Social discount rates for member countries of the European Union

Abstract

PurposeThis paper sets out to estimate discount rates for EU members, on a consistent time preference basis, for application in the appraisal of social projects. The value of the discount rate can have an important influence on the allocation of funds between short‐term and long‐term uses.Design/methodology/approachA key component of the social discount rate is the elasticity of marginal utility of consumption (e) and it is estimated from OECD data relating to marginal and average rates of income tax. A tax model based on the principle of equal absolute sacrifice of satisfaction is employed.FindingsThe estimated discount rates, based on social time preference, mostly lie in the range 3‐5.5 per cent. The main source of variation in rates is differential growth in per capita consumption. Estimates of e are reasonably consistent and for 15 of the countries they lie in the range 1.3‐1.6.Research limitations/implicationsFor more comprehensive tax information, then additional data from each country's tax authority are required. The research on estimates of e and social time preference rates can be extended to cover non‐European countries.Practical implicationsIn the interests of a consistent equitable treatment of future generations, member countries of the EU should employ the same methodology in estimating social discount rates.Originality/valueThis paper applies a practical tax‐based approach to the estimation of e for a large number of European countries. The paper will be of interest to academics specialising in welfare economics and to practitioners involved in social project appraisal.