Welsh Affairs Committee
Oral evidence: Devolution of Air Passenger Duty to Wales, HC 1575
Tuesday 26 March 2019
Ordered by the House of Commons to be published on 26 March 2019.
Members present: David T.C. Davies (Chair); Guto Bebb; Chris Davies; Geraint Davies; Jonathan Edwards; Susan Elan Jones; Jack Lopresti.
Questions 180 - 229
Witnesses
I: Robert Jenrick MP, Exchequer Secretary to the Treasury, and Ann-Therese Farmer, Deputy Director, Energy and Transport Tax, HM Treasury.
Witnesses: Robert Jenrick MP and Ann-Therese Farmer.
Q180 Chair: Minister, good afternoon. Everyone is ready and we shall begin. Thank you both for coming along to give us evidence about Air Passenger Duty and the potential to devolve it in Wales.
I will start by asking the Minister, what assessment have the Government made of the impact of APD on airports and passengers across the UK?
Robert Jenrick: Of course. Good afternoon, and thank you very much, Mr Davies, for the opportunity to give evidence. Can I take the opportunity to introduce my colleague from Treasury, Ann-Therese Farmer?
Of course, this is an issue we have given a great deal of thought to now over several years. The good news is that the aviation sector across the UK is in robust health. It contributes to about £22 billion a year for the UK economy—around £14 billion from the air transport sector itself and £8 billion from the aerospace sector more generally. It is estimated to provide around 230,000 jobs and consists of around 4,500 businesses, many of which, of course, are in Wales. It supports around 500,000 jobs right across the country. Therefore, it is a sector that we are very focused on and we have been giving a great deal of thought in recent years as to how we can continue to support it, not least as we negotiate our exit from the European Union.
With respect to Air Passenger Duty, in particular, this is a tax that is a significant revenue raiser for the Exchequer. We raise about £3.4 billion a year from it, so it does make an important contribution to general taxation and the finance of all of our public services. We have taken a number of steps, over the course of this Government and the coalition Government, to try to support the aviation sector and those people who need to fly. In the Budget last year the Chancellor announced that—for the eighth year in a row—short haul rates of APD will not rise, so they will be staying at £13 for economy and £26 for business and first class flights. We are keeping the cost of APD and passenger travel down for around 80% of passengers.
We made a very significant intervention in 2014, which you may recall, which is when we exempted children from Air Passenger Duty, which was very significant across the whole of the country, particularly for Cardiff Airport where quite a large number of holiday flights go out.
The analysis that we have done to date brings us to the conclusion that Air Passenger Duty—although all of us would like to reduce taxes and to simplify taxes where we can—does provide an important contribution to general taxation.
The last point is that this is an area of the economy that would otherwise be relatively under-taxed. There is no duty on commercial aviation fuel and there is no VAT on airline tickets. Were you not to pursue APD, not only would we lose £3.4 billion to the Exchequer but this would also be a sector of the economy that was not paying a very significant contribution.
Q181 Chair: Can I push you a bit further on this? There must be a huge difference between the amount of that £3.4 billion that comes from the London-based airports and the amount that comes from regional airports, like Cardiff or Bristol. Would you accept that the amount that you get from, say, Cardiff Airport is really pretty negligible?
Robert Jenrick: It is a small amount. The last estimate that I saw was £6 million a year or 0.2% of all the receipts that we received. You are absolutely right, in the scheme of £3.4 billion that is a small sum. The issue that we have always had, if we were to make any step—as you would expect when we devolve or change any significant tax—was to consider very carefully what the consequence of that could be. As you know, one of the concerns that we have had in the past is the knock-on consequence for taking action in Wales, or in particular for Cardiff Airport, on other airports in other parts of the United Kingdom, which I am sure we will come on to discuss. At Bristol Airport, in particular, the concern has been that that does operate as a single aviation market.
Q182 Chair: Can I pin you to something? If Air Passenger Duty were devolved to Wales there would be no impact on the Treasury, would there, because in the first instance even the amount of the potential loss is minimal, 0.2% of the overall total? In any case, you would simply, when you devolved the tax, remove that estimate from the block grant, so the impact on the Treasury of devolving APD is absolutely minimal, isn’t it, Minister?
Robert Jenrick: It is a very limited impact, for the reasons you have just described. If we were to devolve it, there would have to be a discussion about the block grant and in all likelihood the block grant would be—
Q183 Chair: We have a precedent, though, don’t we, you would remove from the block grant the amount of money—
Robert Jenrick: Yes, and in all likelihood the block grant would be adjusted accordingly.
Chair: And it is up to the Welsh Government to decide whether or not to replace that.
Robert Jenrick: It would be difficult to estimate the impact on Exchequer revenues because you would not know exactly what would happen to other airports, such as Bristol, Manchester, Birmingham and Liverpool, which Welsh passengers obviously use at the moment.
Chair: May I just interrupt you there?
Robert Jenrick: The concern would be that this would lead to clarion calls for similar changes elsewhere within the United Kingdom that, in time, might undermine this quite significant Exchequer revenue that supports all of our public services.
Q184 Chair: I think what you are saying is that you have a concern that, if you devolved Air Passenger Duty, the Welsh Government might well reduce APD and that if that were to happen then the clarion call would be for Bristol to reduce APD also. Is that pretty much what you are saying?
Robert Jenrick: That is one of the concerns because the evidence does seem to suggest that Bristol and Cardiff operate in a single aviation market. This is something that I know you have been exploring. At the end of the day, they are two airports that are only 60 miles apart. In many cases, your own constituents are an equal distance between the two airports—some nearer to Bristol than they would be to Cardiff Airport. It is clear that one move for Cardiff would have knock-on consequences. As the Treasury, it is our duty to make sure that those decisions are made carefully and that we think through what the consequences might be.
Q185 Chair: What you are saying is the consequences would be potentially a lot of passengers would go from Bristol to Cardiff and that, therefore, the Treasury would lose out on APD from Bristol. Is that correct?
Robert Jenrick: That is one possible consequence, yes, if you believe that the two airports are part of a single aviation market, which I think the evidence does suggest that they are.
Q186 Chair: In simple terms, it would be good for Cardiff but bad for Bristol?
Ann-Therese Farmer: What I would say is that it is very difficult because there is a lot of uncertainty in how the impacts would play out. We would not necessarily want to draw quite as blunt a conclusion, but that that is definitely a risk given the proximity of the airports.
Q187 Chair: There is a risk that Cardiff could get lots of extra passengers at the expense of Bristol?
Ann-Therese Farmer: There is a risk, yes.
Q188 Jonathan Edwards: The term you have used is a single aviation market. Therefore, you are against giving Cardiff what you would deem to be a competitive advantage because you do not want to disadvantage Bristol. That seems to be the thrust of the British Government’s position. Yet you will be aware of plans to build a second terminal in Bristol Airport. The Welsh Government will not have the ability to object to that and, therefore, would that not give Bristol Airport a significant advantage over Cardiff Airport? Indeed, I read in the papers that the plan of the second terminal is to increase the passenger numbers in Bristol to 20 million by 2040, which is more than double what it is at the moment.
Is it not the reality that, under the British Government’s current policy and the current constitutional framework, Bristol Airport has an inherent advantage over Cardiff Airport?
Robert Jenrick: I am not familiar with the exact plans of Bristol Airport to expand, but that is obviously a commercial decision for them as it would be for Cardiff Airport to expand. What the Treasury cannot control is the decisions of Bristol or Cardiff Airports, who must make whatever decisions they can to grow their passenger numbers, to explore new routes, whatever they wish to do. What we can control is the taxation system. It is an important consideration for us as to how fair the taxation system is for businesses and individuals in the whole of the United Kingdom, so as not to create unnecessary competitive advantages or disadvantages, or at least to think through those very carefully before we do pursue them.
Cardiff Airport obviously belongs to the Welsh Government and is being invested in very heavily as well. I think several million pounds of investment has gone into that. There are opportunities for Cardiff Airport, and I am sure they are embracing them, as well as Bristol Airport is, to try to find new routes, incentivise airlines to come and to make the passenger experience as good as possible, as you would expect.
Q189 Jonathan Edwards: If you are the CEO of Bristol Airport and you are more than doubling the size of your capacity and you are in a single aviation market, the target group of people that you are trying to entice to come to your airport are going to be largely Welsh passengers, aren’t they?
Robert Jenrick: They might be, or it may be that it generates some new passengers who were not previously flying or those who come from further afield, elsewhere in England. As I say, there is nothing wrong in either Bristol Airport or Cardiff Airport trying to maximise their growth prospects. That is a good thing. We want to see a thriving aviation sector and we want to see both airports succeed. What we are discussing today is whether or not we should use this particular tax as a tool to enable Cardiff Airport and the Welsh Aviation sector to grow even stronger than it is today. Our argument is that we need to think very carefully about what the knock-on consequences of that would be for other airports.
Q190 Jonathan Edwards: One last question to finish. Bristol is going to double its capacity numbers to 20 million. It is a much bigger airport than Cardiff. Do you expect Cardiff to lose passengers as a result of the developments in Bristol?
Robert Jenrick: I do not think we have done any analysis of that, so it is difficult for me to comment without knowing the details.
Q191 Geraint Davies: Two questions. First of all, in your introductory remarks you mentioned that there is no tax on tickets or aviation fuel and that APD has been frozen, and you suggested that was a good thing. Do you think it is a good thing, given Paris and the environmental impacts of aviation growing to something like 12% of our carbon footprint by 2050, doubled from 6%? You do not seem to have any recognition at all about the environmental costs of aviation. You seem to just want it to grow, is that right?
Robert Jenrick: No, that is not fair. Air Passenger Duty was never envisaged as an environmental tax but there are those today who would like us to view it through that lens. When we discussed this—for example, during the passage of the Finance Bill—there were those, including Opposition spokespersons, who asked a similar question to you: could one use this to disincentivise people from travelling by plane? That is a consideration that we could take into account. We have sought in recent years to strike a balance. APD is high by international standards. That is partly the nature of the fact that Great Britain is an island, and so it is possible to have a tax in Great Britain in a way that is much more difficult to do in continental Europe.
We have tried to strike a balance between maintaining the tax base, which is an important source of revenue for public services, while also taking opportunities in successive Budgets to freeze it—or on one or two occasions to reduce it—and to make the child exemption. The short answer to you is that we have not viewed it historically as an environmental tax. One could do, if one would like to see it through that lens. It is still high by international standards, and so if one is looking for a disincentive for travel it is quite a high one.
Q192 Geraint Davies: On the environment generally, do you think it is reasonable that I have to spend £100 to go from Swansea to London by train and back and yet for £50 I could fly off to Spain and generate an enormous amount of carbon? You seem to be saying, “I don’t care about that. I just want more people to fly”. There seems to be no thinking in what you are saying about the environment.
Robert Jenrick: No, that is not what I said. I said that this has not been viewed as an environmental tax in the past. The other levers that one could use—such as the taxation of commercial aviation fuel—are determined by international treaty. We have used international fora to consider or to begin the international conversation as to whether one could take action in that respect. There does not seem to be a great deal of demand for major aviation countries, such as the United States, Australia and others, to open those international agreements and consider creating taxation on, for example, aviation fuel, but one could do in the future.
We are doing other things, for example, in terms of investing in cleaner fuels. In the spring statement two weeks ago, the Chancellor announced our intention to help passengers offset the carbon from their travel.
Q193 Geraint Davies: One final question on the APD thing and on the environment: it does strike me that, given that we are going to get rid of the tolls at last on the Severn Bridge, in terms of what Jonathan Edwards was saying about the expansion of Bristol, it is going to be much easier for people from Wales to travel much further to go to Bristol Airport, which is expanding, again undermining the environment because they are moving not to the nearest airport but to a further airport. Isn’t there a compelling environmental case to allow us to have lower APD in Cardiff in order to stop all this vehicle and movement across the bridge to Bristol?
Robert Jenrick: Ann-Therese, would you like to come in?
Ann-Therese Farmer: One point I would make on the carbon situation is obviously that we have other levers that we are using. We are also in the EU Emissions Trading Scheme. There are other ways in which the Government is working to control the emissions from aviation. It certainly would not suggest that APD is the whole answer.
The aviation strategy looks at—this would be DfT-led—issues around minimising the localised emissions in terms of travel to airports.
Q194 Chris Davies: Minister, good to see you. We had a site committee meeting in Cardiff Bay a few weeks ago and we had the chief executives of both Cardiff and Bristol and a senior representative of Birmingham Airport in to see us. They all wanted to see APD done away with completely. Are there any plans in the Treasury to see this reach fruition?
Robert Jenrick: We do not have any plans to do that but obviously the Treasury answer, as always, is that we keep all taxes under review, and it is an option that could be available to the Chancellor or his successors. We have had the same conversations as you have had with the airline industry, as you would expect. They would like to see a reduction in APD.
As I said in my opening remarks, we have taken a number of steps. For eight years now we have frozen Air Passenger Duty on short haul flights. We took the step to take children out of it, which was a significant one. The steps that we have taken in the last Budget would mean that around £300 million of support or foregone revenues are made available to the industry. Therefore, we are taking steps. Of course, the industry would always like us to go further than we are.
Q195 Chris Davies: On the call to transfer APD to Wales, I think you have basically made your position known to the Chair in your opening remarks, and you were not keen to see this happening. How often are you or the Treasury looking to review this decision?
Robert Jenrick: As with all things in respect of tax, we keep this under consideration. I have had a discussion in the last six months with the Secretary of State and so this is something that we will give further thought to. The piece of work that your Committee will produce will, I hope, illuminate and will be something that we give further consideration to.
Q196 Chris Davies: It is not something that is set out in an agenda, in a diary, so that in two years’ time you are going to look at this again? There is no fixed term?
Robert Jenrick: No, we have not committed to any particular schedule to consider this. Under the St David’s Day agreement we considered the case and the options for devolving APD to Wales. That in turn informed a review of options to support English regional airports and then, in 2016, the Government confirmed that they did not intend to devolve APD to Wales. But it is something that we will keep under review and we will pay careful heed to the outcome of your investigation.
Q197 Chris Davies: Following on from the St David’s Day agreement, the Silk and Holtham reports devised or came up with what taxes should be devolved to the Welsh Assembly. Every one of those was devolved apart from APD. Do you think that is fair? Do you think that is fair or not?
Robert Jenrick: Tax devolution in Wales is in a relatively early stage. It is evolving. As you say, some taxes have been devolved, others will be very shortly. This is one that—for the reasons I gave in the opening remarks—requires careful consideration because it will undoubtedly have some knock-on consequences for English airports—English airports that are used by and important to Welsh passengers as well, like Bristol, as we just described.
Coming from just across the border from where you represent, I know that many of your constituents would make use of Birmingham Airport, further north, Manchester, Liverpool and other airports, so it is important that we give careful consideration to this.
It is not unusual for devolution to be asymmetrical in the United Kingdom. That has been our experience. There are occasions where we have to think carefully about whether one intervention suits every nation of the United Kingdom. With respect to APD, we have chosen different outcomes for different parts of the UK, but you can see that there are differences between them. Northern Ireland is clearly part of the island of Ireland, which to most people is clearly a single aviation market. That may require a different solution to Scotland. Scotland and its airports are significant distances away from the nearest English airport and Wales is another step in itself, in the sense that Cardiff is only 60 miles from Bristol. Geographically, at least, perhaps as much as half of the population of Wales would be nearer to an English airport than they would be to Cardiff Airport.
Q198 Chris Davies: A lot of my constituents would see the £6 million, £8 million—whatever it is going to be—that the Welsh Government would then absorb as a further grant for the Welsh Government’s business, which is Cardiff Airport. A lot of my constituents and those further up north would rather see investment in roads and rail and so on. This would not be something I am pushing for, but I know the Welsh Government are. You said you have spoken to the Secretary of State for Wales, but how often do you speak to the Welsh Government about the possibilities of devolving this tax?
Robert Jenrick: I have spoken to the First Minister in his previous capacity as—
Q199 Chris Davies: Not the current one?
Robert Jenrick: I have spoken to the current one when he was Finance Minister—not recently but I have spoken to him—as I have on a number of other issues, which I dealt with with him at the Treasury, and I have had very helpful conversations with him. It is really for the Secretary of State to have a conversation with him and he has had with the Welsh Government in this respect.
You do touch on one point, which is, if it is devolved to the Welsh Government, it would clearly be a decision for them as to what they choose to do with Air Passenger Duty. It is not necessarily a panacea. You have seen in Northern Ireland, where we did devolve long haul APD, that that only opened up one route that was not sustainable—and it closed.
I don’t think you would want to overstate the impact of APD on airlines’ decisions to come to a particular airport or passengers’ decisions to fly. Certainly, for short haul flights, we are talking about £13. That for some budget airlines might be a significant sum but in other cases it might be considered quite a small amount of money.
Q200 Susan Elan Jones: My constituency is up in North Wales, so in terms of what happens to Air Passenger Duty for our area I think most of us are fairly agnostic on it. I recognise that it does have an importance in terms of a pan Wales’ view on this. It seems an anomaly, in terms of the fact this was something that was recommended in Silk but has not happened. From your point of view, do you also think that devolution of APD to Wales could alleviate some of the pressures on overcrowded English airports?
Robert Jenrick: As a general rule, we would like to see the expansion of airlines who wish to do so. We have made it a Government policy to support the expansion of Heathrow, and where regional airports can expand, and where their local communities would like them to, we support that. We would like to see our airports expand, new routes open up, and I can see the economic benefits that could flow with that. APD in itself is not a disincentive for doing so.
As I said earlier—and you may be more familiar with this than I am—the Welsh Government are making a series of significant investments in Cardiff Airport. I forget the exact sums but it was over £10 million last year or the year before—significant sums of money that could open up new routes and so on. I understand there is the new route to Doha, which sounds very positive. I do not think that APD is necessarily a game changer, or I would at least make the observation that it was not in respect of Northern Ireland. There are other ways in which the Welsh Government could support and encourage expansion at Cardiff Airport beyond simply changing the rate of APD.
Q201 Susan Elan Jones: What happens in Cardiff Airport does not really impact one way or another on most of us in North Wales, but the Silk report stated that Bristol and Liverpool may have a case for having a lower rate of APD. Liverpool is pivotal for travellers in North Wales. Would you consider lowering the rates for smaller regional airports in England? There is a good chunk of people in Wales who that really would benefit, and people in England of course.
Robert Jenrick: That is a comment made by many, including many of our colleagues in the House who represent regional airports. At the moment our ability to do so is constrained while we are within the European Union. It is something that one could consider—depending on the outcome of the negotiations and our departure from the EU—making differential tax rates between regional airports and larger hub airports, however you choose to define that. That is not currently possible while we are members of the European Union.
Q202 Chair: Why is it okay under EU rules to devolve APD to Wales, Scotland or Northern Ireland and allow them to reduce APD but it is not okay to, say, charge a slightly higher level to Heathrow and Gatwick, where there are too many passengers at full capacity, but a lower one to Liverpool or Bristol, which might benefit from that? Why is that not possible under EU law?
Ann-Therese Farmer: The Azores criteria mean that to devolve a tax and therefore have a differential rate you need to have independent authority to do that to. We could not—
Q203 Chair: Couldn’t you devolve the tax to the local authority in Manchester or Bristol?
Ann-Therese Farmer: The Government did a review in 2015 looking at regional rates and, also, devolution to the English regions. That review concluded there wasn’t widespread support for any of the options.
Q204 Chair: No, I am not asking whether there is support. I am asking whether it can be done under EU law.
Ann-Therese Farmer: You would have to look at it on a case-by-case basis on the specific characteristics of the authority you were devolving to—that is what I understand. It is hard to make a general statement about it.
Q205 Chair: I do not want to pick on you. I suspect you are not absolutely certain what the answer to the question is. My question is: if it is okay to devolve APD to the Welsh Government or the Scottish Parliament, why is it not okay under EU law to devolve APD to whichever level of authority is responsible for Birmingham or Bristol Airport?
Ann-Therese Farmer: You are right. I do not know the ins and outs of everything to do with the state aid law. It depends on the nature of the authority you are devolving to. Obviously, if you look at English areas there will be a lot of overlap in terms of where the airport is sitting and how that relates to local authority boundaries, and the extent to which those authorities would be able to have autonomous decision-making powers in the way that the devolved Authorities do. That is all essential for state aid criteria to follow through with devolution, so it is very complicated.
Q206 Chair: Would the Greater London Authority count at all?
Ann-Therese Farmer: I have not looked at that. I would also say—as I am sure you know—you are obliged if you devolve for that authority to bear the costs of devolution.
Chair: I will bring Guto in now, he has not spoken yet.
Q207 Guto Bebb: No, I have been very quiet. First of all, obviously, we have talked about Groundhog Day in Parliament every week since Christmas, but this is Groundhog Day for me because I was a Minister in the Wales Office when we were discussing the devolution of APD back in 2016 when the Wales Bill was going through the House. At that point in time, there was a very strong argument made by those who argued that Cardiff and Bristol constituted one aviation market and, clearly, that there was a potential detrimental effect on the amount of services offered to South Wales if there was a degree of competition between Cardiff and Bristol, which resulted in fewer services rather than more services being provided. That was based upon a report that was commissioned by Bristol Airport. There was no real rebuttal at that point in time.
In terms of your comment, I think you have touched upon that report in highlighting that issue. There has since then obviously been another report commissioned, which is the Northpoint report, which was commissioned by the Welsh Government. Obviously there is a degree of a health warning in the same way that there is a health warning with the York report, which was commissioned by Bristol. We now seem to have one report commissioned by Bristol saying that it will have a detrimental effect on choice. We then have another report produced by the Welsh Government that says there will not be. Ultimately the question I would I have is: has the Treasury done any further research—independent research I would argue—which touches upon both reports and comes out with a conclusion as to whether we would lose choice for people in South Wales if there was a devolution of APD?
Robert Jenrick: Ann-Therese, do you want to answer because you have studied the reports?
Ann-Therese Farmer: Sure. The Government—and it would be DfT that would lead this for us—have done some internal analysis to understand the issue. As you say, we would have concerns about some of the assumptions made in both reports. To pick on one in particular, both reports use a very high level of pass-through cost, and that then leads to different results in terms of the impacts on whether you have routes moving and how people move. That does not match a lot of the message we get from industry, which is it is not as straightforward as a cut in APD equals a direct almost 100% pass-through cost to ticket prices. As I said, that does have quite a material outcome on the conclusions you can then draw.
As the Minister has already alluded to, our analysis would suggest that there is evidence that there is an overlap in terms of the aviation market of the two airports. We would not necessarily come down in support of one report or the other. We would have nervousness about the methodologies used in both, but we do think there is a reasonable case that there is some evidence of an overlap between the markets.
Q208 Guto Bebb: That remains the case three years on from when we last discussed this?
Ann-Therese Farmer: Yes.
Q209 Guto Bebb: Also kept under constant review, as you have touched upon already?
Ann-Therese Farmer: Yes.
Q210 Guto Bebb: In terms of the £6 million value of APD to Cardiff, which I think is lower than what it used to be—I accept your figure of £6 million—that is, in the scheme of things, obviously a comparatively small figure. As my hon. Friend from Brecon and Radnor pointed out, it is a £6 million subsidy to Cardiff Airport. Would that genuinely have a significant detrimental effect on an airport that is so much larger than Cardiff; that is, Bristol? In effect, we are talking about a £6 million subsidy to Cardiff, you could argue.
Ann-Therese Farmer: It is very difficult to make a firm judgment on the extent of the detrimental effect it might have on Bristol because there are very fine judgments on the sorts of assumptions you would put to underpin the analysis. All we are saying is we have enough grounds to be concerned that it may have a bit of a distortive effect to want to at least tread very carefully.
Q211 Guto Bebb: Just a final question. I accept your point and I entirely accept the fact that we have to tread carefully. Back in 2016 I came down on the same side of the argument that you are making. In view of the fact that the Welsh Government are investing quite heavily in Cardiff Airport, obviously the way they invest means that they have to make loans available to Cardiff Airport at commercial rates, which I suspect have to be approved or certainly looked at by the Treasury because of the way in which public loans are made available. If the Welsh Government invest £10 million in Cardiff through public investments on commercial terms but it is a public investment, surely the same argument goes in terms of a £10 million set of supports for the airports from the public purse?
Ann-Therese Farmer: Ultimately, the Welsh Government’s role in Cardiff Airport is a Welsh Government devolved responsibility in terms of other action they are taking in relation to Cardiff Airport. That isn’t necessarily for us to make a judgment on. We are just looking at the tax issues here.
Robert Jenrick: That is a fair point you are making. Clearly, it is not for the Government or the Treasury to determine how the Welsh Government choose to run Cardiff Airport. The lever that we do have at our disposal is Air Passenger Duty and the decision of whether or not to devolve it. The point I tried to make earlier is that the Welsh Government can invest in Cardiff Airport, and are investing in Cardiff Airport, so there are other ways in which they could spend several million pounds, should they wish to, in trying to support the airport’s development, attract new routes to important markets and make the passenger experience more attractive, whatever might need to be done to win over more passengers. APD is just one of a number of options that are at our disposal.
Q212 Geraint Davies: I am confused by this in the sense, Minister, that you said that APD is a very small part of the overall picture, and yet your central argument is we should not devolve APD because it would have a significant impact on the relative competitive position of Bristol and Cardiff. On the one hand you are saying it will not make much difference and then you are saying it will make a difference and it will make a difference to Bristol, and yet we have already heard that Bristol have very ambitious growth plans and dwarf Cardiff at the moment. Have you been speaking directly to Bristol Airport?
Robert Jenrick: I haven’t personally spoken to Bristol. I think our officials at the Treasury will have had a conversation with Bristol in the past.
Q213 Geraint Davies: The other thing I was wondering is that my understanding is that there is a strong case for at least devolving APD on long haul to Cardiff, because Cardiff has a longer runway and Bristol cannot accommodate that particular travel so, therefore, there would not be the case that long haul would be taken from Bristol and go to Cardiff. It is just that we would build long haul in Cardiff over time. Are you familiar with that and do you accept that?
Robert Jenrick: We have given that thought, yes.
Ann-Therese Farmer: Yes, of course. A couple of things: first, I think even the Northpoint analysis would acknowledge that for long haul they are a shared market, and there is obviously different points of view on the extent to which Bristol can or cannot accommodate long haul flights. It is not necessarily absolutely clear cut to say that they cannot.
The other thing I would say—and sorry to keep coming back to state aid—again it is something that has to be very carefully worked through, as we did with Northern Ireland from a state aid perspective, to devolve long haul only. It is a fairly complicated thing to work through.
Q214 Geraint Davies: My understanding is that the runways are shorter at Bristol and you can get a long haul flight down, so long as it is not carrying much otherwise it goes over the end. You can do freight, for instance, to Cardiff and not to Bristol.
Gerald Holtham said that he considered APD a suitable tax for devolution because it does not raise any issue of collection, evasion or anything else. Would you agree with that? I do not know whether you are familiar with what Gerald Holtham has been saying.
Ann-Therese Farmer: In terms of the practical steps that we would need to take, from a tax administration point of view we would not see major obstacles to devolving APD.
Q215 Geraint Davies: On the EU stuff that the Chair was touching upon, obviously you are aware that Germany devolved aviation tax and obviously in Britain we do to Northern Ireland and Scotland. As a matter of interest, would there be a case to devolve APD to London? Given it has so much traffic through Heathrow, if London were able to keep any of the money from APD and raised it because they are at capacity, would the idea be that that money would be recovered from London? There is a concern that APD is small change for Wales, although it is significant in terms of growing the airport and building long haul, but for London it would be a game changer in terms of the aggregate amount of tax they could raise.
Robert Jenrick: It would be a very significant sum of money. It is not something that the GLA or the Mayor has lobbied me about, to the best of my knowledge. The point that Ann-Therese was making earlier was that the state aid rules are complex. When you devolve one has to consult the European Commission and work through carefully whether it is state aid compliant to do so. It does appear that it is state aid compliant to do so to a devolved Authority.
It is not clear whether it is to the same extent to a local authority and it will depend very much on the specific circumstances of that. As far as I am aware, we have not had those conversations with respect to the GLA so it is difficult to comment on whether the Commission would agree that one could do that. It would depend on the circumstances and the decision-making powers of the GLA.
Q216 Jonathan Edwards: Geraint has raised the point, but the fact of the matter is Bristol Airport is one of the shortest runways in the whole of the British state, whereas Cardiff has one of the longest. Isn’t it really the crux of the matter that this whole single aviation market compared to the competition between the two has been overegged a bit and, really, it is a decision to stop Cardiff being able to develop to its full potential? The British Government have taken a deliberate decision to stop Cardiff and Wales being able to develop its main airport assets.
Robert Jenrick: No, that is not my understanding of events at all. The figures that I have seen suggest that Cardiff Airport is doing well. Cardiff Airport in 2017, which is the most recent figures I have—I apologise they are not for 2018—had 1.4 million passengers and had seen growth of 44% between 2012 and 2017. It has 30 routes and at least 51 flights a year within each of those. As you know, there have been a number of interesting new developments, like the Doha route.
By my assessment, Cardiff Airport is not a failing airport. It is an airport that is growing. That is a good thing. We all want to see Cardiff Airport succeed. There is no desire by the Government to see Cardiff Airport held back in order to support another airport.
It is a part of the function you would expect from the United Kingdom Government and the Treasury that, before taking any steps to devolve a tax, we think carefully about knock-on consequences, as you would expect us to do if it was vice versa, that are quite likely to have a detrimental effect on a business or an organisation within Wales. That is our job and our duty at the Treasury.
Q217 Geraint Davies: The history of this is that Cardiff Airport used to be successful when it was state-owned. Margaret Thatcher privatised it and obviously it went to the wall. It is now state-owned again and is succeeding and the concern is that the Government are trying to impede its growth by not giving the APD opportunity, even though there is no competition on long haul in particular and Bristol is growing for ideological reasons. What Cardiff is showing is there is a case for other airports to be publicly owned so that the public get the benefit.
Robert Jenrick: There is no ideological reason. We are just trying to make good decisions on behalf of all taxpayers and residents in the United Kingdom.
Ann-Therese Farmer: We have seen very strong growth at regional airports with APD in existence, so we would not consider the existence of APD to prevent that growth.
Q218 Guto Bebb: In terms of the assessment you made, clearly I accept entirely it is the responsibility of the Treasury to look very carefully at the effect of devolving APD as a tax and the effect, both constructive in the Welsh context and negative in the context of other airports. We have had evidence from businesses, especially in South Wales but also some businesses in North Wales, it has to be said—where there is no immediate advantage to my constituents in North Wales—that there would be a knock-on benefit if APD was devolved. There would be more flights from Cardiff. There would be more companies using Cardiff. Has the Treasury made any assessment of the potential economic benefits, if APD was devolved, to the Welsh economy?
Ann-Therese Farmer: Not that I am aware of because obviously the decision of what to do with the tax once it was devolved and, therefore, that assessment of the economic benefit to Wales would ultimately be for the Welsh Government.
Q219 Guto Bebb: There clearly has been work done by Treasury in terms of the possibility of APD being devolved and eliminated in the Welsh context, whether that would have a negative impact on Bristol. Surely, the same assessment should be done in terms of: if there was a reduction of APD in Wales what would be the economic benefits to the South Wales economy and other parts of Wales?
Ann-Therese Farmer: The analysis I was talking about was more narrowly focused on impacts on the aviation sector fairly tightly. In terms of the economic impact of APD more generally, there are a few things. First, let me say it is pretty inelastic; particularly business travel is highly inelastic, so that does tend to affect any assessment you might have from a cut in APD in terms of economic growth.
On some of the issues we have been exploring in relation to Northern Ireland, we are in discussion with businesses at the moment. It is often quite a complex picture. You often have direct benefits for the airport, but if you are encouraging more outbound tourism that can potentially have a negative impact. We do not have a specific assessment of this particular question but, in general terms, again it is hard to draw easy conclusions.
Q220 Guto Bebb: Just to follow up on that, obviously this is an issue that has been kept under constant review by Treasury, and rightly so. There is some evidence that has been presented by the Welsh Government that highlights an economic advantage. If this is being kept under constant review, should that question now be looked at by Treasury as well, so we can have the view of both Governments rather than facing the arguments in favour from one and then not having the information from Westminster?
Robert Jenrick: It could be. The Department for Transport did do work previously and, as I say, from a Treasury perspective, we have analysed this, narrowly focused on the two airports and on tax revenues as a result. We will be interested to read the outcome of your report to see if you come to any conclusions that should lead us forward.
Chair: A couple of very quick ones then. I think it is possible we might have a vote shortly.
Q221 Jonathan Edwards: There are obviously different constitutional settlements between Northern Ireland, Scotland and Wales. In the case of Northern Ireland they have long haul APD devolved, Scotland have the whole lot devolved, Wales have nothing devolved, all determined here in London. Can you explain why the devolution of APD to Scotland has not been implemented despite it being included in the Government of Scotland Act?
Robert Jenrick: Yes. The devolution of APD to Scotland is on hold. It has been paused, as you say. We are working through issues relating to the Highlands and Islands and their exemption. That is proving more difficult than I think the Scottish Government imagined. Our officials at the Treasury are providing them with all the support that they need. The decision is now with the Scottish Government as to how they wish to proceed. Ann-Therese has been involved in the support we have given; have you anything further to add?
Ann-Therese Farmer: No, that is exactly the situation.
Q222 Jonathan Edwards: The previous First Minister said, in an answer in the National Assembly, that he believed that the Treasury regretted the inclusion of the devolution of APD in the last Scotland Act. Is that right?
Robert Jenrick: It is not my experience or any conversation I have had with officials or with the Chancellor. Clearly, it has proved more complex for the Scottish Government than perhaps was envisaged but we do not regret doing it. It is now for the Scottish Government to consider how they want to proceed and to take advantage of the opportunities if they still wish to.
Q223 Jonathan Edwards: Notwithstanding your point about the single aviation market between Bristol and Cardiff, do you not understand the imbalances that it creates within the British state constitution if powers are devolved to Northern Ireland and Scotland but not to Wales? Effectively, Wales is given an inferior constitutional settlement and that, in itself, leads to a competitive disadvantage for Wales when compared to Scotland and Northern Ireland.
Robert Jenrick: As I said in answer to another question, it is not unusual within the devolution settlement that we have arrived at for there to be asymmetries, and for different nations to have different powers and taxes devolved to them. Where I think Wales is different—as I tried to explain earlier—is that we can all understand that Northern Ireland is part of the island of Ireland, so there might be a stronger economic and practical argument there for that to be treated as a single aviation market and for Northern Ireland to have the ability to make changes to APD should they wish to.
Q224 Jonathan Edwards: Are you making a case for Irish unity there?
Robert Jenrick: No—but there is a legitimate case to be argued, if you have one part of the island of Ireland that has APD and another that doesn’t, and if there is such ease of travel between the two, to take action there.
For us, we just want to ensure that, when we devolve taxes, we are thinking very carefully through any unintended consequences and make sure that we are all making—collectively, as the United Kingdom—the right decisions. That is what we have tried to do in this case.
Q225 Geraint Davies: Just in terms of development and connectivity, you may or may not know that over the last 10 years or so Wales has had about 1% to 1.5% of rail investment. It has 5% of the population and 11% of the railways, so there is underinvestment there. Wales, of course, has 17% GVA in terms of wages. The average wage in Wales is far below the UK average wage. Given that you have argued that the case for APD for Cardiff would have a marginal impact but would have an impact on Bristol, which is your basic argument, don’t you think there is an argument in terms of the economics of social justice? We have not had electrification of the railway to Swansea; we do not have the lagoon and all the rest of it. Is there a strong case to be made that we do need some support and that, even if there was a marginal impact on the much richer area of Bristol, in the round APD would be a good thing to do?
Robert Jenrick: We try to make decisions on taxes on their own merits, on the strength of the evidence, thinking through carefully what the impacts will be on the United Kingdom economy, which is the argument we have just had. The wider question I think you are asking about is support for infrastructure and for public services in Wales. I think by 2020 the Welsh Government’s block grant will have grown to over £16 billion before adjustments for tax devolution. That is a real terms increase in spending over the spending period from 2015 to 2020.
As a result of the Budget and the Chancellor’s announcements there, that would be an increase of over £550 million to the Welsh Government’s budget. In that context, I think your argument is that a further ability to flex, with respect to £6 million of tax, would make a significant impact upon the Welsh economy. When seen in the context of a £16 billion block grant, I think that is unlikely.
Q226 Geraint Davies: My point was that there has been historic underfunding, unfair underfunding of Wales for connectivity in terms of infrastructure for railway and, indeed, for connectivity generally. Obviously Wales is very poor in relation to England, and indeed in relation to Bristol, so your argument seemed to be, “It might have a negative impact on the much more powerful Bristol, so we won’t do it”. I am arguing there is a strong case that if we could keep Welsh passengers in Wales rather than going to the growing Bristol, as has been described, that should weigh in the balance in those arguments.
Robert Jenrick: Cardiff Airport is also a growing airport. As I said earlier, it grew by 44% over the course of the last five years. It is a successful airport and I hope it continues to be so.
In terms of broader transport investment, that is a question for the Department for Transport, but we are investing in a number of significant projects, as you know, including £5 billion on the Great Western Route, £125 million to upgrade the valley lines, £500 million for the Cardiff Capital Regional Investment Fund and other projects.
Q227 Chair: A good tit for tat between the pair of you. Thank you for that. I am not sure if we are about to get a vote now. I am keeping an eagle eye on this. Regardless, I think we have come to an end. May I ask if we can have a little bit more information on what these state aid rules are because I am not clear on the difference between a devolved Government and a local authority? With the greatest of respect, I am not sure that either of you are that clear as to how they are treated differently. We would welcome a little more clarification.
Robert Jenrick: We would be happy to write to you. The point we were trying to make is that there is no single definition and one would have to work with the European Commission on a case-by-case basis. There is no definitive answer in that respect.
The other point that I think Ann-Therese made to you was that a number of local authorities are also hesitant about the corresponding drop in their equivalent to the block grant and the impact that would have on a local authority, even a large one such as a Liverpool or a Manchester.
Q228 Chair: If the APD was the same level it would not have any impact on their block grant, would it?
Robert Jenrick: No, but those who want it devolved usually want to cut it.
Q229 Susan Elan Jones: Just on that, with what you get back to us with, can you also clarify on that where the GLA would stand?
Ann-Therese Farmer: We will see what we can say. If it is something we have not looked into then, as the Minister said, we cannot provide a definitive answer.
Chair: It looks as though we have moved on to the Bill. I do not think we are having a vote but, nonetheless, we have given you a good grilling, Minister and Ann-Therese Farmer. Thank you very much indeed for coming along.