The discount rate is basically the estimated cost of borrowing or capital, used to calculate if a public sector project will produce a net positive benefit.
If it is set too low, you spend too much money on projects that are uneconomic and if it is set too high, you may decide not fund a project that is worth funding. So the rate used has a massive impact.
NZIER point out:
Since 2020, interest rates have risen significantly, but the Treasury has not updated the discount rate. This has caused the discount rate to become untethered from interest rates. The last time interest rates were at today’s level, the Treasury’s discount rate was 8.0% – three percentage points above the current value.
And they show this by this graph:
Incredible that this hasn’t increased in the last few years. I would have thought 7% would be a suitable rate for now, based on the likely drop in interest rates occurring.
David Farrar runs Curia Market Research, a specialist opinion polling and research agency, and the popular Kiwiblog where this article was sourced. He previously worked in the Parliament for eight years, serving two National Party Prime Ministers and three Opposition Leaders.
1 comment:
The discount rate used (often called the hurdle rate) should track business lending interest rates, with a margin of at least 2- 3%. your suggestion of 7% is way to low......
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