HM TREASURY (2022)

The public sector discount rate adjusts for social time preference, defined as the value society attaches to
present, as opposed to future, consumption. It is based on comparisons of utility across different points in
time or different generations.

The Green Book discount rate, known as the Social Time Preference Rate (STPR), for use in UK
government appraisal is set at 3.5% in real terms. This rate has been used in the UK since 2003.

Estimation of p:

Estimation of μ and g:
Calculation of STPR:

p=1.5%

u=1

g=2%

STPR=3,5%

Exeptions:

- The recommended discount rate for risk to health and life values is 1.5%. This is because the ‘wealth
effect’ is excluded. Health and life effects are expressed using welfare or utility values, such as Quality
Adjusted Life Years (QALYs), as opposed to monetary values. The diminishing marginal utility associated with
higher incomes does not apply as the welfare or utility associated with additional years of life will not
decline as real incomes rise.
- The standard UK discount rate may not be appropriate for appraisal of Official Development Assistance
(ODA) expenditure. For example, long term growth rates, the probability of catastrophic risk and the macro-
economic effects associated with expenditure may differ. An appropriate estimate of the STPR for the
recipient country should be used. Government departments should contact Department for International
Development if they require further information.

- Policies or projects which involve long term effects may require a different approach. This can be
particularly important for policies expected to have significant environmental effects. Where long term
effects are expected to occur, the appraisal of proposals may involve longer timescales. Generally, the
maximum life span of an intervention is assumed to be up to 60 years. This may be extended where there is
evidence a longer time period is required for the full effects of an intervention to materialise. The standard
STPR of 3.5% applied in appraisal should decline over the long term due to uncertainty about future values
of its components.
Da 0 a 30 anni -> 3,5%
Da 31 a 61 anni -> 3%

- Intergenerational effects: Where the possible effects of an intervention being examined as part of an
appraisal are long term and involve very substantial or irreversible wealth transfers between generations
further sensitivity analysis is appropriate. This could include irreversible changes to the natural
environment. This involves applying both the standard Green Book discount rate and a reduced discount
rate (excluding pure social time preference, δ) to costs and benefits. When applying this approach the Net
Present Social Value (NPSV) using the standard STPR and the reduced rate STPR should both be included in
the results of the appraisal and explained clearly. The difference between these two estimates of NPSV
provides an estimate of the intergenerational wealth transfer attributable to pure social time preference which
should be part of the explanation of the approach.

- Inflation should not be considered: Discounting is solely concerned with adjusting for social time
preference and has nothing to do with adjusting for inflation. The recommended Green Book discount rate
applies to real values, with the effects of general inflation already removed. To promote transparency the
best practice approach is to first convert costs or benefits to a real price basis, and then perform the
discounting adjustment. The inflation rate and discount rate should not be added and applied to costs and
benefits, as it gives an arithmetically incorrect result.