Ordering the state is neither right nor left-wing

Argentina is apparently stuck at a dead end. The fall in GDP associated with the pandemic was greater than in most countries and deepened the recession that began in mid-2018. The country is also facing a severe foreign exchange bottleneck that prevents the expansion of imports to recover the economic activity. It, too, faces a high and growing inflation. Although formal employment in the salaried-private sector was maintained, a sharp drop in informal employment occurred with broad reductions in the population’s income. Under these circumstances, it is not surprising that the poverty rate rose above 40%.

In the debates regarding diagnoses and strategies to overcome this deep crisis, the Minister of the Economy made public his opinion that fiscal sustainability is not an ideological issue. His statement goes against the widespread and deep-rooted idea in the political system and public opinion that policies in favor of a more orderly public sector tend to be “right-wing”. In the official’s view, having a public sector less dependent on monetary and debt issuance is the way to have a strong state, a central requirement to make good “left-wing” policies.

How relevant and pertinent is the Minister’s statement? Data from the Ministry of the Economy can help to shed some light on the question. Taking the total public expenditure of the federal and the provincial public sectors, it can be observed that:  

• Between 1960 and 2005, public spending remained in the order of 28%.
• Between 2005 and 2015 it increased by 15 percentage points of GDP, reaching the historical record of 43% of GDP.
• Between 2015 and 2019 it drops to 39% of GDP.

These data suggest that the public sector malfunctioning is an issue that goes beyond ideologies. Up to the 2002 crisis, there were ups and downs, with a chronically imbalanced public sector, bad taxes, and expenditures allocated with little strategic sense. Then came the international boom that was not used to correct these problems but to deepen them. For example, with the indiscriminate distribution of pensions to people without contributions or massive subsidies to utility bills. Since 2015, the expansion of public spending has been reversed, but only partially.

Spending systematically above available resources is the quantitative face of the problem. From hereupon comes the fiscal deficit, the high indebtedness, the monetary issuance, the dollar bottleneck, and the high inflation. However, this vision is limited and leads to a dead end. It makes some propose the rapid adjustment of public spending, and, on the other, makes others reject it because of the high social costs it may generate. The clash of these two visions has been a constant during the decades of Argentina’s decline.

To overcome the frustrations, a comprehensive assessment of the problem is needed. Balancing revenues with expenditures is only part of the solution (in fact, in 2019 Argentina reached almost zero primary deficit). The other part requires addressing the qualitative issues. The latter refers to the low quality of taxes (distortionary and regressive) and the inefficiency and lack of public expenditure allocation strategy. In advanced societies, tax systems are simpler and focused on personal income and wealth. Public expenditure is efficiently applied to providing good infrastructure (energy, transportation, and communications) and social development (education, health, security, housing, and urban planning).

A well-ordered State is neither a “right-wing” nor a “left-wing” approach but a matter of common sense. If the public policy debate does not assume this principle, opportunistic, improvised, and unproductive proposals will prevail. The result will be the economic and social deterioration deepening. On the contrary, a comprehensive reorganization of the public sector will build the capability to execute good public policies, independently of the ideological orientation, which the democratic process will define.