Taxpayer-Funded Car Scrappage

The retail motor trade is lobbying hard to get the government to introduce a car scrappage scheme, which would encourage people to scrap cars that are older than ten years and purchase new ones: See these pieces in yesterday’s Irish Times and the Morning Ireland interview with Alan Nolan, director of the Society of the Irish Motor Industry.

Willem Buiter discusses the plans of this sort that have been introduced in Germany, France, Italy and Spain.  He doesn’t like them—“This artificial shortening of the economic life of a car seems nuts.  It’s worse than getting paid to dig holes and fill them again.”  The case for these measures in Ireland is even weaker.  Unlike the countries listed above, we do not have car manufacturing, so this measure is largely aimed at helping a thin-margin wholesale and retail motor trade sector.

To be fair, Alan Nolan did put the case for the scrappage scheme articulately, arguing that the scheme would pay for itself by inducing new purchases and VAT revenue.  Economists, however, are always wary of claims about tax cuts and subsidies being self-financing.  In particular, schemes like this suffer from very serious “deadweight loss” problems: The government ends up subsidising lots of people who would be making the purchases anyway.

Mr. Nolan argued that since the scheme is limited to cars over 10 years old, the owners of these cars were unlikely to be in the market without this measure.  I think this could go either way.  Some people are happy to drive old cars but there is also the fact that old cars are far more likely to irretrievably break down, so their owners have no choice but to buy a new one (or take the bus …)

Beyond this small issue, there is an important general point that the government needs to be very wary of allocating increasingly scarce fiscal resources on this kind of special interest group subsidy.

8 replies on “Taxpayer-Funded Car Scrappage”

If people have jobs and income, they need no incentives to switch cars. To subsidise a sector based on an imported product is madness – might as well start a big-screen-tv scrappage scheme.

I would advocate helping the “motor industry” by reducing VAT on servicing existing cars – there’s still imported parts but you are helping skilled labour (mechanics) and not the unskilled (car salesmen).

From today’s Eurointelligence:

“German car wrecking premium is too successful

The German government is worried that too many people are taking up the car wrecking offer that pays E2500 per car. So far, 1m people have taken up the offer, far more than the government had estimated. The costs are not massive, about E3.75bn though larger than budgeted. FT Deutschland reports that the retailing association believes that the recent fall in sales was due mostly to the car wrecking premium, which would suggest that the stimulus for the car industry is not so much an economic stimulus, but comes at the expense of other industries. ”

There was also a piece on the German news about this last night. I think they were saying that the scrappage scheme was benefiting lower range cars like FIAT more than high end models like Mercedes. Which kind of stands to reason, of course.

What about a bicycle scrappage scheme, though? I have three old ones in my back garden I’m dying to get rid of…

Could I suggest a quango scrappage scheme? Any quango more than ten years old……

What about a house scrappage scheme? We manufacture houses here! And Tom Parlon says building and selling houses is the best way to get the economy moving again.

The usual arguments for such a scheme are that there are some kind of constraints holding people back from buying cars. Thus the stock of cars is older than it should be and that is bad for the environment since there is substantial technical progress in car technologies. Furthermore, the proponents argue that by giving a small subsidy the government will get a lot of tax back directly. Indirectly there will be the environmental benefits via newer more efficient cars and jobs in the car production industry. Given hat Ireland only has a few component manufacturing plants the job benefits to Ireland will be negligible one way or another.

The whole argument for a scrappage scheme hinges on the assumption that somehow more cars will be bought due to the scrappage scheme than would otherwise be bought. In this respect it might be useful to consider the evidence on our own 1990s scrappage scheme (July 1995 to end of December 1997) that is often cited as having been ‘successful’ by the proponents for a new scheme (primarily the car retail industry).

Using the published data on the total number of cars registered along with published data on new registrations it is trivial to work out the rate of replacement. An interesting fact emerges – the average rate of replacement during the period when the last scrappage scheme operated, at 4.1%, was lower than for the period 1982 to 1994 (6.2%) or the period from 1998 to 2007 (6.6%). In other words it is difficult to make the case that the last scrappage scheme increased the rate of replacement. If it did not then it is reasonable that those who availed of it were going to replace their car anyway – 100% deadweight!!

One might argue that things are different now and of course that is true – instead of being at the start of a period of sustained growth we are now looking at a significant decline in the economy and a massive increase in unemployment. As a consequence few people will want to spend a large amount of money on a car when there is so much uncertainty around. A few thousand euro towards the purchase of a car is not going to fundamentally change that and thus the only people who will avail of a scrappage scheme will be those who were going to buy a car anyway. This issue is now being debated in Germany. Some are arguing that their scheme is going to put the second hand car dealers out of business first (why buy second hand if you can get a dollop of tax payers’ money) and when the scheme ends it will put the other car dealers out of business too unless the world economy picks us soon (the few who were going to buy over the period already bought their car).

Scrapping cars is a dumb idea. Why should we bail out the German economy and the parts of the Irish economy that produces nothing?

My car is 17 years old and has its NCT. The main difference between my car and an 09 is the illusion that I am poverty stricken driving an old car. The car has not moved on since the 1950s. The petrol engine has been around since 1854, the Diesel since 1893 and the tyre since 1846. Cars get more refined and have nicer toys but a car is a car and if it is a 2009 or a 1959 makes little difference. Sure the engine is more refined but thats pretty much it.

My car has had three drivers and still has the same owner. If we had complied with the celtic tiger mentality we would have had NINETEEN additional cars on the road. So even if the car spews out pure CO2 24 hours a day it would not get anywhere near to the CO2 produced to build and ship in these 19 cars.

The government can take the keys from my cold dead hands. I will drive it as long as it is legal and the laws of physics allow.

The most concerning thing for me is that instead of tackling the problems head on we hear that the government has no plan B apart from doing Plan A harder.

If we apply scrappage to cars then we should apply it to trucks, computers, dishwashers and anything with a plug on it. It is daft and at best clutching at straws.

Buying a car on finance makes no sense. Scrapping a car after ten years makes no sense.

Buy and run a car for an extended period and save up and pay for the car in real money makes the most sense. Artificially boosting an “industry” that is based on sending borrowed money abroad for things we really don’t need outside of snobbery is stark raving bonkers.

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