Subsidies and new pensions explain 60% of increase in public spending

The extraordinary growth of public spending in recent years is the main cause of high inflation and exchange rate volatility. Curiously the areas which are the main contributors to the fiscal overflow and need more reforms are not directly affected by the cabinet change. Without a revision of public spending decisions, which are currently made with an important share of demagogy, improvisation and little responsibility, it will not be possible to stop the loss of reserves and stimulate the economic growth.    

The changes in the government cabinet have generated positive expectations. Although in public speeches officials speak about “deepening the model”, it is clear that the how to tackle the high inflation, the dollar volatility, the loss of reserves and the slump of the economic activity are the main concerns. Hopes are that the change in the cabinet, which involves the displacement of highly questioned public officials, will lead to measures such as a multiple exchange rate system, a smooth process of devaluation of the official exchange rate and moderation in wage increases.

Without entering in much detail about the policies that the new officials would promote, ii is rather disturbing that the fiscal imbalance is still being underestimated. Data published by the Ministry of Economy indicate that between 2004 and 2013 the income generated by taxes and social security increased by AR$290 billion in real terms (i.e., adjusted for inflation) while government spending rose by AR$420 billion. This impressive increase in national public expenditure is explained by:

· 34% due to subsidies to state-owned and private companies.

· 24% due to new pension given away under non contributory basis.

· 18% due to the raise in public employment.

This data shows that while the growth of public spending is generalized, some components have a decisive impact on the expansion. Almost 60% of the increase in expenditures is caused by subsidies to sustain private companies, mainly utilities under control prices, and unprofitable state-owned companies and non-contributory pensions. Three quarters of the increase in public spending can be explained by these two factors and the increase in public employment.

The excess of public spending well above the increase in revenues, forces a massive monetary emission which is the primary factor of the high inflation. A multiple exchange rate system, devaluation of the official exchange rate, import restrictions, controls on prices and wages are strategies that may act over the symptoms but not on the disease. In other words, no policy, even the most inventive and bold, will avoid the needs to moderate the rate at which public spending is rising. Therefore, controlling expenditures is the main challenge of the renovated cabinet. Paradoxically the areas which need more reforms (since they are the main cause of the surge in public spending) are the less affected by the changes in the cabinet

In pensions, the experience of other countries in the region shows that with a less rudimentary policy as Argentina took giving away pensions it is possible to expand the coverage in a sustainable and equitable way. Also it would be possible to achieve a better income distribution by subsidizing low income families with lower tariffs instead of subsidizing the state-owned and private companies. Regarding to public employment it is vital to professionalize human resources and eradicate the practice of using the public sector to feed political clientelism and distribute personal favors.

The restrictions in the foreign exchange market, price controls, and manipulations of the INDEC, barriers to exports and imports and threats to entrepreneurs are improvised measures. The change of public officials goes in the right direction but the most important and complex task is to abandon demagogy and professionalize the public sector in order to reduce de fiscal deficit and improve the public sector management.