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Economics

[2502] A too convenient instance of government spending

The Malaysian GDP figures for the 4th quarter came out today, with the full year growth being slightly above 5%. Judging by the components of the GDP and their respective growth, I find the growth rate of 5% to be too convenient for the government, which projected the 2011 economy to grow between 5% and 6%. The reason is that government spending grew by close to 17%.

I shared this last month, and the 4th quarter growth for government spending was even higher than the previous quarter: 23.6% from a year ago.

I did a little calculation just now while I was finishing a GDP report for my bank. I found out that if government spending had not grown at all, that would have shaved almost a complete percentage point out of the 5% annual GDP growth. If the spending increase had been slightly more modest, the overall growth would have missed the government’s target easily. Really, it would not take much to miss the target.

I know there is a low base effect given that there was hardly any government spending growth in 2010. It is very likely that spending planned for 2010 was postponed to 2011.

But the government spending growth is still convenient, too convenient, nonetheless. This may appear to be a case of perverse incentive.

It is much like a case in Liar’s Poker:

One trader remembers that ”Lewie would say he thought the market was going up, and buy a hundred million [dollar-worth of] bonds. The market would start to go down. So Lewie would buy two billion more bonds, and of course the market would then go up. After he had driven the market up, Lewie would turn to me and say, ”˜See I told you it was going up’”¦”

By Hafiz Noor Shams

For more about me, please read this.

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