14 recessive episodes in 6 decades

Revenues from the Value Added Tax (VAT) on domestic activities –that is, excluding the tax on imports– has been growing in the first two months of 2020 by barely 30% year-on-year. Given that year-on-year inflation is on the order of 50%, the slump in real terms is steep. More worryingly is the prolongation of the downturn that has already accumulated almost two years.

Many factors explain this behaviour. Undoubtedly the new government’s announcements of tax moratoria would have led to further evasion. Nevertheless, the main reason for the drop in revenues observed in recent months is the economy’s lack of dynamism.

How does the current recession fit into the economic context of Argentina in recent decades? Taking as a reference the annual variation of the Gross Domestic Product (GDP) per capita, based on information published by Norte y Sur Fundación and the Ministry of Economy, it appears that in the last 60 years, there were 14 recessive episodes. These were as follows:

• 8 episodes lasted only one year and occurred in 1966; 1978; 1985; 1995; 2009; 2012; 2014; 2016.
• 3 episodes lasted 2 consecutive years and were in 1962 – 1963; 1975 – 1976; 1981 – 1982.
• 3 episodes lasted 3 or more years, and occurred in 1988 – 1990 (hyperinflation); 1999 – 2002 (fall in convertibility); and the current crisis that started in 2018.

These data show that Argentina has a high propensity to fall into recession. In 40% of the years in the last six decades, the GDP per capita decreased. The problem became more severe over time. From 1988 to the present, 8 out of 14 recessive episodes occurred. In the last 10 years, there were 6 falls in GDP per capita. This explains the stagnation of GDP per capita in the last decade. The rule is that expansionary cycles quickly abort in crises and the crises are increasingly frequent.

The main consequence of these cycles is a profound social deterioration. The increase in poverty, the lack of housing, infrastructure, the decline in health and education are phenomena coming out of this mediocre economic performance. Moreover, the continuous cycles warn about the limits to fiscal policy. The most recent evidence is the failure of the previous government’s gradualism. The fiscal deficit was supposed to be reduced as revenue increased thanks to economic growth, while public spending remain constant. The crisis unleashed in 2018 made explicit the failure of this experiment based on relying on growth as a remedy to the fiscal imbalance.

Although the current government is less explicit about its strategies, some announcements show similarities. Proposing that it is politically unfeasible to correct fiscal imbalances is, in essence, the same logic of gradualism. That is to say, avoid public spending adjustment in the hope that the economy will grow, and this will increase public revenues, correcting the fiscal imbalance.

Assuming that it is possible to overcome the recession without changes in the organization of the public sector is a high-risk option that proved to be a failure. A more consistent strategy requires to stop accepting with resignation the public sector malfunctions. This implies reforms in the tax and social security systems and redesigning the federal public sector to end its interferences with provincial and municipal functions.