Government Discounting Controversies: Changing Prices, Opportunity Costs and Sytematic Risk

21 November 2011
By Michael Spackman

The conceptual basis and numerical quantification of the time discount rate (or rates) to use for public sector analysis have been debated for over half a century. In this paper for the Grantham Research Institute on Climate Change and the Environment and the Centre for Climate Change Economics and Policy, NERA Special Advisor Michael Spackman addresses those aspects that are in principle amenable to formal analysis, with minimal need for judgements about ethics or administrative practicability. These include controversies, many of them very long lasting, about the discounting of quantities measured in the numeraire of marginal utility, about the opportunity cost of public capital and current spending, and about the relevance of equity risk premia to government appraisal. It is concluded that, while current UK government practice in these respects is sound, some positions that are still supported widely elsewhere do not stand up to close examination, but are likely to continue to be held as matters of faith.