David Prosser: The car industry will remain stuck on the hard shoulder

Outlook So this is what Lord Mandelson has spent the past two months working on: a £2.3bn package of support for the car industry, of which £1.3bn is coming from Europe, which includes little help for firms lower down the supply chain, and which can only offer up the vague promise of a plan to improve the access to credit of manufacturers' finance arms.

The car industry was doing its best to be constructive yesterday, particularly as the Society of Motor Manufacturers and Traders is due to meet Lord Mandelson for negotiations over the package today. But you can see why the unveiling of this long-awaited package of support for car manufacturing got something of a lukewarm reaction from groups such as the CBI.

The first problem is that what's on offer looks pretty measly by international standards. The big three US car manufacturers had to fight hard for government aid, but in the end they won support many times more valuable than what Lord Mandelson announced yesterday. Closer to home, Germany and France have already offered their motoring industries much more substantial help.

Still, size isn't everything. If the car industry felt the cash was being directed to the right places, there might be a bit more celebrating going on in motoring-dependent areas such as the west Midlands. As it is, the region's Labour MPs are pleased they finally have something to offer their constituents, but anyone who was wandering around Coventry, for example, will have noticed a distinct lack of dancing in the streets last night.

The fundamental flaw with this support – welcome though we must its encouragement of greener cars – is that it focuses on supply rather than demand. Car manufacturers and the associated component industries are struggling for one reason alone: too few people are buying new vehicles right now.

Indeed, whatever the government support on offer, those in the motor industry will find it hard to sleep at night until more people start buying cars again.

So what can the Government do to get to that stage? Well, one obvious thing is to steer a path out of recession. No one buys a car if they think they'll be out of a job in a few weeks' time, so lifting the threat of unemployment for as many people as possible is where we want to head.

In the meantime, however, we need a focus on people who still feel confident enough to splash out, but can't get the credit that is typically needed to finance a purchase of this size. That's why it's so disappointing yesterday's announcements did not include firm proposals on how the credit arms of manufacturers might be helped. The new trade minister, Mervyn Davies, is in charge of drawing up that plan, but this help is needed now if demand is to be boosted. Why it hasn't been included in this package, given that the Government has known about the credit market problem for months, is difficult to explain.

There are measures Lord Mandelson might have adopted that would stimulate demand even without more credit. Why, for example, not follow Germany's example? It is offering Germans up to €2,500 if they trade in a car that is nine years old or more in favour of a new model. That's a green policy – newer cars are already cleaner – with clear economic benefits. Indeed, Germany's car dealerships reckon they'll get 200,000 extra sales this year as a result of the policy, the sort of uplift which would safeguard jobs at British firms.

Moreover, again leaving aside the issue of credit, there is evidence that British buyers will spend money on cars if they are given real incentives to do so. For all the talk on the high street about the ineffectiveness of the VAT cut in November, it's noticeable that the decline in car sales after the cut – which has a more discernible effect on large purchases – slowed markedly.

The fact that the Government has announced a support package at all for motoring is a signal that it buys the argument car manufacturing is a special case. Note, for example, the lack of any financial assistance for retail, an industry that employs greater numbers of British workers than motoring, and is at the sharpest end of this slowdown.

Having accepted car production needs state aid – for good reason, given the highly skilled manufacturing base it sustains – surely Lord Mandelson could have done better than this?