Question

The U.S. Office of Management and Budget (OMB) recommends that the government use different discount rates for public investments than for the sale of government assets. For public investments, the OMB suggests a discount rate that reflects the historical pretax rate of return on private investments, while for the sale of government assets, the OMB recommends using the cost of government borrowing as a discount rate.

Why might the OMB make this distinction? That is, (a) what is the social value created by capital investment, and what is the cost? (b) What is the social value created by selling existing assets, and what is the cost?

Answer 1

OMB might use this distinction because pretax rate of return on public investment being higher may attract new and huge public investment

Where as cost of government borrowing for sale of public assets is used so givernment deficit decreaes thatis objective of sale of public assets is fulfilled

a. Social value created by capital investment is increasing finance for developmental works and huge capital will increase labour employment and capital per labour increases

b. Social value created by sale of existing assets is more finance with the government so less burden of tax on public

Cost of sale of assets is less assets and due to disinvestment unemployment may increase and share of private sector increases which may act as pressure group