A6.2 Discounting in the public sector allows costs and benefits with different time spans to be compared on a common "present value" basis. 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.
A6.3 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. Exceptions to the use of the standard STPR are outlined below.
A6.4 The use of the STPR in public sector appraisal differs from private sector discounting. Decisions about the overall size of public spending and allocation of budgets are taken on a top down basis. The costs associated with raising funds (i.e. through taxes or debt issuance) are not used when appraising individual projects, programmes or policies. The cost of borrowing is not included as a decision variable on whether to go ahead with an individual project or not. In addition, there is no allowance for project specific risk in the STPR as risks should be identified and costed explicitly in appraisal. This approach to the STPR contrasts with private sector discounting which incorporates allowances for the cost of raising capital and compensation for risk.