Car subsidies: What works, what fails
- Source: Gasgoo.com
- [14:45 August 26 2009]
- Comments
To jump-start disastrous auto sales, subsidy programs were launched throughout the world. Some worked. Some failed miserably.
Out of the many programs, let's look at three representative ones: The German program, the Chinese program, and the American program.
Typically for Germany, they took someone else's idea, perfected it, and it became a roaring success.
The idea to give government money to people who retire their old cars had been developed in France. The French program was a failure years ago. It was resuscitated in late 2008.
It became a minor success: According to official ACEA numbers, January to June sales in France rose a benign 0.2 percent. June sales in France were 7 percent above June 2008.
The German program was launched in January 2009. The Germans put more money on the table than their French neighbors: In France, a retired car is worth 1000 Euro with a new purchase. In Germany, it is 2500 Euro.
This hit the proverbial sweet spot: According to the same ACEA numbers, January to June sales in Germany rose 26 percent. June sales in Germany were 40.5 percent above June 2008. (ACEA is on vacation. According to official statistics of the German Kraftfahrt-Bundesamt, July sales rose 29.5 percent.)
The German program was originally funded with 1.5 billion Euro. Two months after its launch, it was clear that the so-called "Abwrackprämien" program would run out of money quickly.
In March 2009, funding was increased to 5 billion Euro, good for 2 million cars. As this is being typed, more than 1.8 million applications for the subsidy have been submitted, there is enough funding left for 155,000 cars. This is in a market that sells 3 million cars in a good year. Obviously, this program is a huge success. And it is money well spent.
At a VAT tax rate of 19 percent, the program is practically self funding. If someone buys a car worth more than 13000 Euro, the government comes out ahead. The German program will wind down once the funds are exhausted. However, a follow-up program is already being discussed.
The Chinese program is a mix of tax subsidies, a "cars to the countryside" program, with a "replace old with new" program added.
China halved the purchase tax on cars with engines of 1.6 liters and smaller, while raising the tax on bigger displacement cars. Compared with other countries, the "clunker" money in China is relatively small.
Subsidies range from 3,000 yuan to 6,000 yuan. China's fleet is relatively young, therefore, the program has limited impact. In the cars to the countryside program, farmers buying light trucks and minivans get a 10 percent discount, with a subsidy ceiling of 5,000 yuan.
While frugal compared to what other countries spend, the tax reduction and cars to the countryside are credited as the catalyst of amazing growth for Chinese auto sales. In July, China registered the biggest gain since January 2006, with passenger vehicles up 70.5 percent, and overall vehicle sales up 64 percent.
In a wise decision, China decided to continue the "replace old car with new" program and "vehicles going to countryside" project beyond the end of this year. The purchase tax cut is likely to end by December 31, however, "some adjustments in related policies" can be expected.
