Public revenues in Argentina are higher than in Chile and Uruguay - IDESA


Report Nº: 80308/04/2019

Public revenues in Argentina are higher than in Chile and Uruguay

The IMF expressed concern because tax revenues grow below the projected. This is contradictory given the very high tax pressure of Argentina. The experience of neighboring countries suggests that with less but better-managed public spending, the fiscal deficit can be reduced and the social situation improved. The International Monetary Fund (IMF) approved the third disbursement […]

The International Monetary Fund (IMF) approved the third disbursement for US $ 10.8 billion foreseen in the financial aid package to the Argentine Government. In the IMF’s evaluation of the course of the economic policy, it points out that the high fiscal and external deficits are decreasing and, although economic activity contracted, there would be signs that the recession has reached the bottom. Its main concern is that inflation remains high with expectations and inertia rising.

Another warning raised by the IMF is that fiscal revenues are at levels below the projected. To reach the goal of primary fiscal balance in 2019, it advises taking additional steps to strengthen public revenues. It also points out the importance of maintaining prudence in public spending and protecting the fiscal resources aimed at alleviating poverty.

One question that needs to be addressed is whether the increase in public revenues has the centrality that the IMF attributes to it in order for Argentina to emerge from the crisis and how viable it is to move forward in this regard. To shed some light on the answers, the analysis of the IMF’s own data, published on its website, could be of help. According to this source, it is observed that:

  • In Argentina, total public revenues (federal, provincial and municipal) amount to 36% of GDP.
  • In Uruguay, public revenues amount to 30% of GDP.
  • In Chile, public revenues amount to 24% of GDP.

These data show that public revenues in Argentina are considerably higher than in neighboring countries. In other words, the huge fiscal deficit of Argentina is not because Argentinians pay fewer taxes than in neighboring countries but because public spending is much higher. According to the IMF, public expenditure in Argentina is 41% of GDP while in Uruguay it is 33% and in Chile it is 25%. Also, neighboring countries show that lower public spending does not imply higher social costs. The prove is that poverty in Argentina affects 32% of the population, while in Chile and Uruguay poverty affects only 8% of the population.

Increasing the tax pressure is inadvisable because it will deepen the recession which will result in increasing –instead of reducing– the fiscal deficit. More consistent would be to improve the organization and administration of the tax system to enhance the collection of the central taxes (VAT and Income Tax) and thus reduce distortive taxes. The logic would be to lower taxes that hinder the expansion of the economy, the exports, and the employment, compensating with a higher collection of VAT and Income Tax.

In the process to equilibrate the public finances, the centrality must be placed on reducing public spending. As Chile and Uruguay teach, less public spending is compatible with poverty reduction insofar as it is managed efficiently. For example, for the federal government and most of the provinces, the pension system is the main source of fiscal imbalance. By eliminating duplications of coverage and privileged treatments, it is feasible to reduce spending without social costs. Another central component in public finances is civil servant salaries. New hires could be suspended and simultaneously improve the quality of services by eliminating the overlap of functions between the three levels of government, reducing bureaucracy and adopting new technologies.

Broad political consensus on central issues, such as social security and spending on civil servants, are essential to reduce and improve the quality of public expenditure. Austerity and professionalism in policy management should be added. Unfortunately, the lack of agreements is what prevails, as evidenced by several bills proposed by the opposition in Congress whose common denominator is to go on increasing the fiscal deficit.

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