ALISTAIR DARLING, the chancellor, is set to end months of speculation by announcing a “scrappage” scheme to encourage people to trade in old cars for new in his April 22 budget.

The policy has been urged on the government by the crisis-hit motor industry, which is facing an alarming collapse in output. It says that without a new sales incentive, the sector will face tens of thousands of job losses.

Details of the scheme are still being finalised in discussions between the Treasury and the business department, headed by Lord Mandelson. It is expected to involve a £2,000 allowance for people trading in for scrap a car more than nine years old against the purchase of a new or nearly new vehicle.

Ministers and officials are said to have been impressed by the impact of such schemes in other countries. A similar scheme in Germany, involving a €2,500 (£2,250) scrappage allowance, has reversed its slide in sales. New car registrations in Germany last month were up by 40% on a year ago. In Britain, in contrast, they were down by more than 30%.

Whitehall sources dismissed reports that Darling and Mandelson were at loggerheads over the issue. “It is completely wrong to say Alistair and Peter have fallen out on this,” said one. The sources said it was recognised in government that while help was on the way for the industry in the medium term, including loans from the European Investment Bank for the development of greener vehicles, help was needed in the short term to pull the industry out of its slump.

Officials have been negotiating with the car industry about sharing the cost of the scrappage scheme and about ensuring that any allowance does not take the place of existing discounts by motor manufacturers, which would defeat the object.

Industry sources said cash-strapped manufacturers were reluctant to share the cost of the scheme and warned that anything less than a £2,000 allowance would be ineffective in boosting sales. But they insisted that firms would co-operate fully to ensure that it succeeds.

Britain’s Society of Motor Manufacturers and Traders (SMMT) has been pushing for the scheme for months and has criticised the government for dragging its feet in comparison with other countries.

Austria, France, Italy, Portugal, Romania and Spain, as well as Germany, had all introduced scrappage schemes with a significant impact on car sales. China and Brazil had boosted car sales to record levels last month with tax incentives for buyers.

“A scrappage scheme will provide the incentive needed and the evidence is clear that schemes already implemented across Europe do work to increase demand,” said Paul Everitt, chief executive of the SMMT. “The UK is the only major European market not to implement a scheme.” The SMMT calculates that a one-year scheme would cost £160m.

Last week Gordon Brown signalled a £2,000 allowance against purchases of electric cars but critics pointed out that these were impractical for many road users at present and few were made in Britain.

Some environmentalists oppose a scrappage scheme, arguing that it is more environmentally friendly to run old cars until they cease to function because a significant part of their emissions occur during manufacture.

Friends of the Earth has backed the policy, saying it would persuade motorists to “swap gas-guzzlers for fuel-efficient models”.

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