THE SOCIAL COSTS OF GRADUALISM BECAME EXPLICIT |


Informe Nº: 15/05/2018

THE SOCIAL COSTS OF GRADUALISM BECAME EXPLICIT

The persistent rise of the dollar led to the rise of the benchmark interest rate of the Central Bank up to 40% to curb the rise in the currency. This generates a climate of uncertainty and financial suffocation that negatively impacts the functioning of the productive activity, discouraging new investments and the generation of good jobs.

The government clung to the idea that with gradualism the “social costs of adjustment” are avoided. It is a politically attractive argument but false. Reality is showing that slowly correcting the huge inherited imbalances also produces social and economic damage. Without more space for delays, the economic authorities had to improvise actions along the lines of advancing faster in the ordering of public accounts. Specifically, a change in the fiscal deficit target was announced, going from 3.2% to 2.7% of GDP. This implies a reduction of the fiscal deficit of the order of U$S 2.6 billion.

The announcement of the reduction of the fiscal deficit target was not accompanied by an explanation of how it will be achieved. Anyway, to assess about possible fiscal spaces it could be pertinent to have a look at the National Budget 2018. According to this source it can be observed that:

  • The program “Infraestructura de Transporte Urbano para el Área Metropolitana” has a budget of U$S 2.1 billion.
  • The program “Plan de Agua y Saneamiento para AySA (región metropolitana)” has another budget of U$S 0.9 billion.
  • Thus, there is U$S 3 billion that the Nation spends for the metropolitan area.

These data are just a pair of evidence that there is room to reduce national public spending without appealing to cuts that negatively impact the quality of life of the most vulnerable population. Throughout the national territory, except in the metropolitan area, the costs of urban transport infrastructure and water and sanitation are addressed by local governments. Therefore, it corresponds that these national spending in favor of the metropolitan area be addressed by the City and the province of Buenos Aires for the suburbs. Just by taking this step toward respecting the federalism, the savings promised by the national government could be achieved.

Furthermore this step would imply moving faster and more consistently with the implementation of the Fiscal Consensus. In this agreement, it was established that the Province of Buenos Aires will receive the equivalent to the amount originally represented by the Fondo del Conurbano. For this to be possible, the federal government pledged to transfer U$S 1.8 billion in 2018 and U$S 2.8 billion in 2019 that will be maintained from there. To compensate, the elimination of the subsidies of the federal government in the metropolitan area (AMBA) was foreseen.

It would be very negative if the reduction of the fiscal deficit were materialized by postponing state investments in national infrastructure. These expenditures are fundamental for the competitiveness and quality of life of citizens. The error can be avoided by putting the emphasis on reducing inequitable and / or inefficient current expenses. The best example is what happens in the pension system. According to data published by the Ministry of Social Security, 20% of the contributors are within some differential or special regime that will give access to benefits with lower age and / or higher pensions than the general regime and 20% of retirees have double coverage, that is to say, they enjoy simultaneously retirement and pension. Reviewing these rules could moderate the growth of pension spending (which even with the new adjustment rule grows at a rate of 30% per year) and move towards higher levels of equity.

Reality is showing that gradualism generates short-term political dividends, but does not avoid social and productive costs. In the opposite direction, with faster and more strategic actions in the ordering of the public sector, the whole society can be benefited, but especially the most vulnerable population which suffers the most from high inflation and the low generation of quality jobs for not addressing the imbalances of the public sector.

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