David Prosser: Reinforcing the crash barriers

Outlook: The car industry is heading for cold turkey once the scrappage drug is withdrawn

Adroit does not begin to do justice to Lord Mandelson's political skills. Pulling a rabbit out of the hat in the form of a £100m extension to the car scrappage scheme scored the Business Secretary the biggest cheer of the day at the Labour Party conference yesterday, winning a bigger round of applause than Alistair Darling's sure thing, a crackdown on bankers' bonuses.

Lord Mandelson no doubt had to twist the Chancellor's arm to get the finance for scrappage, though once benefits are netted off, the scheme costs the taxpayer nothing. That £100m investment is more than paid for by the extra VAT receipts earned by the Exchequer on sales of new cars. At the current 15 per cent VAT rate, any car sold for more than £7,600 produces tax receipts worth more than the £1,000 cost to the public purse of each deal done through scrappage. The average scrappage purchase price has been around £9,000, so the scheme actually provides the Treasury with quite a windfall.

The manufacturing sector is delighted that its calls for more help for the automotive industry have been heeded so quickly. The only bright spot in last week's UK car production figures, which showed a serious deterioration during August, was the small increase in production of cars for sale in this country: that suggests scrappage has been having a beneficial impact on demand.

All in all then, yesterday represented another decent shift at the coalface from Lord Mandelson, whose fanbase in the business community continues to grow. Still, one nagging doubt persists. Was the extension in scrappage borne of political or economic necessity?

The Government warned again yesterday that scrappage could only ever be a temporary measure, designed to get the car industry through a short-term crisis. Our scheme has now been in operation for considerably longer than the equivalent initiative in the US, yet there seems to be no weaning car producers on to a more solid basis for sustainable sales.

It's possible, of course, that Lord Mandelson thinks car manufacturing is now through the worst, but wanted something to announce in Brighton. On this occasion, however, the economic argument is more plausible than a political explanation.

The danger with scrappage has always been that you cannibalise future sales – rather than stimulating interest from car buyers who would not otherwise have considered buying a new vehicle, you simply persuade people to bring forward a purchase they would anyway have made in the next couple of years. Having offered £300m to finance such purchases, quite a bit of cannibalisation has already taken place, so now more money has to be poured in to keep the buyers coming.

If the UK was on target for a strong economic recovery, that might not be such a problem – you would get normalised levels of demand for new cars coming back at a rate strong enough to compensate for most of the future sales brought forward. But no one thinks we are on target for such a rebound – which means that the car industry is heading for a nasty period of cold turkey once the scrappage drug is finally withdrawn.

That's what has happened in the past. In France, the withdrawal of a scrappage scheme in the mid-Nineties saw sales dip by more than 20 per cent. The downturn could be worse this time around, however, given the pricing pressures on the car industry, especially in this country. Not only is the cost of raw materials escalating rapidly, the weakness of sterling means UK prices are having to rise even more sharply to reflect these costs – scrappage aside, showroom prices have already begun to increase, and the restoration of VAT to the full 17.5 per cent rate in the new year will accelerate that trend.

Cars made in the UK, which tend to be larger vehicles rather than the smaller models that have seen the most benefit from scrappage, look particularly vulnerable to a flat recovery – demand is likely to be slower to return at the more expensive end of the market.

So much for the discussion about exit strategies. Mr Darling has made it clear that the fiscal stimulus package must be unwound as we begin to start tackling the crisis of the public finances, but also insists the Government will not do anything to threaten the recovery. The extension of scrappage tells you where the Chancellor believes the balance of that debate currently lies.

Darling is too restrained on bonuses

There is not much point in carping about political grandstanding at party conferences – that's the whole point of these shindigs these days. But was it really too much to hope that the Chancellor might offer a little more detail yesterday about the shape that his crackdown on bankers' bonuses might eventually take?

All we got was a rehash of the ideas Alistair Darling first fleshed out in the summer: chiefly that banks must pay bonuses over time, so that they reward long-term performance, and that automatic bonuses are a no-no.

For example, we're still waiting for a response to the suggestion first made in Sir David Walker's much-mocked review of City pay that greater transparency is needed – at least by publishing details of pay bands for top earners. Lord Myners' suggestion that more detail should be forthcoming on individual bankers, with naming and shaming, to use the phrase of the modern era, has been similarly ignored.

No wonder there has been so little grumbling in the City about this "crackdown". Many bonuses are already paid over the long term – indeed, at Lehman Brothers, bankers lost the awards because bonuses had been paid in stock that could not be sold and then became worthless.

As for the obsession with automatic bonuses, of course it is daft to promise bankers a certain level of bonus however well they perform. But non-guaranteed bonuses, dependent on success that can only be achieved by more risky behaviour, are a far greater threat.

The G20 proposals on bonuses, including the regulation of pay through higher capital funding requirements, are sensible but limited. What Mr Darling announced yesterday did not go beyond them.