The Green Book discount rate

Why the Government values the future backwards

Corporate finance services
Insight

On the 28 October 2026, the Chancellor delivered the Autumn Budget – the moment public spending decisions reach the public. However, the machinery for appraising which projects make the cut sits out of sight, in a Treasury document called the Green Book.

For many, Green Book is a Best Picture-winning film released in 2018, yet for HM Treasury, the Green Book provides a framework for judging the costs, benefits, and risks of public spending proposals.

Inside that framework is a number that should look familiar to anyone in finance, but also slightly strange: a discount rate. The Government discounts the future much as a business does when assessing an investment, converting tomorrow’s costs and benefits into today’s money. The logic is familiar, but the definition of return is not. An investor is principally concerned with future cash flows and the return required for taking investment risk. The Green Book instead asks what future economic and social costs and benefits are worth to society today.

Acting on an independent review, the Green Book published alongside the Budget cuts the discount rate for assessing public spending projects from 3.5% to 3.0%, and early commentary reads the cut as a way to justify more long-term investment without raising the cash cost. A seemingly modest 0.5% movement places materially greater weight on benefits that arise decades into the future and will inevitably influence how long-term public investments are assessed.

The more interesting question is not what the rate should be though, but whether one singular rate should apply to every public project.

What a discount rate is, and what this one is not.

In a company valuation, a discount rate reflects the return an investor requires to part ways with their capital for uncertain future cash flows. The rate builds up from the time value of money with premiums for risk factors. Under normal conditions, the riskier the project, the greater the required return (the discount rate), and the greater the effect of discounting.

The Green Book rate does a different job. It is a social discount rate, designed to determine whether a future benefit is worth waiting for, not necessarily whether it pays. The 3% is built as a 2% risk-free rate plus a 1% premium for systematic risk. Unlike a commercial rate, though, that 1% premium is fixed: It applies to every standard project alike, rather than being set according to the project-specific risk. The rate is really asking how much less society should value a benefit because it arrives later rather than sooner.

Consequently, a public project can generate little or no financial return to Government and still present a good investment if the wider benefits to society can justify the resources committed.

The two approaches share a name and little else. A business valuation asks what an asset is worth today. The Green Book asks whether a project is worthwhile for society.

Feature	Commercial rate	Green Book rate
What it measures	Required return	Whether a benefit is worth waiting for
Starting point	Cost of capital and investor expectations	Society’s preference for value now versus in the future
Effect of higher project-specific risk	Rate rises	Costs and benefits to be discounted are adjusted
Effect of a longer horizon	Typically, rate rises	Rate falls
Aims to earn a return	Yes	No

A lower rate means a bigger investment pipeline

The Green Book published alongside the Budget cuts the standard rate from 3.5% to 3.0% and flattens the schedule by which it declines over long horizons: 3.0% for years 1 to 30, 2.5% for years 31 to 75, and 2.25% thereafter. The change follows an independent review by Professors Mark Freeman and Ben Groom, published on 30 June 2026.

The mechanism matters more than the headline. All else equal, a lower discount rate improves the appraisal of projects where benefits take decades to materialise, so projects previously unable to demonstrate sufficient social value may now do so. That is why early reaction to the Budget framed the cut as a justification for a larger pipeline of public investment, without changing the underlying cash cost. But it doesn’t necessarily make the spending worthwhile.

One rate implies every project is equally worthwhile

A single rate, adjusted only for time, implies that every public project delivers the same kind of societal value.

Is this right?

A hospital, a bypass, and a flood defence do not offer society the same return, any more than three companies offer an investor the same return.

A business handles uncertainty by moving the rate. For example, when a project’s payoff is risky, the rate goes up, and the project has to clear a higher bar. So, the obvious question is why the Green Book does not raise its rate when a project’s societal benefit is questionable, and lower it when the benefit is close to certain.

The reviewers considered exactly this. They accept that adjusting the rate on a project-by-project basis is theoretically correct. They then decline to make it standard practice, on two grounds: (i) it would be disproportionate for most projects, and (ii) the UK lacks the evidence base to do it reliably across departments.

The economically correct answer has been set aside, not because it is wrong, but because the country is not yet equipped to apply it.

Where the reviewers broke their own rule

The reviewers themselves did not treat one rate as absolute. Their report proposed two exceptions.

The first was a lower rate for what they called social insurance: projects that pay off most when society is in crisis, such as pandemic preparedness or counter-terrorism. Such benefits land precisely when they are needed most, so the review argued they should be treated more generously.
The second was the largest transformational projects, where the review suggested dropping a single centrally set rate in favour of case-by-case analysis of the welfare involved.

The published Green Book, though, sets out a more standardised approach in its core guidance. The social insurance rate does not appear. The pattern is worth noting: the independent review recognised circumstances in which greater project-specificity could be justified, while the framework ultimately adopted by Government places greater weight on consistency.

It is reasonable to ask how well one rate serves the many mid-sized projects in between.

What is the answer? Subjective, but challengeable.

The usual objection to a project-specific rate is that it would be subjective: a judgement rather than a formula. But the objection carries less weight than it first appears, because professional judgement is exactly how valuation works.

When a Corporate Finance team sets a discount rate for a company valuation, it is a reasoned judgement, informed by the business, its sector, its prospects and the risks attached. It does not pretend to be objective. What makes it robust is not objectivity but scrutiny. The rate has to stand up when HMRC reviews the valuation, and it is either defended on its merits or revised.

That is the model worth considering for public appraisal. A variable rate would demand expertise and would invite challenge, which is a strength rather than a flaw.

The question is whether appraisal built on openly challengeable expert judgement would serve the taxpayer better than one rate applied across the board.

Pragmatism or a cop-out?

So which is it? The reviewers ultimately retained one rate because the UK cannot yet introduce the framework needed to make a variable rate feasible at the scale public appraisal demands. For now, that is a defensible call. But a missing evidence base is a reason to build one, not a reason to stop asking the question.

The challenge is ultimately a familiar one for valuations: how do you assess value and risk when conventional measures do not tell the whole story? Setting and challenging discount rates is part of what the Price Bailey Strategy & Corporate Finance team does, whether supporting a company valuation, testing the assumptions behind an investment case, or defending a rate under HMRC scrutiny. If your organisation is weighing an investment where financial return is only part of the picture, that is a conversation worth having. Contact us using the form below.

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