The above was revised from an original piece showing relationship between GDP growth and debt correlation chart, using data from this little obscure article.
“If our economy grows in the next 10 years at the rate of less than 4% (annually) and we do not curb our operating expenditure, we would have to increase borrowings by 12% (annually). Then, we will arrive at the position where our debt level will be 100% of GDP in 2019.”
Yes, the Pemandu CEO still said that the country will become bankrupt by 2019, if the above conditions are fulfilled. First, our GDP growth remains or falls below 4% p.a. With the world economy going into a (deep?) recession soon, of which the reason could be quite easily understood by anyone who cares to do a little research of their own, the country growth (as measured in GDP) will most likely not 'grow' higher than the stated 4%.
However, it is the following statement- if our borrowings increase by 12% annually, and which we will IF (a big "if") we do not curb our operating expenditure especially government subsidies to its citizens, then we would certainly go bust. Which is quite true if we do a little math as shown in the chart above.
That is also assuming the government does not cap the debt when it reached 55% of GDP. But let's not forget that political will and moral will are usually at odds with each other. And many developed countries have debt that is multiple times their GDP.
The above calculation is arrived at using only simple elementary arithmetic. It is certainly no rocket science and anyone with a basic knowledge of math can grasp it.
But the consequence of the above statement by Pemandu is that the only solution the the problem of "low growth" is to increase our borrowings ie. debt. And the only way to do that is to cut down on subsidies.
That, i have a problem with. Let's start with causation- cause and effect. It's always a good place to start anything.
Cause - low growth rate (less than 4% pa) and spending on subsidies (part of 'operating expenditure').
Effect - increased / high borrowings (at 12% pa) and country will go bankrupt.
As much as math explains the correlation between GDP growth and debt ie. the rate of debt growth exceeding GDP growth will always caused debt to overtake GDP at a certain point in time, and thus the inevitable. But math alone does not explain causation of one to the other. Correlation does not equate to causation.
Would a low growth rate coupled with an increase spending in in operating expenditure alone, specifically subsidies "caused" us to borrow more in order to pay for these 'subsidies' which would then caused the country to go "kapow"?
Or is it the other way round? Our increasing operating expenditure coupled with low growth rate (where local and foreign investment has gone down tremendously) necessitated the increased borrowings? One would only know that if s/he did a thorough research on the subject.
Also, does subsidies make up a large part of a country's operating expenditure? According to this article by a respected economist, a large part of our country operating expenditure is taken up by "supplies and services", and "emoluments" (ie. salaries and wages of public servants).
Unless one could get good answers to those questions, i would say the Pemandu CEO's statement that our country would become bankrupt if we don't cut down on subsidies alone is total hogwash. If we become bankrupt it will be because of other reasons that most people living here will be fully aware of. The solution to problems of low growth, escalating debt and high budget deficit lies elsewhere.
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