Government cash for your old banger
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Associate Editor
David Stevenson Apr 17, 2009
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The government may pay you to scrap your old car as long as you buy a new one. David Stevenson reports.
What's new
Chancellor Alistair Darling "is set to end months of speculation by announcing a 'scrappage' scheme to encourage people to trade in old cars for new in his 22 April budget", says David Smith in The Sunday Times. The plan to boost new car buying is rumoured to involve paying people £2,000 for scrapping cars more than nine years old, provided that they purchase a new, or nearly new, replacement.
Why do we need a car scrap scheme?
The British car industry has broken down. New car registrations were down over 30% in March, and car chiefs claim that without a new sales incentive, tens of thousands of motor industry jobs will be lost. Assuming that "we want to do anything in this country except buy and sell houses and count other people's cash", says Citywire's Tony Bonsignore, the government must act. The auto industry could be allowed to fail, "as it surely will without any outside help", or more money could be injected directly. But as the government has already announced a £2.3bn aid package, it is right to consider this new scheme.
Who else runs a car scrap scheme?
The Germans, for starters. Their scheme has seen demand for new cars rise to their highest February level for ten years, with new car registrations up 40% on a year ago. The German government has already tripled the size of its plan from €1.5bn to €5bn, upping the number of cars covered from 600,000 to two million. And Germany is not alone. Austria, France, Italy, Portugal, Romania and Spain have all introduced scrappage programmes to bump up new registrations. Meanwhile, China and Brazil boosted car sales to record levels last month using tax incentives for buyers.
But how much will a British scheme cost taxpayers?
It's not clear. The details are still being bounced between the Treasury and Lord Mandelson's business department. The Society of Motor Manufacturers and Traders (SMMT) reckons that a one-year 'cash for bangers' scheme would cost just £160m. But that estimate looks very low compared to the cost of, say, the German scheme. Tellingly, both the Chancellor and Treasury officials, "who must sign off the programme, have expressed deep anxieties about its cost and terms", say Suzy Jagger and Francis Elliott in The Times. So "the Treasury is understood to have suggested the car industry match a taxpayer bonus of only £1,000" to stop taxpayer subsidies simply replacing discounts already offered by manufacturers.
Sounds like a win-win
It isn't. Ironically, the car-makers themselves could be hurt. Car chiefs have warned that state aid of only £1,000 a car won't work. "If it's a question of whatever the government puts in, the industry has to put in, effectively the government is saying: 'You're bleeding, but you have to buy your own bandages'," says Paul Everitt at SMMT. "Agreeing something that's a damp squib in the marketplace would be a disaster for the car industry. A scrappage scheme should help revive the industry, not sink it." And under the government's plans the taxpayer will still pick up a £1,000 per car tab.
Will it boost car sales?
Sure, but whose? Some 85% of new cars bought in Britain are imports, says the SMMT. So the scheme is "bad news", says The Independent's Sean O'Grady. "We'll be helping the French, German, Korean, Polish, Czech and Slovakian motor industries rather than our own." Although Britain is the second-biggest car market in Europe, only 20% of cars made here are bought here. So overseas firms, who produce more of the vehicles sold in Britain than we do, could soon be rubbing their hands in glee. We must assume that "the main benefit of the scrappage scheme will be felt in the wider motor business – dealers, importers and the like – rather than in manufacturing", says O'Grady.
How green is the scheme?
Friends of the Earth reckons that motorists will "swap gas-guzzlers for fuel-efficient models". But other environmentalists argue that it's more environmentally friendly to run old cars until they pack up. That's because most car emissions are produced during the highly energy-intensive manufacturing process. Indeed, the European Federation for Transport and Environment describes the German scheme as "being dressed up as an environmental measure, despite evidence that it can do more harm than good". This means that, at best, the jury is out on this issue.
Why limit the scheme to cars?
"Why didn't the government offer us a subsidy to buy pick'n'mix from Woolworths," asks Sean O'Grady in The Independent, "or kitchens from MFI?" The truth is that all government-backed subsidy schemes actually create more problems than they solve. Even talk of artificial incentives intensifies demand slowdowns as potential purchasers await an official announcement.
And any buying boost is purely temporary, with the scheme's expiry followed by a long sales drought. As such, Willem Buiter, a professor at the London School of Economics, isn't impressed by the proposed cash-for-bangers scheme: "This artificial shortening of the economic life of a car seems nuts. It's worse than getting paid to dig holes and fill them in again. It's like being paid to burn down your house to help the residential construction industry."
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