The Treasury New Zealand's social discount rate

Feb 17, 2025

We all know Governments need to invest in things to safeguard future generations and the planet. Things like floodwalls, renewable energy and social investments in health, development and children’s education.
 
Until recently, the New Zealand Government had an implicit disincentive to prioritise projects with long term social or environmental benefits – because of how it set the public sector’s 'social discount rate'. The social discount rate captures how we trade off the present versus future benefits (and costs) when making public policy decisions.
 
But, with the help of Motu Research and other advisors, the Treasury recently made substantial changes to the social discount rate they use to evaluate public sector proposals. Previously, Treasury used a single discount rate that trades off everything across time in the same way, whether we’re looking at investing in something like an office building or river quality. The changes mean we now have two rates: One for commercial proposals at 8% (for things like office buildings), and the other for non-commercial proposals at 2% (for things like investing in water quality or addressing juvenile offending). [Note: Each of these annual rates is ‘real’, i.e. after adjusting for inflation.]

This means proposals with long-term social or environmental benefits will look a lot more valuable to the Government than they did previously – and so be a higher priority for the Government to invest in.

In February 2025 we held a joint Motu / Treasury New Zealand Public Policy Seminar on the Treasury's social discount rate.

View the recording here.

See the slides from the presentation here.

 One advisory input into the Treasury’s decision process was a commissioned expert paper by Motu Research’s Arthur Grimes, How Should the New Zealand Government Discount Future Payoffs? 

For more background thinking, see Treasury's paper on Deriving values of the social rate of time preference.

At this seminar, Arthur Grimes (Motu Research) and Chris Parker (the Treasury) discussed the underlying analysis that supported the discount rate changes.

Kirsten Jensen (the Treasury) and Geoff Simmons (Parliamentary Commissioner for the Environment) discussed the public policy relevance.


 
About the presenters

Arthur Grimes is a Senior Fellow at Motu Research and Professor of Wellbeing and Public Policy at Victoria University of Wellington’s School of Government. Arthur’s current research focuses on the economics of wellbeing and public policy, and on urban economics (including housing). He has published widely in both these fields and has published also on monetary and related topics.

Chris Parker is a Principal Advisor in the Treasury's Housing and Urban Growth team. He is an economist with expertise in cost-benefit analysis and urban policy (e.g., land, housing, infrastructure, local government). Previously, he was chief economist at Auckland Council, consultant at each of NZIER and Hyder Consulting, and at FRST (Foundation for Research, Science and Technology). 

Kirsten Jensen is a Principal Advisor in the Treasury's Public Finance Policy team. She led the Treasury policy work on the public sector discount rate, is leading public sector cost-benefit analysis and agencies’ use of the cost-benefit analysis tool for advice. She has served as a board director of the International Society for Benefit Cost Analysis.

Geoff Simmons is the Chief Economist at the Parliamentary Commissioner for the Environment. He has worked as an economist for the Productivity Commission, the UK Home Office and Treasury New Zealand and served as a general manager at the Toi Mai Workforce Development Council and the Morgan Foundation. Geoff has also co-authored four books, two of which include a focus on environmental economics.

Motu Public Policy Seminars are free to the public, but please subscribe to receive email notifications of Motu's events and publications.

Thanks to The Treasury, Stats NZ and EECA for their generous support.