Inflation, income distribution, and cost benefit analysis

Abstract

The impact of inflation on project analysis is relevant even where input and output prices are rising proportionately, if the distribution of project income is being analysed. This analysis may be applicable in cases where certain project beneficiaries receive a fixed return—lenders at fixed interest-while others receive a variable return out of profits which are a residual item.Fixed depreciation provisions also result in distribution changes. The main beneficiaries out of the trading profit of an enterprise are lenders, equity owners and tax recipients. Inflationunder conventional accounting assumptions result in a shift from lenders to tax authorities and possibly to equity owners.In cost benefit analysis where distributional objectives are relevant, inflation must there fore betaken into account, and so a current price analysis is required. The application of differential distributional weights between the public and private sector further complicates project valuation under inflation which varies according to the public vis a vis private interests in the project. © 1986 Taylor & Francis Group, LLC.