Informe Nº: 21/01/2018

DEBT INTERESTS REPRESENT ONE THIRD OF FISCAL DEFICIT

The results of the national public finances for the year 2017 have been announced. In the presentation, the economic authorities highlighted the fact that the primary deficit fell in terms of GDP in comparison to 2016 and did so to a greater extent than was forecasted. Having achieved a primary deficit reduction beyond the self-imposed goal was emphasized as important progress towards the order in public finances.

Notwithstanding the importance of the achievement, it is necessary to mention that the primary deficit is a partial indicator. It measures the difference between income and expenses without considering debt interest payments. The logic is to measure income and expenses generated in the year without taking into consideration the interest payments considering that they corresponds to an excess of a past expenditures financed with debt.

For a comprehensive evaluation of the state of the public finances, it is useful to add interest payments to the primary deficit in order to reach the total fiscal deficit (also known as financial result). Taking these definitions and the information published by the Ministry of Public Finance, it can be observed that:

  • In 2016, the fiscal deficit was 5.9% of GDP, consisting of a primary result of 4.3% and interest payments of 1.6% of GDP.
  • In 2017, the fiscal deficit was 6.1% of GDP explained by a primary result that fell to 3.9% of GDP but an interest payment that rose to 2.2% of GDP.
  • That is to say, the fiscal deficit rose 0.2% of GDP, due to a decrease in the primary deficit (-0.4%) that was lower than the increase in interest payments (+ 0.6%).

These data reflect the efforts made to reduce the primary deficit, but also how insufficient they are to compensate for the growth in interest payments. One of the consequences is that interest payments already represent one third of the fiscal deficit and with an increasing dynamic since the growing primary deficit forces to obtain more debt.

Unless the possibility of a new default is neglected, the interest payments must be considered in the same category of spending as the rest of the public expenditures (public salaries, pensions, social transfers and public works). Therefore, the attention should not be focused on the primary result but on the financial result or total deficit. With this indicator, it is more obvious that the rhythm of gradualism adopted in ordering the public finances is financially and socially inconsistent. From the financial point of view, it operates in a perverse circle since because there is no deficit reduction, new debt is obtained, which generates more interest payments which are higher than the savings achieved in other expenses. From the social point of view, the social cost involved in assigning an increasing share of fiscal resources to the payment of interests is higher than the hypothetical social costs that are avoided by going at such a gradual pace in reducing the fiscal deficit.

To overcome these inconsistencies, it is essential to accelerate the search for the public sector equilibrium. It is not necessary –for now– to appeal to shock strategies with orthodox “adjustments”. But to move forward more decisively towards a more fair and rational organization of federalism and the pension system would be fine. A strategy that could save resources is to eliminate interventions of the national government that advance on functions and responsibilities of the provinces and municipalities. More important still is to address the challenge of re-engineering the pension system based on more equitable and financially sustainable rules.

The vested interests of those who benefit from delaying a good organization of the public sector are more powerful than those who are harmed by the fiscal disorder. One way to mitigate this imbalance is to stop minimizing the impact of rising interest payment. Putting as a central goal reducing the total deficit (not just the primary one) is the way to give financial consistency to the gradualism and, most importantly, to make it socially fairer.

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