A social discount rate for the United Kingdom

Discussions about the appropriate discount rate to adopt for public decisions continue unabated. In the United Kingdom, Her Majesty's Treasury has conducted periodic reviews of the theoretical and applied literature in order to assess the appropriateness of `official' discount rates recommended for public sector decision-making. The last such review was conducted in 1991 and produced two recommended rates: 6% in real terms for public sector projects and 8% in real terms as a required average rate of return. While no official review has taken place since 1991, this paper reports the results of a review of the latest evidence on social discount rates in the context of the United Kingdom. We argue that the 1991 `official' rates are well in excess of any reasonable and defensible discount rate. Our best estimate is 2.4% and a range of 2-4% probably sets the upper and lower bounds of what is a credible social discount rate. Given the very wide disparity between rates of 6-8% and 2-4%, the policy implications are formidable.

[1]  David F. Bradford,et al.  Constraints on Government Investment Opportunities and the Choice of Discount Rate , 1975 .

[2]  E. Kula.  An Empirical Investigation on the Social Time-Preference Rate for the United Kingdom , 1985 .

[3]  E. Kula,et al.  Social interest rate for public sector appraisal in the United Kingdom, the United States and Canada , 1987 .

[4]  Maurice FitzGerald Scott,et al.  A new view of economic growth , 1989 .

[5]  Costas Meghir,et al.  Consumer demand and the life-cycle allocation of household expenditures , 1993 .

[6]  J. Muellbauer,et al.  Economics and consumer behavior , 1980 .

[7]  D. Prelec,et al.  Negative Time Preference , 1991 .

[8]  R. Crisp.  Counting the Cost of Global Warming , 1993 .

[9]  M. Fg. Scott.  The Test Rate of Discount and Changes in Base-Level Income in the United Kingdom , 1977 .

[10]  R. Howarth,et al.  Intergenerational Resource Rights, Efficiency, and Social Optimality , 2017 .

[11]  R. Howarth,et al.  Intergenerational transfers and the social discount rate , 1993 .

[12]  Richard B. Norgaard,et al.  Sustainability and discounting the future , 1991 .

[13]  J. Hicks.  Capital and Growth , 1966 .

[14]  G. R. Corey,et al.  Discounting for Time and Risk in Energy Policy. , 1984 .

[15]  David Pearce,et al.  The Social Appraisal of Projects: A Text in Cost-Benefit Analysis , 1981 .

[16]  G. Loewenstein.  Anticipation and the Valuation of Delayed Consumption , 1987 .

[17]  D. Champernowne,et al.  On Economic Inequality. , 1974 .