The costs of car scrappage.

In the most recent budget the government has extended the car scrappage scheme until June 2011. Its effects have been highlighted again today with the announcement by the CSO that despite the economic downturn car sales jumped 56% last year on 2009 figures. These figures may well be positive news for the car sales industry in this country but is this announcement all good news?

The scrappage scheme "provides for VRT relief when a new passenger car with CO₂ emissions of not more than 140g/km is purchased and registered and another passenger car, over ten years old is scrapped. The VRT relief now available has been reduced from €1,500 down to €1,250 for qualifying vehicles registered during the period 1 January 2011 to 30 June 2011." This has added heavily to the increase of almost 30,000 more new cars being purchased in the state than last year. According to industry figures this has lead to an the increase in an estimated €109m extra in Government revenue and a rise of 3,500 in the number of people employed in the industry.

There are however some questions about the schemes real benefit.The scheme subsidises a car manufacturing industry which is not indigenous and firms who's profits are exported. This means that the benefit of the scheme will be felt as much by foreign firms operating in Ireland and exporting profits as by the Irish individuals employed and operating franchises on their behalf. The scheme also includes write offs, cars that have ceased to be road worthy and only cars that are ten years old. This asks the question - surely these cars would have been purchased anyway?

Assuming that the average person changes car every six or seven years this scheme simply means that for an owner of a five year old car an incentive is created to bring forward their purchase instead of deferring it until their usual time of purchase.

The Budget 2010 described the scheme as budget neutral however the long run effects are yet to be seen. Is this just consumption brought forward rather than new consumption? Are the target beneficiaries(ie the Irish taxpayer and employees) of the scheme really the ones who will profit? Should we be relying on even more consumption based tax?

A serious cost benefit analysis from the dept of finance needs to ask these questions before the scheme is extended further.