Social discounting and the cost of public funding in practice

This paper is a contribution to the understanding and development of social discounting regimes. It first addresses three, often overlooked implications of how public funding differs from private financing by debt and equity. One implication is that the cost of systematic (income-correlated) risk in public service benefits does not fall as a rate of return, but as an absolute reduction in the value of the benefits. This is quantitatively important. Another is that, while ‘social opportunity cost’ discounting can for some governments be the best practicable option for most cost benefit analysis, it is unsuitable for other applications, which require lower rates. This can be handled by a hybrid regime. Third, with ‘social time preference’ discounting it is usually assumed that the cost of public funding should be handled by an explicit shadow price (≥1) for public spending. However a value-for-money approach, optimising spending from given, constrained budgets, is in important ways superior. The paper then examines US Federal and United Kingdom central government conventions, illustrating hybrid and value-for-money regimes, and also illustrating the difficulties of establishing and maintaining analytically rigorous social discounting procedures in practice.