Will Car Sales Improve Thanks to Government Scrappage Incentives?

The American government is following in the footsteps of many European countries and implementing a ‘cash for clunkers’ incentive to try and encourage buyers back into the struggling car market. The scheme will offer an incentive of up to $4,500 to owners of old cars getting 18 miles per gallon (mpg) or less if they upgrade to a vehicle that gets at least four mpg more, so people could trade in a gas-guzzling 4×4 and buy a Honda, Nissan or other smaller more efficient car in its place. Getting cash rewards for purchasing a newer vehicle is intended to show potential customers that it makes good financial sense, but can a scheme like this really work in the long run?

The UK implemented a similar scheme in May, where the government and car manufacturers are giving consumers £2000 towards a new replacement vehicle in exchange for scrapping ones over 10 years old. Since the scheme began it has taken over 35,000 orders, not enough to reinflate the car industry but certainly enough to make a difference. The question is how long these results can continue, once the number of eligible car owners dwindles and the finances set aside for the project start to run out. Recent predictions by a chief executive at French automakers Renault suggest that the time of crisis will continue for few years yet, and that the numbers of people wanting to buy a Renault were unlikely to return to normal levels any time soon. So despite the fact that these cash incentives are managing to persuade buyers in the short term, it could be an even bigger blow for manufacturers if the orders stop coming in before the recession is over.

And obvoiusly it’s not only motoring that has been hit by the global recession, money is tight for everyone. Offering consumers the chance to get money back may get them interested but compared to the cost of a new car it doesn’t go very far. It’s not as if you could trade in your old banger and buy a new BMW in its place, and a lot of people just wouldn’t consider making such an expensive purchase when they’re already struggling with debt and the uncertain economic climate. The scrappage schemes are a short term solution, but should help to rebuild public confidence in the car industry, as well as encouraging people who may otherwise have bought a second hand car to pay just a little extra for a new one instead.