A Simplified Assumptions of a Budget Deficit

GDP & Debt correlation
Malaysia
Simplified assumptions and estimates of a Budget Deficit policy:
Interest rate on debt (est):			4.00%	(average taken from here)
GDP rate of growth* (est) :			5.00%	(optimistic estimate)
Debt rate of increase^ :			7.95%
All figures in 'RM billion ('000,000,000)
* - Source:	http://www.tradingeconomics.com/malaysia/gdp-growth-annual
^ - Source:	refer to 'M'siaFedGovt-FP 2006-2015' chart below
GDP source:	http://en.wikipedia.org/wiki/Economy_of_Malaysia#Macro-economic_trend
Debt source:	http://www.bnm.gov.my/index.php?ch=111#FiscalSector
Year	Actual Year	GDP	Debt	Interest	% of debt to GDP
1	2010	765.90	405.10	16.20	52.9%
2	2011	804.20	437.31	17.49	54.4%
3	2012	844.40	472.07	18.88	55.9%
4	2013	886.62	509.60	20.38	57.5%
5	2014	930.96	550.11	22.00	59.1%
6	2015	977.50	593.85	23.75	60.8%
7	2016	1,026.38	641.06	25.64	62.5%
8	2017	1,077.70	692.02	27.68	64.2%
9	2018	1,131.58	747.04	29.88	66.0%
10	2019	1,188.16	806.43	32.26	67.9%
11	2020	1,247.57	870.54	34.82	69.8%
12	2021	1,309.95	939.75	37.59	71.7%
13	2022	1,375.45	1,014.46	40.58	73.8%
14	2023	1,444.22	1,095.11	43.80	75.8%
15	2024	1,516.43	1,182.17	47.29	78.0%
16	2025	1,592.25	1,276.15	51.05	80.1%
17	2026	1,671.86	1,377.60	55.10	82.4%
18	2027	1,755.46	1,487.12	59.48	84.7%
19	2028	1,843.23	1,605.35	64.21	87.1%
20	2029	1,935.39	1,732.98	69.32	89.5%
21	2030	2,032.16	1,870.75	74.83	92.1%
22	2031	2,133.77	2,019.47	80.78	94.6%
23	2032	2,240.46	2,180.02	87.20	97.3%
24	2033	2,352.48	2,353.33	94.13	100.0%
25	2034	2,470.10	2,540.42	101.62	102.8%
26	2035	2,593.61	2,742.38	109.70	105.7%
27	2036	2,723.29	2,960.40	118.42	108.7%
28	2037	2,859.45	3,195.76	127.83	111.8%
29	2038	3,002.43	3,449.82	137.99	114.9%
30	2039	3,152.55	3,724.08	148.96	118.1%
31	2040	3,310.18	4,020.14	160.81	121.4%
32	2041	3,475.68	4,339.75	173.59	124.9%

(Chart from: Economic Planning Unit and Department of Statistics Malaysia)

Notes and assumptions (which are quite 'unrealistic'):
(1) The year 2010 is used as base year.
(2) Assuming a flat/linear GDP growth and interest rate.
(3) Inflation not taken into account.
(4) Govt debt increase is difficult to ascertain without more data (or digging for data), so a median between the average of 6.5% & 9.4% (from 2006 to 2015) based on the above chart is taken.

Actual and estimated figure for year 2010 and 2011 can be found in the Treasury's Economic Report 2010/2011.

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By the time a child who is born this year in 2011, reaches 23 (in 2034), she or her will be inheriting a country where its debt will already have outgrow its GDP by a whopping RM70 billion.

Using the "Rule of 72" for compound growth, at an 8% annual rate, the country's debt will double in nine years from the estimated RM405 billion in 2010 to RM806 billion in 2019.

According to a report by the Asian Development Bank Institute here, "Malaysia has consistently incurred deficits since 1970, except for small surpluses for three years prior to the (97/98 financial) crisis when high growth rate were achieved." The 2011 forecast fiscal deficit is 5.4% of GDP (source: http://www.treasury.gov.my/pdf/economy/er/1011/chap4.pdf).

Looking at the microeconomic level, an article by CAP here says that Malaysia has one of the highest average 'household debt to disposable income' ratio (at 140%) compared to even the U.S. and Singapore. In another word, common people like you and me had high "leverage".

It is a simple mathematical fact that as long as a country's growth in debt exceed its GDP growth, that country will no be able to pay off its debt as the above simple illustration showed.

It is impossible (not improbable) to expect permanent, sustained growth if the growth was based on the growth of debt. One side can't expect to keep on taking while the other side kept on giving. That is what debt is.

In short, government deficit spending ie. using borrowings or debt to run the government over the long term will only get its citizens and the future generations mired in debt. Then there are the questions of where does all this deficit spending go? And who benefits from them?

Addendum:
A short definition of budget deficit: http://tinyurl.com/3v45xv5
Difference between budget deficit and fiscal deficit: http://tinyurl.com/425pj4k