Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

The first component of the STPR formula is a utilitarian preference; the second one (p) is a pure time preference.The pure inter-temporal preference reflects consumer’s impatience or, more generally, the present value attributed toa future marginal utility. The utilitarian part measures the utility reduction of a marginal Euro caused by increases inreal income. This means that in a developing economy where future consumption will be plentiful compared to thepresent level, individuals will require more compensation for postponing consumption. The social rate of timepreference represents, in fact, the minimum return that individuals demand for giving up some of their currentconsumption in exchange for additional consumption in the future.All the values in the formula are country specific, especially those of consumption growth (g) that depend directly onGDP, which is quite different across the 27 Member States. Social and individual preferences affect the marginalutility parameter (e); life expectancy and other individual characteristics influence the time preference parameter (p).If we consider mortality-based statistics, a consistent proxy for the utility discount rate (p), we can observe a deathrate very close to 1% for the majority of countries.Estimation of the elasticity of the marginal utility of consumption, e, is less direct and proves to be lesshomogeneous. A range of values between 1 and 2 is consistent with the evidence provided by behaviouralapproaches and revealed social preferences based on tax-based data. 110Assuming that income tax structures are at least loosely based on the principle of equal absolute sacrifice ofsatisfaction, then the extent of progressiveness in the tax structure provides a measure of e. 111 The more progressivethe tax structure, and thus the greater the extent of social aversion to income inequality, then the larger the value of e.For the real annual per capita growth rate the best approach would be to estimate a long-term development path foreach economy, based on an appropriate growth model. Our estimates are based, however, on past annual growthrates.In Table B.2, where all these values are summarized, we show a purely indicative SDR for some countries.The presence of two different groups clearly emerges. As suggested before, the discriminating factor is the growthrate. It alone justifies the presence of different social discount rates for at least two macro-areas: the matureeconomies, on one hand, and the fast-growing ones, on the other. In the EU context this difference can beexpressed in terms of eligibility or non-eligibility for the Cohesion Fund.Table B.2 Indicative social discount rates for selected EU Countries based on the STPRapproachNon CF countries G e P SDRAustria 1.9 1.63 1.0 4.1Denmark 1.9 1.28 1.1 3.5France 2.0 1.26 0.9 3.4Italy 1.3 1.79 1.0 3.3Germany 1.3 1.61 1.0 3.1Netherlands 1.3 1.44 0.9 2.8Sweden 2.5 1.20 1.1 4.1CF countries G E P SDRCzech Rep. 3.5 1.31 1.1 5.7Hungary 4.0 1.68 1.4 8.1Poland 3.8 1.12 1.0 5.3Slovakia 4.5 1.48 1.0 7.7Source: Our estimates based on World Bank, European Commission and OECD data 112110Evans (2007) fully develops the STPR method and he studies in detail every parameter of the formula and the ways of estimating them; amethod that was also mainly used for our assessments.111The formula is the following: e = Log(1-t) / Log(1-T/Y)where t is the marginal rate of income tax; T is the total income tax liability and Y the total taxable income.112Data from 2000 to 2006 are mainly taken from the 2005 spring economic forecast of the European Commission (DG ECFIN (2005).‘European Economy’, No 2/2005). Where the OECD Economic Outlook 77 database reported different values from those of the EuropeanCommission, they have been replaced. Forecasts for the period 2007-2008 (2009-2010) are taken from the Stability or Convergence Programme ofmember countries, respectively for former European countries and for 2004 entrants. Data for elasticities (e) are taken from the OECD Tax207