A6.12 Available evidence suggests a range of plausible values of µ (mu). The 2003 edition of the Green Book set a value of 1. As set out in Annex 3, the estimate used by DWP for distributional weighting is 1.3 (based on Layard et al. 200844), while Groom and Maddison (2018)45 use a number of techniques to estimate a pooled value of 1.5.
A6.13 Historic growth rates in consumption per capita depend on the time period considered and the extent to which more recent growth rates or projections are considered to be representative of long term trends. The 2003 Green Book set g at 2%. Freeman, Groom and Spackman (2018)46 reference average real annual per capita consumption growth for the UK for the period 1949 - 2016 of 2.2% per year. Estimates based on ONS data from the recent past, for example 1996 to 2016, are lower at 1.7% per year.47
A6.14 Future projected growth rates are also relevant. Long-run forecasts of GDP growth (rather than consumption) from the Office of Budget Responsibility are for growth of 2.2% per year in real terms. This implies an annual projected growth rate of GDP per capita of 1.9%.48
A6.15 Taken together, the range of estimates of µ and g suggest 2% remains plausible as an estimate of the overall wealth effect. For the purposes of the STPR the estimate of µ is retained at 1 and g at 2%.
Box 29. Calcuation Of STPR
| r = ρ + µg Where ρ = 1.5%; µ = 1.0; and g = 2% 0.015 + 1*0.02 = 3.5% |
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44 Layard et al. (2008) "The marginal utility of income" Journal of Public Economics, Vol. 92, pp. 1846-1857.
45 Groom and Maddison (2018) "New Estimates of the Elasticity of Marginal Utility for the UK" forthcoming in Environmental and Resource Economics. Working paper version (2013) Centre for Climate Change Economics and Policy Working Paper No. 141.
46 See Freeman, Groom and Spackman (2018) "Social Discount Rates for Cost-Benefit Analysis: A Report for HM Treasury" published on the HMT Green Book web page
47 The ONS quarterly national accounts publication provides historic consumption data. Based on analysis in December 2017 the approximate compound annual growth rate in consumptions per capita between 1996 and 2016 was 1.7%. Freeman, Groom and Spackman (2018) provide a range of estimates for different historical horizons.
48 Long-run forecast of GDP growth from the Office for Budget Responsibility – Long-term economic determinants – November 2017 Economic and fiscal outlook – supplementary documents published on 24th of January 2018. Estimate of average long-term GDP per capita growth consistent with OBR's long term economic determinants.