HM Treasury has appointed two academics to conduct a review into the Green Book discount rate, which aims to support comparisons of costs and benefits that occur over time.
The Green Book is the government’s guidance on assessing the costs, benefits and risks of different options to achieve government objectives, wther they are policies, programmes or projects. The discount rate is a key method of appraising the “time value” of money for these proposals.
Prof Mark Freeman and Prof Ben Groom will undertake the work over the coming months, with interim findings expected in March next year and a final report in June.
Freeman is a professor of finance at the University of York and also serves as deputy chair of the Financial Conduct Authority’s Cost Benefit Analysis Panel.
Groom is a specialist in biodiversity economics at the University of Exeter and also a visiting professor at London School of Economics.
Both academics previously worked on a review of the Green Book discount rate that reported in 2018.
Their appointment – made by chief secretary to the Treasury James Murray – follows this summer’s broader Green Book review, which identified concerns from several stakeholders about the Green Book’s approach to discounting.
HM Treasury said those concerns centred on the extent to which the magnitude of the discount rate in the Green Book “unfairly undermines” the appraisal of long-term transformational schemes that produce benefits “well into the future”.
The earlier review set out to consider whether the Green Book was being used in a way that ensured fair, objective and transparent appraisals of projects outside London and the south-east of England.
HM Treasury committed to the discount-rate review in June, but has only now announced who will conduct it and what the timescale is.
The Green Book discount rate is known formally as the Social Time Preference Rate. The STPR is currently set at 3.5% in real terms for the first 30 years of a proposal.
Freeman and Groom are tasked with answering a number of questions, including looking at evidence for remaining with the current STPR approach, or changing to an alternative.
Other questions include whether the discount rate should be adjusted for place-based objectives and environmental scarcity.
They are also asked for views on whether the social discount rate should be adjusted for transformational projects – and, if so, how.
The terms of reference for the review call on Freeman and Groom to consider the UK context for HM Treasury’s questions, but also urges them to look at international comparisons to “better inform” judgments on the UK approach.