No, the scrappage scheme is not making a profit

We\’re going to see this all over the place:

Scrappage has led to an estimated 20pc boost in sales, and is turning out to be a money spinner for the Treasury. This is because the amount of VAT the Government recoups on many of the deals is greater than the £1,000 subsidy it gives to the owner of a 10-year-old car to buy a new model.

With VAT currently at 15pc, the Treasury is in profit whenever a scrappage customer pays more than £7,600 for a car including tax. According to the motor industry the average price of cars bought under the scheme has been £9,000.

This means that the Treasury is on course to net £405m in VAT receipts, £105m more than is being invested in the scheme, if the government ceiling of 300,000 deals is reached.

That only works if you count all cars that are sold under the scheme and do not subtract the number of cars that would have been sold without the scheme.

Economics, as has been noted, is something which happens at the margin. We want to know what are marginal sales and what has been the cost (and tax revenue received from) those marginal sales.

Sceptics argue that at least some of the deals would have taken place without the subsidy. This view is held in Whitehall, which is resisting calls to extend the programme.

Someone with some sense down there then. Hurrah!

So, if you see someone touting this idea that we taxpayers have all made a profit by subsidising new car purchases and they don\’t mention marginal numbers, only gross, you\’ll know that they are simply ignorant.

Do report back if you see examples….

5 thoughts on “No, the scrappage scheme is not making a profit”

  1. Cash for Clunkers in the States has had the thoroughly predictable effect of cratering auto sales after its end: September Auto Sales Go Clunk.

    For my part, the most hair-raising part of the US scheme was that the cars removed from the roads were scrapped. If a more perverse reading of Bastiat’s broken window theory could be found, I don’t know what it is.

  2. I’m with Mr. Gillies- even if (and I doubt it) the increase in VAT reciepts has paid for the scheme- the fact remains that a lot of valuable vehicles have been destroyed, and resources diverted to their replacement. Even if it does transfer money from the polulace to the government, this would be better done by a simple tax increase, not by destroying the nation’s wealth.

  3. The “cash for clunkers” deal required only that the traded-in car have its engine when demolished. It wouldn’t surprise me if quite a few of the vehicles mightn’t have been stripped of many of their parts in demand in the junkyard business: air conditioners, hub caps, radios–anything that wouldn’t have interfered with running the vehicle into the dealership.

  4. Can someone explain to me how total sales could be lower under a world that had cash-for-clunkers than if it had not existed?

    Tim adds: Sure.
    Cash for clunkers was a nett destruction of wealth. As we know from things like falling house prices (another reduction of total wealth) a reduction in wealth leads to lower spending on consumables. Thus the reduction in total wealth from cash for clunkers will lead to a lowering of total sales of cars.

    It will have shifted purchases around in time, this is true, and was the point of it. And I don’t insist that cash for clunkers will lead to a reduction in the total number sold over time.

    Only that you asked for a mechanism by which it could and there is one. Nothing extraordinary about it, nothing “right” or “left” about it. Just a simple observation about the world. Poorer people buy fewer cars: cash for clunkers made us all poorer. Thus fewer cars will be purchased.

    In more detail, whether that outweighs the fiscal stimulus? Now we’re talking about politics, which isn’t what you asked.

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