Hostname: page-component-cd9895bd7-jn8rn Total loading time: 0 Render date: 2024-12-26T16:56:58.888Z Has data issue: false hasContentIssue false
  • English
  • Français

Social Discounting and the Cost of Public Funds: A Practitioner’s Perspective

Published online by Cambridge University Press:  31 March 2020

Michael Spackman
Michael Spackman*
Affiliation:
Department of Geography and Environment, London School of Economics and Political Science, London WC2A 2AE, UK, e-mail: [email protected] NERA Economic Consulting, Marble Arch House, 66 Seymour Street, London W1H 5BT, UK
Get access Rights & Permissions [Opens in a new window]

Abstract

Social discounting conventions vary widely. Some differences reflect institutional constraints, but many reflect differing assumptions about how a social discount rate should be derived and applied. The divide between advocates of social opportunity cost and social time preference (STP) frameworks seems unbridgeable. There is no consensus among STP advocates on whether the social cost of funding $1 of public spending is barely more than $1 of consumption or perhaps more than $2; or on whether the covariance of public service benefits with income merits a discount rate premium that is trivial or a few percentage points. The practicalities of government fund raising are sometimes overlooked. The issues are here reviewed in the light of the literature and of experience with developing and applying social discounting regimes and extended debates within government.

Keywords

cost–benefit analysisfinancial riskmicroeconomic behavioral economicsmicroeconomic policy formulationsocial discount rate.D04D90D61G32H43
Type
Article
Information
Journal of Benefit-Cost Analysis , Volume 11 , Issue 2 , Summer 2020 , pp. 244 - 271
Copyright
© Society for Benefit-Cost Analysis, 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Arrow, Kenneth, and Kurtz, Mordecai. 1970. Public Investment, The Rate of Return and Optimal Fiscal Policy. Washington, DC: Resources for the Future.Google Scholar
Arrow, Kenneth, and Lind, Robert. 1970. “Uncertainty and the Evaluation of Public Investment Decisions.” American Economic Review, 60(3): 364–378.Google Scholar
Atkinson, Giles, Dietz, Simon, Helgeson, Jennifer, Hepburn, Cameron, and Hakon, Saelen. 2009. “Siblings, Not Triplets: Social Preferences for Risk, Inequality and Time in Discounting Climate Change.” Economics, 26: 141–169.Google Scholar
Barrios, Salvador, Pycroft, Jonathan, and Saveyn, Bert. 2013. “The Marginal Cost of Public Funds in the EU: The Case of Labour Versus Green Taxes.” Taxation Papers 35, Directorate General Taxation and Customs Union, European Commission.Google Scholar
Barro, Robert. 2009. “Rare Disasters, Asset Prices, and Welfare Costs.” American Economic Review, 99(1): 243–264.CrossRefGoogle Scholar
Barro, Robert. 2015. “Environmental Protection, Rare Disasters and Discount Rates.” Economica, 82: 1–23.CrossRefGoogle Scholar
Benartzi, Shlomo, and Thaler, Richard. 1995. “Myopic Loss Aversion and the Equity Premium Puzzle.” Quarterly Journal of Economics, 110(1): 73–92.CrossRefGoogle Scholar
Bradford, David. 1975. “Constraints on Government Investment Opportunities and the Choice of Discount Rate.”American Economic Review, 65(5): 887–889.Google Scholar
Brealey, Richard, Cooper, Ian, and Habib, Michel. 1997. “Investment Appraisal in the Public Sector.”Oxford Review of Economic Policy, 13(4): 12–28.CrossRefGoogle Scholar
Burgess, David. 2013. “Reconciling Alternative Views About the Appropriate Discount Rate.” Journal of Public Economics, 97(1): 9–17.CrossRefGoogle Scholar
Burgess, David. 2018. The Appropriate Measure of the Social Discount Rate and its Role in the Analysis of Policies with Long Run Consequences. Arlington, VA: Mercatus Centre, George Mason University.CrossRefGoogle Scholar
Burgess, David, and Zerbe, Richard. 2011. “Appropriate Discounting for Benefit-Cost Analysis.” Journal of Benefit-Cost Analysis, 2(2): 1–20.Google Scholar
Burgess, David, and Zerbe, Richard. 2013. “The Most Appropriate Discount Rate.” Journal of Benefit-Cost Analysis, 4(3): 391–400.CrossRefGoogle Scholar
Claxton, Karl, Paulden, Mike, Gravelle, Hugh, Brouwer, Werner, and Culyer, Anthony. 2011. “Discounting and Decision Making in the Economic Evaluation of Health-Care Technologies.” Health Economics, 20(1): 2–15.CrossRefGoogle ScholarPubMed
Council of Economic Advisers. 2017. “Discounting for Public Policy: Theory and Recent Evidence on the Merits of Updating the Discount Rate.” Available at https://obamawhitehouse.archives.gov/sites/default/files/page/files/201701_cea_discounting_issue_brief.pdf (accessed 26 January 2020).Google Scholar
Creedy, John, and Passi, Hemant. 2017. “Public Sector Discount Rates: A Comparison of Alternative Approaches.” New Zealand Treasury Working Paper 17/02.Google Scholar
Cropper, Maureen, Aydede, Sema, and Portney, Paul. 1994. “Preferences for Life Saving Programs: How the Public Discounts Time and Age.” Journal of Risk and Uncertainty, 8(3): 243–265.CrossRefGoogle Scholar
Dahlby, Bev. 2008. The Marginal Cost of Public Funds: Theory and Application. Cambridge, MA: MIT.CrossRefGoogle Scholar
Dietz, Simon, Gollier, Christian, and Kessler, Louise. 2018. “The Climate Beta.” Journal of Environmental Economics and Management, 87: 258–274.CrossRefGoogle Scholar
Drupp, Moritz, Freeman, Mark, Groom, Ben, and Nesje, Frikk. 2018. “Discounting Disentangled.” American Economic Journal: Economic Policy, 10(4): 109–134.Google Scholar
Epstein, Larry, and Zin, Stanley. 1989. “Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework.” Econometrica, 57(4): 937–969.CrossRefGoogle Scholar
Feldstein, Martin. 1970. “Choice of Technique in the Public Sector: A Simplification.” The Economic Journal, 80(323): 985–990.CrossRefGoogle Scholar
Feldstein, Martin. 1997. “How Big Should Government Be?” National Tax Journal, 50(2): 197–213.Google Scholar
Feldstein, Martin. 1999. “Tax Avoidance and the Deadweight Loss of the Income Tax.” Review of Economics and Statistics, 81(4): 674–680.CrossRefGoogle Scholar
Frederick, Shane, Loewenstein, George, and O'Donoghue, Ted. 2002. “Time Discounting and Time Preference: A Critical Review.” Journal of Economic Literature, 40(2): 351–401.CrossRefGoogle Scholar
Frederick, Shane. 2006. “Valuing Future Life and Future Lives: A Framework for Understanding Discounting.” Journal of Economic Psychology, 27(5): 667–680.CrossRefGoogle Scholar
Gollier, Christian. 2013. Pricing the Planet's Future: The Economics of Discounting in an Uncertain World. Princeton, NJ: Princeton University Press.Google Scholar
Gollier, Christian, and Hammitt, Jim. 2014. “The Long-Run Discount Rate Controversy.” Annual Review of Resource Economics, 6: 273–295.CrossRefGoogle Scholar
Groom, Ben, and Maddison, David. 2019. “New Estimates of the Elasticity of Marginal Utility for the UK.” Environmental and Resource Economics, 72: 1155–1182.CrossRefGoogle Scholar
Harberger, Arnold. 2007. “Suggested New Steps Toward the Practical Implementation of Cost–Benefit Analysis.” Conference on Cost–Benefit Analysis, University of Washington, Seattle. Available at https://evans.uw.edu/sites/default/files/public/Harberger-New_Steps.pdf (accessed 26 January 2020).Google Scholar
Harberger, Arnold, and Jenkins, Glenn. 2015. “Musings on the Social Discount Rate.” Journal of Benefit Cost Analysis, 6(1): 6–32.CrossRefGoogle Scholar
Harrison, Mark. 2010. “Valuing the Future: The Social Discount Rate in Cost–Benefit Analysis.” Visiting Researcher Paper, Productivity Commission, Canberra. Available at https://www.pc.gov.au/research/supporting/cost-benefit-discount/cost-benefit-discount.pdf (accessed 27 January 2020).Google Scholar
Jacobs, Bas. 2018. “The Marginal Cost of Public Funds is One at the Optimal Tax System.” International Tax and Public Finance, 25: 883–912. https://doi.org/10.1007/s10797-017-9481-0.CrossRefGoogle Scholar
Jenkins, Glenn, Kuo, Chun-Yan, and Arnold, Harberger. 2011. “Cost–Benefit Analysis for Investment Decisions.” Development Discussion Paper: 2011–1. Available at https://www.agrilinks.org/sites/default/files/resource/files/cost-benefit_analysis_for_investment_decisions.pdf (accessed 27 January 2020).Google Scholar
Joint Regulators Group. 2012. Discounting for CBAs Involving Private Investment, But Public Benefit. London, UK: Joint Regulators Group. Available at http://stakeholders.ofcom.org.uk/consultations/discounting-for-cbas/statement (accessed 26 January 2020).Google Scholar
Keeler, Emmett, and Cretin, Shan. 1983. “Discounting of Life-Saving and Other Nonmonetary Effects.” Management Science, 29(3): 300–306.CrossRefGoogle Scholar
Little, Ian, and Mirrlees, James. 1974. Project Appraisal and Planning for Developing Countries. London, UK: Heinemann Educational Books, Ltd.Google Scholar
Liu, Liqun. 2003. “A Marginal Cost of Funds Approach to Multi Period Public Project Evaluation.” Journal of Public Economics, 87: 1707–1718.CrossRefGoogle Scholar
Lopez, Humberto. 2008. “The Social Discount Rate: Estimates for Nine Latin American Countries.” Policy Research Working Paper; No. 4639. World Bank, Washington, DC.CrossRefGoogle Scholar
Lucas, Deborah. 2014. “Rebutting Arrow and Lind: Why Governments Should Use Market Rates for Discounting.” Journal of Natural Resources Policy Research, 6(1): 85–91.CrossRefGoogle Scholar
Metcalfe, Robert. 2017. “Myopic Loss Aversion: A Behavioral Answer to the Equity Premium Puzzle?” behavioraleconomics.com. Available at https://www.behavioraleconomics.com/myopic-loss-aversion-a-behavioral-answer-to-the-equity-premium-puzzle/ (accessed 27 January 2020).Google Scholar
Moore, Mark, Boardman, Anthony, and Vining, Aidan. 2013a. “More Appropriate Discounting: The Rate of Social Time Preference and the Value of the Social Discount Rate.” Journal of Benefit-Cost Analysis, 4(1): 1–16.CrossRefGoogle Scholar
Moore, Mark, Boardman, Anthony, and Vining, Aidan. 2013b. “The Choice of Social Discount Rate and the Opportunity Cost of Public Funds.” Journal of Benefit-Cost Analysis, 4(3): 401–409.CrossRefGoogle Scholar
Moore, Mark, Boardman, Anthony, and Vining, Aidan. 2017. “Risk in Public Sector Project Appraisal: It Mostly Does Not Matter!” Public Works Management & Policy, 22(4): 301–321. https://doi.org/10.1177/1087724X17709482.CrossRefGoogle Scholar
Millar, Allan. 2013 “Behavioral Economics and the Equity Risk Premium Puzzle.” Available at https://www.seeitmarket.com/behavioral-economics-and-the-equity-risk-premium-puzzle-13264/ (accessed 27 January 2020).Google Scholar
Ni, Jincheng. 2017. “Discount Rate in Project Analysis.” Département Développement Durable et Numérique, France Stratégie. Available at https://www.strategie.gouv.fr/sites/strategie.gouv.fr/files/atoms/files/10_fs_discount_rate_in_project_analysis.pdf (accessed 27 January 2020).Google Scholar
Norwegian Expert Committee. 2012. “Cost–Benefit Analysis” (English translation), Official Norwegian Reports NOU 2012: 16, Norwegian Ministry of Finance.Google Scholar
New Zealand Treasury. 2016. “Discount Rates.” Available at http://www.treasury.govt.nz/publications/guidance/planning/costbenefitanalysis/currentdiscountrates (accessed 27 January 2020).Google Scholar
O’Callaghan, Daniel, and Prior, Seán. 2018. “Central Technical Appraisal Parameters: Discount Rate, Time Horizon, Shadow Price of Public Funds and Shadow Price of Labour.” Staff Paper, Irish Government Economic & Evaluation Service, Department of Public Expenditure and Reform. Available at https://igees.gov.ie/wp-content/uploads/2019/07/Parameters-Paper-Final-Version.pdf (accessed 27 January 2020).Google Scholar
OMB. 1992. Circular A-94: Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs. Available at https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/circulars/A94/a094.pdf (accessed 26 January 2020).Google Scholar
OMB. 2003. Circular A-4: Regulatory Analysis. Available at https://obamawhitehouse.archives.gov/sites/default/files/omb/assets/omb/circulars/a004/a-4.pdf (accessed 26 January 2020).Google Scholar
OMB. 2017. Memorandum M-17-21: Guidance Implementing Executive Order 13771, “Reducing Regulation and Controlling Regulatory Costs.” Available at https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/memoranda/2017/M-17-21-OMB.pdf (accessed 27 January 2020).Google Scholar
Pariès, Matthieu, and Loublier, Alexis. 2010. “Epstein-Zin Preferences and Their Use in Macro-Finance Models: Implications for Optimal Monetary Policy.” Working Paper Series No 1209/June, European Central Bank. Available at https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1209.pdf?05b26baa7cf730b71a07002c82033b4c (accessed 26 January 2020).Google Scholar
Parsonage, Michael, and Neuberger, Henry. 1992. “Discounting and Health Benefits.” Health Economics, 1(1): 71–76.CrossRefGoogle ScholarPubMed
Paulden, Mike, and Claxton, Karl. 2012. “Budget Allocation and the Revealed Social Rate of Time Preference for Health.” Health Economics, 21(5): 612–618.CrossRefGoogle ScholarPubMed
Rees, Martin. 2003. Our Final Century: Will the Human Race Survive the Twenty-first Century? London, UK: Heinemann.Google Scholar
Sjaastad, Larry, and Wisecarver, Daniel. 1977. “The Social Cost of Public Finance.” Journal of Political Economy, 85(3): 513–548.CrossRefGoogle Scholar
Spackman, Michael. 2004. “Time Preference and the Cost of Capital in Government.” Fiscal Studies, 25(4): 467–518.CrossRefGoogle Scholar
van Ewijk, Casper, and Tang, Paul. 2003. “How to Price the Risk of Public Investment.” De Economist, 151: 317–328.CrossRefGoogle Scholar
Weil, Philippe. 1990. “Nonexpected Utility in Macroeconomics.” Quarterly Journal of Economics, 105: 29–42.CrossRefGoogle Scholar
Weitzman, Martin. 2001. “Gamma Discounting.” American Economic Review, 91(1): 260–271.CrossRefGoogle Scholar
Werkgroep discontovoet. 2015. Rapport Werkgroep Discontovoet, English Summary: 11–18. Available at http://www.mkba-informatie.nl/mkba-voor-gevorderden/richtlijnen/rapport-werkgroep-discontovoet-2015/ (accessed 26 January 2020).Google Scholar