Increasing welfare spending increases poverty - IDESA

Report Nº: 101104/04/2023

Increasing welfare spending increases poverty

Paradoxically, poverty keeps increasing under a government whose historical flag is social justice. The increase in public spending, including welfare spending, causes an inflationary acceleration that condemns a rising number of people, especially children, to live in poverty.

The INDEC reported that between the first and second semester of 2022, poverty increased from 36.5% to 39.2% of the population. The concern and anguish generated by this jump in poverty are heightened by the fact that the incidence of poverty at present is likely to be even higher due to the acceleration of inflation in the first months of 2023.  

Poverty is a multi-causal phenomenon. One very important factor is the inability of many people to access good jobs, both due to economic stagnation and the lack of job skills. Another cause is high inflation. Evidence shows that the most vulnerable people have greater difficulty defending their incomes against the erosion caused by generalized price increases. High inflation not only conspires against a well-functioning economy but also has a very regressive impact on personal income distribution. 

To explain the increase in poverty since the current government took office, the following comparison can be made. Between the second half of 2019 and the second half of 2022, it can be observed that:

  • Primary public spending went from 18.7% to 20.3% of GDP, within which spending on welfare plans (not including AUH), went from 0.7% to 1.8% of GDP.
  • Inflation rose from 53% to 85% annually.
  • The number of poor people increased from 10 million to 11.5 million.  


These data show that the increase in public spending and, in particular, that aimed at alleviating poverty –welfare spending– was ineffective in reducing poverty. On the contrary, the increase in spending led to an acceleration of inflation that resulted in more people with incomes below the poverty line. This translates into a vicious circle: in an attempt to reduce poverty, public spending is increased, but this accelerates inflation, which leads to a further increase in poverty. 

The situation looks dramatic for the coming months because price growth is unlikely to moderate. This poses enormous challenges for the next government. Lowering public spending in order to reduce inflation encounters now new sources of resistance. One of them is the growing weight of welfare spending in total public spending. Welfare spending is already approaching a sum equivalent to the salaries of public employees and a third of contributory pensions. The increase in welfare spending did not serve to reduce poverty, but to turn it into a very important component of total public spending with powerful vested interests resisting its revision. The current Minister of Social Development’s failures in revising benefits is conclusive proof of this.

This is another sign that traditional fiscal adjustment policies do not solve the chronic financial and management deficits suffered by the Argentine State. For this reason, a more disruptive approach aimed at a comprehensive reorganization of the public sector is needed. In this logic, the provinces must assume their responsibilities in social functions (housing, urban planning, health, education, and social assistance) and take charge of financing them with the taxes collected in their territories. The main source of financing for the provinces should be the VAT generated in their territory and co-participation should be eliminated. With this organization, incentives will be generated for each province to be the architect of poverty reduction in its territory.

The federal government should concentrate on its functions, which are integration to the world –as much deteriorated as the social situation– and to implement sound macroeconomic policies. This implies that the national ministries of health, education, and social development should be substantially reduced in their bureaucratic structure and turned into technical agencies for the evaluation of the results of social issues in the provinces. 


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