Government loans for auto manufacturers

September 12, 2008

Last year, the Congress authorized the Department of Energy to make $25 billion in loans to auto manufacturing firms and suppliers of automotive components. Manufacturers could use those loans to reequip or establish facilities to produce "advanced technology vehicles" that would meet certain emissions and fuel economy standards; component suppliers could borrow funds to retool or build facilities to produce parts for such vehicles.

Subsequent funding was required before such loans could be made, and that funding has not yet been provided. The budgetary cost for such loans, based on the rules in the Federal Credit Reform Act of 1990, reflects the expected cost to the government of any subsidy, not the face value of the loans.

Several recent press reports have incorrectly suggested that CBO has estimated a 15 percent subsidy cost for loans to the automakers, so that $25 billion in loans would cost $3.75 billion. CBO's analysis, however, suggests a 30 percent subsidy cost for such loans under the conditions specified in the authorizing legislation. The resulting subsidy cost would imply a budget cost of $7.5 billion for $25 billion in loans. (Early this year, CBO had informally suggested a 15 percent subsidy cost. Since then, however, credit conditions for the auto manufacturers have deteriorated markedly -- the market interest rates on their outstanding debt, for example, have risen dramatically.)