Report Nº: 99620/12/2022
The enormous happiness caused by the third Soccer World Cup contrasts with the sadness of being the World Champion of Inflation. This “achievement” is neither a product of luck nor the exclusive merit of this government. It is the result of the fact that, as in soccer, everyone is wearing the same shirt: the fiscal deficit.
The Ministry of Economy is relieved and rejoiced that inflation has broken the fateful 5% or more monthly inflation rate that has been repeating itself since March. According to INDEC, consumer prices in November grew by 4.9%. At this rate, annual inflation is 92%. It is plausible that the increase in prices in 2022 will end up being less than 100% per year. Even so, Argentina is the World Champion of Inflation.
The strategy that the Minister of Economy has been applying is based on avoiding a mega-devaluation by appealing to multiple exchange rates, strict import controls, and moderation of the fiscal deficit by devaluing pensions, postponing public works, and delaying payments to suppliers. This is complemented by a series of price agreements and absorption of monetary emissions with Leliqs. The goal is to reach April 2023 with a 3% monthly inflation. Difficult. But, even if it is achieved, Argentina will revalidate its world leadership in terms of macroeconomic instability.
How did Argentina become the World Champion of Inflation? The evidence shows that it is not only merit of this government. According to data from the Ministry of Economy, in the last 62 years, it is observed that:
These data show that the persistence of very high inflation is associated with the fact that the fiscal deficit was a real “State policy”. Certainly, inflation depends on many factors, besides the fiscal deficit. But, for Argentina to be the World Champion of Inflation, it is crucial to have maintained unbalanced public finances for more than 6 decades. The technical directors have changed (Peronists, military, radicals alone or in alliances with the center-left or center-right) but the essence of the strategy has not changed. In matters of bad organization and administration of the State, as in soccer, everyone has the same shirt. There is no rift.
To recover stability and progress, disruption is required. The first step is to assume that the deficit and inefficiency originate in the poor organization of the State. That is why traditional fiscal adjustments consistently fail. It is not a solution to devaluing pensions, postponing public works, freezing public salaries, delaying payments to suppliers, or creating new taxes. These measures may provide short-term financial relief at the cost of aggravating future imbalances and deepening the poor quality of public management. In order to get out of the decline, it is essential to rethink the organization of the State.
Disruptive measures must be comprehensive and profound. As regards tax organization, a drastic simplification must be applied by unifying national, provincial, and municipal taxes. For example, VAT should absorb Internal Taxes, provincial sales and stamp taxes, and municipal taxes. The same applies to property taxes, which should absorb real estate and automobile taxes, making a single wealth tax. At the same time, it is necessary to apply a reorganization of taxation powers so that each jurisdiction is financed with the taxes it generates in such a way that a co-participation regime is not necessary. In this way, the provinces and municipalities will be stimulated to generate added value in their territories and to value the patrimony of their citizens. It is also essential to organize the functions of the State, eliminating overlapping between the national, provincial, and municipal levels.
To naturally assume being the World Champion of Inflation is to resign oneself to decadence. This defines the decisive importance of an integral organization of the State to achieve structural fiscal balance and a better quality of public management.
