Summary measures of social welfare

5.54 A variety of measures can be used to summarise Social CBA. Estimates of Net Present Social Value (NPSV) and Benefit Cost Ratios (BCR) are commonly used:

NPSV is defined as the present value of benefits less the present value of costs. It provides a measure of the overall impact of an option.

BCR is defined as the ratio of the present value of benefits to the present value of costs. It provides a measure of the benefits relative to costs.

5.55 When calculating the NPSV or BCR:

future costs and benefits should be adjusted for inflation to 'real' base year prices. The base year should be the first year of the proposal.

future costs and benefits should be discounted by the Social Time Preference Rate (STPR) to provide the present value.

5.56 The most appropriate summary measures and their construction will depend on the context in which the decision is being made:

Where optimising over a constrained budget, as is usually the case for government spending, the BCR can be constructed as a measure of social value divided by the relevant public spending constraint (e.g. NPSV/£ or the Present Value of Benefits/£). This assesses the benefits bought per £ of public spending. It can be used to allocate across a portfolio of spending to maximise Value for Money.12

For Regulatory Impact Assessments, where the constraint is based on cost targets for business regulation, an indicator of the cost to business (or deregulatory benefits) of options will be relevant.

Where departments or types of spend with a constrained budget operate on thresholds, the relevant measures may be framed accordingly. For example 'cost per QALY measure' is commonly used in the health sector to assess Value for Money with a pre-defined threshold that should be met to be considered Value for Money.

When comparing a range of options a consistent formulation should be used to calculate the BCR of all options. Ideally organisations should use a consistent approach to formulating BCRs for similar types of decision and across time.

5.57 Where non-monetised costs or benefits are significant summary measures alone will not capture the full impact of an option. Similarly, a single measure may fail to adequately reflect the full range of potential costs and benefits to society if there are significant risks attached to an option that have proved challenging to quantify. It may be unrealistic to produce a single number that adequately captures the full impact of an option.

5.58 Appraisal is iterative and involves checks and reworking of steps in the analysis and planning stages of an intervention. If additional evidence is identified at a late stage it may be necessary to reconsider:

the selection of the short-list, repeating Social CBA and Social CEA

the preferred way forward (i.e. the option identified at the long-list stage which is most likely to deliver SMART objectives)

the choice of preferred option (the chosen option at the short-list stage)

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12 Public sector budgets are nearly always constrained so it is generally impossible to undertake all projects that would provide benefits that exceed their public-sector costs. This means public spending has an opportunity cost that needs to be considered when assessing options. Considering options in terms of the benefits per £ of the relevant budget constraint allows the opportunity cost to be taken into account.