The 2014 budget anticipates a strong adjustment cut - IDESA

Informe Nº: 15/11/2013

The 2014 budget anticipates a strong adjustment cut

As it has been occurring for several years, the budget submitted to the Congress suffers from severe inconsistencies. Still, it contains valuable information. Very suggestive data is that the increase in pensions, government salaries and subsidies to unprofitable public and private companies are projected to grow below the inflation level. This is a strong evidence that, beyond political speeches, the dreaded “economic adjustment” is not a policy option but an inevitable path originated in the last decade’s wrong decisions and wasted resources.

While in progressing societies the state budget is an institution of vital importance in mobilizing technical analysis and political dialogue, in Argentina it is a degraded instrument whose significance barely generates some predictable and known questionings. The consequence is the loss of the opportunity to discuss with transparency and democratic spirit the scheduling of state activities. This can be seen as testimony to the severe process of institutional decay.

Without minimizing the seriousness of this reprehensible practice, valuable information can be retrieved from the 2014 budget bill. From the point of view of envisioning the near future, it is very interesting to note that the Executive intends to make a strong reduction in the fiscal deficit. While estimations show that the National Public Administration will end with a $45 billion deficit in 2013, there is a projected $870 million surplus for 2014.

Although there is an obvious need to rebuild the public finances, the striking part is the willingness to recognize it. More interesting still, is the way authorities hope to reverse the fiscal imbalance. In this regard, the Budget bill sent to Congress proposes for 2014:

· A public salary growth of 17%.

· A pension growth of 22%.

· An increase of only 3% in economic subsidies to unprofitable state owned and private companies

The data from the 2014 budget explicitly states the extent of the fiscal “adjustment” needed, according to the government, in order to rebuild the public finances viability. While price growth, as measured by the private inflation rate published by Congress, is about 25% yearly, the new budget proposes an increase of pensions and public sector wages that are significantly lower than inflation and to practically freeze economic subsidies.

To stop the nominal growth of subsidies there will be needed a dramatic policy change towards nationalized and private companies in deficit. According to information published by the Argentinean Budget Association (ASAP), which uses official data, economic subsidies up to July 2013 have been growing at a 46% annual rate. With this dynamic, the only way to really achieve the desired change proposed in the 2014 budget is with a “massive price hike”. Otherwise, it is unthinkable that they will continue to provide the services that are currently subsidized with such an abrupt cut in national state assistance.

Although the underlying changes in the 2014 budget are very difficult to carry out from a political point of view, they are very modest compared with the magnitude of the current accumulated imbalances. Evidence of this is that there is a projected need to transfer $57 billion from the Central Bank and $28 billion from ANSES to the National Treasury. In other words, in order to cut the funding through emission and retirement funds, an additional fiscal “adjustment” of $ 85 billion would be needed.

The unrestrained growth of subsidies, the indiscriminate granting of pensions with moratorium and the massive appointment of public employees has led to a situation where the fiscal “adjustment” is inevitable. If choosing to deepen the emptying of the ANSES and to accelerate monetary emission, it will be inflation that will force the “adjustment” through a reduction in real wages, pensions and subsidies.  A less severe, but more complex alternative, is the one being proposed by the government in the 2014 budget, but in order to be put into practice it needs courage, political conviction and professionalism; attributes that neither the ruling party nor the opposition parties have demonstrates up to now.

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