Building Queensland and Infrastructure Australia require the use of a 7% discount rate in cost-benefit analyses of public infrastructure projects, but is a 7% discount rate applied to the future benefits of public infrastructure projects too high? Marion Terrill of the Grattan Institute argues discount rates should not be frozen where they were in the 1980s, given that real interest rates paid on borrowings by governments have fallen substantially since then. I’m grateful Marion agreed to be interviewed for my podcast. Our conversation is now available as Economics Explained EP42 Unfreezing Discount Rates.
A 7% discount rate means that $100 of benefits in fifty years’ time are worth only $3 today, in present value terms, compared with $18 (i.e. 6X higher) for a 3.5% discount rate. A higher discount rate means we are less likely to favour projects with high upfront capital costs but which deliver benefits to current and future generations which grow over time. Arguably, a project like Cross River Rail falls into that category, although I’ve always been sceptical about the projected benefits.
Here is a link to Marion’s 2018 report on discount rates co-authored with Hugh Batrouney:
The Resources for the Future Working Paper I quote from in my introductory remarks is Discounting for Public Cost–Benefit Analysis