Treasury’s reliance on flawed market benchmarks is undermining long-term public investment, writes Dr James Schuurmans-Stekhoven.
WHEN A PROPOSAL for a vital public infrastructure project, a regional hospital upgrade, or a long-horizon social program is quietly flushed down the toilet by our state or federal treasuries, the execution weapon is always a single, bloodless number: the social discount rate.-
Confronted by furious community groups or citizens who foolishly believe taxes should fund public civilisation, institutional bureaucrats pull on their best technocratic expressions and gesture vaguely at their spreadsheets. The math, they assure us with practised solemnity, is objective, unyielding and entirely free of ideology.
To ensure that taxpayers aren’t “wasting” money, the state must evaluate public investments against the opportunity cost of capital in the private sector. And what better benchmark for private sector efficiency than the historical rate of return of the stock market?
It sounds like robust, hard-headed fiscal discipline. In reality, it is a magnificent piece of accounting fiction. By benchmarking public investment against the equity market, our governments are holding themselves to a mythological standard — a curated “winners’ gallery” that completely ignores the structural body count of private enterprise and the massive social wreckage that corporations routinely dump onto the public ledger.
Consider the mathematical sleight of hand known as survivorship bias. When an index like the ASX 200 boasts a healthy, compounding long-term return of 7–10%, it is presenting a heavily airbrushed history. It looks like a perpetual wealth machine only because the bankrupt, the stagnant and the utterly liquidated are quietly scrubbed from the data. When a private firm goes under, it is delisted. When the index rebalances, the losers are dumped into an unremembered grave and replaced by rising corporate stars.
The stock market index is not a reflection of every dollar ever invested in the private economy; it is a ledger of the lucky survivors. Yet, when the state uses this inflated figure as its hurdle rate, it subjects public goods to an impossible, rigged exam.
High discount rates aggressively vaporise the present value of future benefits. Under a standard 7% discount rate, a massive environmental or social benefit accruing 30 years from now is rendered practically worthless on today’s balance sheet. This mathematical mechanism systematically decapitates projects with long-term horizons – from high-speed rail to climate change mitigation and early childhood intervention – ensuring they never survive a Treasury audit.
The message from Treasury is clear: if your grandchildren can’t monetise it by next Tuesday, it isn’t worth building.
But the asymmetry runs far deeper than selective index bookkeeping. The private sector’s high rates of return are frequently purchased by actively manufacturing social costs that the state is then forced to clean up.
Take the current corporate stampede toward artificial intelligence. When an enterprise replaces 30% of its workforce with AI algorithms, its operating expenses plummet, its net income spikes and its stock price rockets. On a corporate balance sheet, firing human beings is logged as a brilliant efficiency gain that rewards shareholders.
But from a macroeconomic perspective, those displaced workers do not simply evaporate. Their costs are merely dragged off the corporate spreadsheet and dumped onto the public one. The state must now pick up the tab for structural unemployment, regional economic decline, retraining programs, and the downstream mental and physical health crises that inevitably follow when people are stripped of their identity and livelihoods.
Herein lies the ultimate farce of modern public finance: the very corporate manoeuvres that drive up stock market returns simultaneously increase the state's financial burdens. Yet, under current technocratic logic, as corporate returns rise due to ruthless labour displacement, the Government’s benchmark hurdle rate goes up. The state’s capacity to invest in society is actively crippled by a benchmark that climbs higher every time corporations externalise their collateral damage.
The hard truth, long understood by economic historians but aggressively ignored in the halls of treasury departments, is that “pure capitalism” is a fairytale for the gullible. The private sector has never been an autonomous, self-sustaining wealth generator. It relies on a permanent, uncredited public subsidy just to stay afloat.
Private enterprises do not pay the capital costs required to breed, feed and educate the healthy human beings they hire from the public school and healthcare systems. Some pay fuel taxes, but they do not cover the gargantuan capital depreciation of the roads, ports and rail lines that carry their supply chains.
Furthermore, the foundational technologies that tech barons pretend they invented in their garages – from the internet and GPS to basic pharmaceutical compounds – were overwhelmingly incubated through high-risk, long-horizon public research grants before being handed over for private profit-making.
More fundamentally, the state acts as the ultimate corporate insurer of last resort. The very concept of the limited liability corporation is a state-enacted law that shields investors from personal ruin, legally shifting the downside risk of business failure onto creditors, workers and society. And when systemic crises inevitably hit – be it a global financial crisis or a pandemic – the free-market purists instantly vanish, replaced by corporate executives holding their hats out for public debt to rescue them from their own fragility.
Why, then, do our institutional bureaucracies persist with this absurd accounting? Because decoupling “economics” from “political economy” serves a highly effective political purpose.
For most of the 19th Century, the discipline was explicitly called political economy. Practitioners like Adam Smith and Karl Marx understood that you cannot separate the distribution of wealth from state power and class interests. The modern shift to rebrand the field as a hard science, complete with complex calculus and Greek-lettered variables, was a deliberate attempt to make wealth distribution look like an impartial law of nature, akin to gravity.
Framing public investment through the lens of neutral mathematical models beautifully removes it from the democratic sphere. It allows governments to shrug and say, “We would love to fund that hospital, but the mathematical models show the Net Present Value is negative”. It transforms a profound conflict of societal values and power into a boring problem of arithmetic, safely insulated from voters.
If a private company had to fully indemnify every worker it displaced, pay the true cost of its environmental degradation and fund the holistic maintenance of the civilisation that sustains it, its rate of return would plummet.
It is time for our treasuries to abandon the free-market fantasy. The state is a steward across generations, not a short-term hedge fund. We must replace market-mimicking hurdle rates with social discount rates that reflect reality, not the selective memory of a stock market index.
Until we change the boundaries of the spreadsheet, our public policy will remain a giant laundering scheme: subsidising private profit at the expense of our collective future.
Dr James Schuurmans-Stekhoven has a career defined by high-level academic rigour, a polymathic approach to research and a commitment to strategic optimisation across multiple disciplines.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License
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