Report Nº: 77503/10/2018
The national government presented the 2019 budget proposal to Congress. The most outstanding feature is the adoption of the zero primary deficit target. In order to reach this objective, revenues are projected to grow 42% with respect to those estimated for 2018, while primary expenses (that is, without taking into account debt interest) would increase to 25%. In any case, once interest payments are computed, the total deficit for 2019 amounts to $600 billion, which represents 16% of total revenues.
Given the seriousness of the crisis that is being faced, it is no longer a priority to elucidate in what proportion the failure is attributable to errors in the government’s design and strategy or to exogenous factors (drought, Turkey, Trump, etc.). It is more conducive to analyze whether the adjustment proposed by the government responds to the traditional format or has distinctive elements that aim not only to come out of the emergency but also to establish the bases for sustained growth.
The government’s inflation projection for 2019 is 35%. Revenues will grow 7% more than prices, mainly due to the increase in export taxes, the reduction in export drawbacks and the suspension of the schedule that extends the use of the paid tax on checks as payment on the income tax. On the expenditure side, it is projected that:
• Debt interest payments will grow 10% in real terms.
• Pension payments will increase 1% in real terms.
• Public investment will grow in nominal terms by 5% which, corrected for inflation, is equivalent to a fall of -22% in real terms.
These data suggest that the adjustment promoted by the government does not have very different elements from those applied in the past. A distinctive feature is that there is no appeal to fiscal saving by depreciating the pensions, since the rule of automatic pension adjustments will be respected. The counterpart is much stronger cuts in other expenditure components (mainly public works) and an increase in tax pressure. Even so, although primary equilibrium would be achieved, the total imbalance would still be very high due to interest payments. This implies that it will not be possible to avoid further accumulation of public debt and thus increased interest payments.
On both the revenue and expenditure side, most of the measures are temporary palliatives that a strategy of sustained growth. In order to strengthen public revenues, very distorting taxes are used that discourage exports. This not only conspires against productive growth but it will be unsustainable as soon as the exchange market tends to normalize. On the expenditure side, the fact that the adjustment focuses on investment in infrastructure shows that short-termism prevails.
In the face of the crisis, it is better to react than to passively allow it to deepen further. But to self-limit to a traditional adjustment without tackling more ambitious and innovative measures in the ordering of the State has high risks of repeating frustrations. Equally simplistic are the proposals that take as their central and excluding axis a new exchange regime. There is no exchange rate regime (dollarization, convertibility, indexed exchange rate, etc.) that leads to good results if the public sector maintains its propensity for high imbalances, bad taxes and massive squandering of public resources.
In order to get out of the decadence, it is key to assume as a strategic decision that the Nation stops interfering in functions that belong to the provinces and municipalities. Although the 2019 budget decreases these items, USD 3.1 billion in expenditures on education, health, social development, housing and water and sanitation, which corresponds to the provinces, are still preserved. Another crucial issue is to address a pension reform that gives equity and sustainability to the pension system. Finally, the improvement of the tax administration and the redesign of the tax structure must be given prioritized.