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.