Accountants welcome discount rate discussion

Chartered Accountants welcome discount rate discussion

The Institute of Chartered Accountants is welcoming news the Ministry of Economic Development is investigating the effect of the public sector discount rate on government investment decisions. The discount rate is a calculation applied to determine the expected payback on an investment.

Higher rates favour short-term investments, while lower rates favour projects over a longer time period. David Pickens, the Institute’s director of government relations, said: “research released by the Ministry illustrates the high relative discount rate used in New Zealand. The respective discount rates are: New Zealand, 10%; US 7%; Australia (Victoria) 6%; EU, 5%; UK, 3.5%; Germany, 3%.

“Robust cost benefit analysis is an important part of the public policy process. It’s important to ensure that mechanisms in that process don’t introduce costly bias into decision making.

“We would welcome greater debate on how government investment decisions are made. Generally speaking, there is often insufficient attention paid to how government projects are costed and benefits calculated.”

The New Zealand discount rate was set in 1971. The MED discussion paper suggests the rate is being used as a proxy for rationing funds, rather than for properly accounting for time and the cost of capital. The decision to discuss the rate is a welcome one, with potentially significant implications for government investment decisions.

ENDS

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