.

It is no surprise, then, that when APD is combined with a 20% sales tax on hotel accommodation, the World Economic Forum’s Travel and Tourism Competitiveness Report 2011 has the UK languishing at 134 out of 139 countries in its ranking of ticket tax and airport charges competitiveness. The Forum will publish the 2013 update to the Competitiveness Report in March, and I fear that there will be little improvement in the UK’s ranking.

But as the tax burden on the travel and tourism sector in the UK increases, it is becoming ever clearer that such taxes are acting as a brake on growth and on job creation. These taxes not only discourage foreign visitors but also reduce the spending power of those visitors who still travel. And new independent research from PwC, the professional services firm, commissioned by four of the UK’s leading airlines including British Airways, demonstrates that APD is among the most distortive taxes in the UK economy – more distorting even than the main tax on corporate profits. The research indicates that abolishing APD could boost the level of UK GDP by almost 0.5%, while simultaneously increasing government tax receipts as a result of increased employment, corporate profits and investment.

Airlines compete with other carriers internationally, and those based in countries with high aviation taxes find it more difficult to develop new routes and maintain good frequencies, with knock-on impacts for business passengers and for industries that cater to tourists. Meanwhile, hotels operate at sub-optimal occupancy rates.

If governments around the world really want to capitalize on the coming boom in tourism from the emerging economies, they will eliminate these distortive taxes and reap the benefits.

Author: Tom King is Head of Government and Industry Affairs at British Airways

Image: An airpline comes into land at Heathrow Airport in London REUTERS/Luke MacGregor