Fiscal gradualism leads to high inflation and stagnation

Negotiations with the IMF have been gaining prominence and have become a priority in the national economic agenda. In this context, the government seeks to strengthen its negotiating force trying to show the governors’ and other political actors’ support to its position. At the same time, geopolitical efforts are being made at the international level to influence the IMF Board of Directors.

The Minister of Economy explained that there are a series of agreements with IMF officials, including a gradual advance towards fiscal balance. But there is disagreement on the timetable. The IMF is requesting that the deficit reduction be faster than what the government considers advisable. The fact is that the national government has a total public debt of US$ 350 billion, which grew by US$ 40 billion in the last two years and the debt with the IMF represents only 12%. In other words, the problem of Argentina’s public indebtedness goes far beyond the IMF issue.

Public debt is the consequence of past fiscal deficits. One way to illustrate the endemic nature of the phenomenon is to analyze the consolidated public accounts (i.e., those of the national government and the provinces) over the last 60 years. According to data from the Ministry of Economy it is observed that between 1961 and 2019 (before the pandemic):

• Public revenues were on an annual average basis 24.3% of GDP.
• Total public spending was on an annual average basis 29.0% of GDP.
• This means that in the last 6 decades only 85% of spending was paid for with public revenues, while the remaining 15% was overspending.

These data show that Argentina’s public sector consistently spends far beyond its means. This is a constant that transcends the political or ideological color of governments. For 60 years there were governments with very different orientations, but all of them spent on top of the revenues. The surpluses observed between 2003 and 2008 are no exception. At that time, expenses were accrued –such as lawsuits for lack of pensions’ indexing and interest on the defaulted debt– which were not recorded as such in the public accounting at that time. These spendings were registered several years later when they were paid.

The fiscal deficits accumulated in the last 6 decades are equivalent to almost three times the GDP. This leads to excessive indebtedness and monetary emission, which are the main factors of stagnation. Therefore, arguing that imbalances can be corrected gradually hoping that economic growth will increase public revenues to finance the excess of spending is inconsistent. This is what the previous government did by financing the overspending (supposedly transitory until the economy grows) with external debt. It is very contradictory that the current government proposes the same gradualism as the past one when gradualism is what generated the debt.

The strategy of balancing public finances as the economy grows is doomed to failure. The reason is that what curtails growth is precisely the State’s disorder. The State absorbs private savings with public bonds to finance overspending and the Central Bank does the same with Leliqs and repros to contain the inflationary impact of monetary emission. This leaves the real economy without financing, which makes it impossible to move towards a growth path. On the contrary, it is ordering the State what will bring price stability, encouraging savings to stop fleeing and be channeled to finance the real economy’s growth.

Whatever the pace of gradualism, the result will be the same: high inflation and stagnation. Whether it is at the speed proposed by the government or the IMF does not change the outcome. It would be much more productive to channel efforts to reorganize the State. For example, to take advantage of the governors’ meeting to agree on the unification of VAT with the provincial sales taxes and to eliminate the co-participation so that each province is financed with the added value generated in its territory.