As sovereign insolvency hogs headlines around the world, so heightens the popularity of deficit-reduction agenda. No more only wonks make the noise. Some men in the streets are echoing the slogan of economic conservatism as well, filling the lonely space sitting not quite centered in the Malaysian political spectrum.<\/p>\n
One ratio has been brandied around whenever there is a discussion on fiscal deficit: deficit-to-GDP.<\/p>\n
In the first reading of the federal budget as well as in the Economic Report published on the same day, the government highlighted the ratio to show that the government is pushing the deficit down earnestly. I myself used the ratio to suggest that the government could have a lower deficit<\/a>\u00a0if it was not for the slew of dishonest populism the\u00a0government\u00a0is engaging in.<\/p>\n The ratio can be misleading if you are unfamiliar with it. It is a simple ratio, yes, but it is deceivingly so because of its denominator.<\/p>\n Assuming the projection of lower ratio for next year will be achieved, the absolute deficit will not actually fall as dramatically as the ratio suggests. In 2010, 2011 and 2012, the actual and the projected absolute deficit are RM43.3 billion, RM45.5 billion and RM43.0 billion respectively. In terms of deficit\/GDP, -5.6%, -5.4% and -4.7%. You can immediately see the relationship between absolute deficit and the ratio is not one of straight line. From 2010 to 2011, the absolute deficit is expected to increase but the ratio is expected to fall. From 2011 to 2012, the absolute deficit is projected to fall modestly. Modest is not an adjective to use to describe the ratio in the same period however.<\/p>\n What reduces the ratio is not so much the reduction in absolute deficit but the increase in GDP. When the increase in GDP overwhelms the increase in deficit, then the ratio will go down.<\/p>\n