A frugal life is an easy life!

I always apply the ideal, "if it sounds too good to be true, then it usually is!"

When the car scrappage scheme was brought in by the government, it looked too good to be true. Why hadn't it been done before? How similar to the european scrappage plan was it?
Question 1: How does this affect the government?
Of the £2000 discount, the government use taxpayer's money to provide £1000 of the discount, the dealership sells a car, then claims the £1000 back from the government.
Everything sounds ok with that... or does it?

Simple maths - what's the level of price (of a car) before the government returns a profit?
The government has £1000 to recoup (that it pays the dealership out of the taxpayer pot) with VAT being at 17.5% - £1000 is 17.5% of £5715, so for every car under that price the government loses out, for every car above £5715 the government makes a profit on the £1000 it is paying out.
So on a car of £11000 the government recoups £1925 in tax, take off the £1000 IF the customer has a car to scrap with the scheme, the government shows a profit of £925 this is profit off the customer!

Question 2: What does the dealership get out of the deal?
The dealership gets increased interest and increased numbers of car sales going through their books.
Again, this sounds great... or does it?
If you own a business and you were ordered to knock a £1000 off for each customer, what would you do? Would you add an extra £1000 to your prices? Most would and have done!
Add to this the cost of scrapping the old cars, which again falls on your company, you'd be putting up prices by about £1200 to cover your losses.

Using the scheme, the dealerships have increased all their prices, so those using the scrappage scheme are paying the same amount as the price was previously.

Question 3: What does the paying public get out of the deal?
Absolutely nothing!
Those using the scheme, are paying the same prices as before the scheme (Price increased £1200 then given a "discount" from the dealer of £1000) - they often pay more as there is no "trade in" value anymore (cars are now scrapped) - they are also paying more to the government, as the prices increase to stop the dealerships from taking a hit on each scrappage sale, this in turn increases the amount of VAT that becomes payable on the purchase. Any car bought for £5715 or less, the customer saves money, anything above this amount and the government recoups more than it discounts.

How many brand new cars have you seen being sold for £5715?

The bigger issue is with the majority of customers, who don't have a car that qualifies for the car scrappage scheme!
As all the prices rise to cover the dealership's extra £1200 costs (for the discount and to scrap the old cars) those without a car they can use in the scheme now have to pay higher prices, they also have to pay more VAT to the government (as their car price is higher) that's an extra £175 per £1000 added to the price of the car!
Most people buying new cars do not have a car to scrap.

The government win - more revenue gained in tax
The dealerships win - more sales and more interest
What does the customer gain? The customer loses out.... again!