Report Nº: 102924/08/2023


The government appeals to the inflationary adjustment of public spending, led by the loss of the real value of pensions. The main risk is that the next government will be tempted to maintain this same kind of adjustment to reduce the fiscal deficit. What must be done is a comprehensive reorganization of the State.       

The deterioration of the national State public finance continues to deepen. The persistent and high fiscal deficit indicates that the national Treasury is exhausting its capability to issue public debt and the Central Bank of issuing money. Through Leliqs, the Central Bank absorbs part of the excess of issuance by borrowing from banks the savings it captures from their clients. The abuse of this instrument has led to Leliqs being the equivalent of 3 monetary bases. 

The government emphasizes that the bad economic situation is due to the indebtedness to the IMF and the drought. It has already resigned itself to the high inflation and the economic slowdown. All its energies now are put into postponing the devaluation that would add complications to the primary election. Meanwhile, the opposition capitalizes politically on the uneasiness and raises the need for a stabilization plan though ambiguously. Neither the government nor the opposition makes it explicit, but a strong fiscal adjustment seems inevitable. 

In this context, it is relevant to observe the dynamics of the national State public finances in the last months. Comparing the 1st semester of 2023 with the same period of the previous year, adjusting for inflation, it is observed that:

  • Public revenues fell by AR$1.2 trillion at current prices.
  • Primary expenditure –before interest payments– fell by AR$800 billion.
  • Within primary spending, the main national government expenditure, which is retirement and pensions, fell in real terms by $500 billion.  

These data show that the adjustment of public spending is already underway. It is not being implemented explicitly but through the loss in real value, produced by inflation, on important components of public spending. The most decisive, in terms of its impact on total spending, is that of pensions. On the one hand, announcements of high nominal pension increases are boasted. On the other hand, since these increases are lower than inflation, public spending is reduced. For the time being, this is not enough to compensate for the fall in revenues, but it does imply a reduction in real terms of public spending. 

Argentina has a long experience in strategies to reduce the fiscal imbalance through inflationary adjustment. In essence, the strategy consists of keeping from adopting explicit measures to correct fiscal deficits, letting inflation do the “dirty work”. It is a politically attractive option, although socially very costly as well as opportunistic and hypocritical. Most importantly, it does not correct the organizational problems of the State. This type of adjustment may be effective in temporarily correcting the fiscal imbalance. But it does not prevent the propensity of the public sector –derived from its bad organization– to mismanage and spend more than its revenues.  

The major risk is that the next government will fall into the temptation of maintaining this type of adjustment initiated by the current government. If the starting point is that part of the “dirty work” is being done –such as, for example, the most resisted one, which is the loss in pensions’ real value– and contextual factors are playing in favor of revenues (termination of the drought, Vaca Muerta, lithium), a strategy limited only to alleviate the crisis is likely to persist. This strategy will not generate sustained economic growth. 

Comprehensive management of the State indeed requires innovative and disruptive ideas. It also requires a great deal of boldness and political skills to implement them. But limiting only to adjusting the State and taking advantage of better context conditions will be another waste of opportunity to get out of the decline. From a political, social, and productive point of view, it will surely end up being a new frustration. 


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