Treasury to lower ‘social discount rate’ for first time in 25 years following Exeter economist’s review

An Exeter’s economist’s review into how the Treasury evaluates public policy has sparked a significant shift in Government decision-making.

The Chancellor John Healey announced at the Budget he will be accepting several recommendations from an academic-led review into the social discount rate, a central part of the Treasury’s ‘Green Book’ that hasn’t changed in a quarter of a century.

Recommendations from the review, co-led by the University of Exeter’s Professor Ben Groom and Professor Mark Freeman from the University of York, will influence all future public policy initiatives, from transport infrastructure projects to the building of new hospitals.

The Chancellor announced last month that the Government would accept the review’s key recommendation to lower the social discount rate used in the Treasury’s ‘Green Book’ from 3.5% to 3%.

This means more consideration will be given to future generations’ wellbeing in cost-benefit analyses, with greater importance placed on projects with long-term benefits such as long-lasting infrastructure, and more weight placed on the future environmental impact of infrastructure projects initiated now.

The Chancellor of the Exchequer’s Budget statement today announced a reform of the Treasury’s investment manual, the Green Book.  As part of this process, HM Treasury has formally responded to the recommendations of the Discount Rate Review by publishing:

A formal response to the Discount Rate Review,

A new version of the Green Book, updated to reflect changes to the approach to discounting,

A new version of the discounting supplementary guidance to the Green Book.

In summary the official response states: “The final report sets out 23 discrete recommendations. HM Treasury has accepted 15 in full, partially accepted 5 and has not accepted 3 at this stage … Where recommendations have not been accepted in full, HM Treasury has set out its reasoning and will keep the relevant issues under review” (Response document, #1.4).

In addition to the change to the headline discount rate from 3.5% to 3%, the major accepted changes are:

• An updated term structure of discount rates with lower rates for long-term maturities,
• A 5-yearly review process for the discount rate,
• The replacement of sector specific discount rates with more accurate long-term sectoral valuation of costs and benefits.
• The removal of certain types of sensitivity analysis.  

Professor Groom, who is Dragon Capital Chair in Biodiversity Economics at the University of Exeter Business School and a member of the Land, Environment, Economics and Policy (LEEP) Institute, said: “Social discounting works like the inverse of compound investing, with the rate you use being very consequential. It could, for example, determine whether a government invests in projects or policies with long-term payoffs. For instance, in economic analysis the long-term benefits of climate mitigation would loom larger at a 3% discount rate than they would at a 5% discount rate. At 5% interventions with shorter term payoffs would be ranked higher.

“Lowering the social discount rate can mean the difference between a government backing projects designed to address long-term climate change or favouring projects with quicker returns but which deliver less for society.

“Mark and I are thrilled that our Review’s recommendations, and particularly the headline discount rate being reduced from 3.5% to 3% in real terms, are being taken on board by HMT and we look forward to any further interactions with the Treasury that this may lead to.

“The Review was a great example of the way in which academics and government can collaborate to improve decision-making in the public sector.”

The social discount rate is central to the Treasury’s ‘Green Book for appraising public policies, projects and programmes. It provides a framework and evidence base for comparing costs, benefits and risks that arise at different points in time.

Governments use social discounting to determine how costs and benefits that occur in the future such as the impacts of nuclear power, climate adaptation projects, transport and other policies and programmes, are valued in the present.

A low discount rate places more weight on costs and benefits that accrue to future generations’ in cost–benefit analyses.

This does not mean high return projects are not still viable, but it does mean that projects with longer term benefits pass the cost-benefit test and can form part of the government portfolio.

Read the Green Book discount rate review 2026 here.