Public Sector Discount Rates for Cost Benefit Analysis

Published 14 Jul 2008
Page updated 19 Oct 2010

The discount rate plays an important role in the cost-benefit analysis of public sector projects. Treasury's guidance on carrying out cost benefit analysis sets out what discount rate is appropriate in any situation and how it should be used.

Note on Revision of Public Sector Discount Rates

The derivation of the public sector discount rate is set out in the following document. Note that the recommended discount rates were revised in October 2010 to reflect the following changes since this document was prepared:

The risk-free rate is based on the 10 year government stock rate, which in 2008 was 6.4% but has come down to 5%.
The forecast inflation rate was previously assumed to be 3%; we now think that 2.5% may be more realistic as an average over the next 10 years.
The corporate tax rate was announced in the 2010 Budget to reduce from 30% to 28% as from 1 July 2011.
Other tax changes announced in the 2010 Budget include the removal of the depreciation deduction for long-lived buildings and the removal of the 20% depreciation loading. As a result, the effective tax rate for general purpose buildings is assumed to have increased to match the statutory rate of 28%, and the effective tax rate on all other investments is assumed to have increased to 24%.