Argentina´s problems are not solved through devaluation

The devaluation caused an extraordinary increase in tax collection, but the increase in public spending was higher due to the strong growth of economic subsidies. As expected, the attempts to go back to the “productive model” through devaluation are failing since the current context is very different from the one on which salaries and pensions were lowered during the 2002 crisis. The deteriorating balances of the companies providing public services due to the devaluation will require higher economic subsidies. 

The mega devaluation of 2002 produced a strong improvement in the state bill. Between 2001 and 2003, total fiscal revenue grew 59% led by a 78% increase in tax collection. In contrast, public spending grew only 25%, primarily due to an increase of only 17% in pensions paid by ANSES and a 38% raise of public wages. In this way, it was possible to move from a $ 8.7 billion fiscal deficit in 2001 to a fiscal surplus of $ 1.8 billion in 2003. This adjustment, later accompanied by a favorable and unprecedented external environment, formed the foundations of the so called "productive model".

The underlying purpose of the sharp devaluation generated between last December and January was to restore this "model". Since the international context remains very favorable for Argentina, the expectation was that the devaluation will recompose the fiscal balance and, in this way, reproduce the path of growth that took place between 2003 and 2008.

However, early signs show that the fiscal imbalance is not corrected by the devaluation. According to official data of the Ministry of Economy the fiscal deficit rose from $ 1.6 billion in January 2013 to $ 3,1 billion in January 2014. The increase in the fiscal déficit is explained by:

· A rise in government revenues by 44% supported by a 42% increase in tax revenue.

· An increase in government spending of 45%.

· Within public spending, wages and pensions rose by 34% while subsidies to the private sector were increased by 73%.

This suggests that the devaluation will not have the same effect on the fiscal balance as the devaluation of 2002. While the price increase associated with the devaluation provoked a rise in tax collection, this did not offset the explosive dynamic of public spending. In other words, unlike what occurred in the past decade, the devaluation is failing as a corrective instrument of macroeconomic imbalances.

One of the underlying messages in the dynamics of fiscal accounts at the beginning of the year is that there is no more room for a further deterioration of public services. During the 2002 crisis a crucial role was played by the freezing of tariffs, which is impossible in the actual context of depredated and disinvested companies. That is why the escalating costs produced the devaluation require higher economic subsidies.

Another pillar of the “model” of 2002 was the reduction of real salaries and pensions, a consequence of the high inflation provoked by the mega-devaluation. However, at present, there is a law which requires an automatic updating of pensions which hinders the reduction of their real value. The same happens with public salaries, employees are not willing to accept rises which are lower than the expected inflation, as it is evidenced by the current conflict with the teachers of the Buenos Aires province.

Currently there is no margin to return to the "model". In 2002 pensions were determined discretionally by the president, unions were less conflictive and public companies were in a better financial situation. Currently none of the previous conditions hold. Therefore, instead of persisting in the wrong direction, it is recommended to think of new approaches. This includes reforms which address the problems generated by the current government which will be faced by future administrations such as the degradation of public companies, the deterioration of the sustainability of the pension system, the massive accumulation of spurious public employment and the public debt which includes unpaid debts and new debts generated by nationalizations.