Wednesday, February 15, 2012

Explaining Spain’s unsurprising deficit fudging

Reports are finally coming out that Spain’s 2011 deficit “miss” may have just been the new government trying to make 2012 look better.

When a government changes, you generally only get blamed for what happens on your watch. If you get elected in December, it’s almost a gift from the gods, since its trivial to make the old guys look bad and you look good.

It likely started like this: three years ago, when the deficit was starting to look bad, the government shifted a bunch of costs from the end of December to the beginning of January. Obviously this trick only works once, because once you get to the next year, you’ve already shifted as much from December to January the next year.

So the new government comes in and says, geez, we have a bunch of expenses in January that should have really been for December, lets just shift those back to December. This way, we get a head start on the deficit next year, and we can drum up a panic to justify what we were going to do anyway.

Of course, sometimes politicians can be too clever for their own good… in the case of Greece, the new government tried this trick in 2009, but instead of inspiring confidence in the next years budget numbers, the reaction of the markets was total panic and the rest is history.

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