Social discount rate cut for the first time in 25 years
Treasury adopts the key recommendation of a review co-led by Dragon Capital Chair Professor Ben Groom, giving future generations more weight in public spending decisions
Treasury lowers the social discount rate following review co-led by Dragon Capital Chair
For the first time in 25 years, the government is changing the discount rate it uses to judge public spending. The new rate follows a review co-led by Professor Ben Groom, Dragon Capital Chair in Biodiversity Economics, and Professor Mark Freeman of the University of York.
The social discount rate sits at the centre of the Treasury’s Green Book, the guidance used to appraise everything from new hospitals to transport infrastructure. It sets how much weight costs and benefits in the future carry against those felt today. The government has accepted the review’s main recommendation to cut the rate from 3.5% to 3%. As a result, public decisions will give more weight to the wellbeing of future generations, to long-lasting infrastructure, and to the long-term environmental effects of projects started now.
With today’s Budget, the Treasury published its formal response. Of the review’s 23 recommendations, it accepted 15 in full and 5 in part. Alongside the headline cut, the accepted changes include lower discount rates for very long time horizons and a review of the rate every five years.
Ben said the lower rate could decide whether governments back long-term action on climate change or projects that pay off sooner but do less for society. He described the review as a strong example of academics and government working together.
This work is central to the Chair’s research theme on intergenerational fairness. Ben will present the review to audiences in Sydney and Brisbane during his Economic Society of Australia tour next month.
