Money expansion finances half of public expenditure - IDESA


Report Nº: 86410/06/2020

Money expansion finances half of public expenditure

The Covid-19 lockdown led to a sharp drop in revenue with a steep surge in public spending. The result was the monetary issuing becoming the main source of financing for the federal State. Thus, there is a climate in which confinement seems cost-free. But the consequences will emerge when the lockdown is relaxed.

While Europe and the United States are coming out of confinement and returning to normal, in Argentina –after 80 days of confinement– uncertainty still prevails about the dynamics of contagion. There are some encouraging facts, such as the shift from isolation to social distancing in the provinces of the interior of the country. More flexibility opens the space for a gradual economic and social recuperation. But in the Buenos Aires Metropolitan Area (AMBA), the confinement was extended until June 28th, which implies that the lockdown will last up to 100 days.

Federal authorities argue that containment is the most appropriate prevention to the threat of the virus. However, its negative consequences are becoming increasingly evident. From the perspective of the economy and employment, the impacts are devastating. Other diseases are being left unattended in terms of health, and new health disorders in the population are emerging. Additionally, there is also severe financial stress on health institutions due to a lack of medical activity. In the area of education, the school year is lost.

Public finances are also under the strains of the economic paralysis derived from confinement. According to the Ministry of the Economy and the Central Bank, in the federal State it is observed that

  • In the first quarter of 2020, 74% of revenue came from taxes and 26% from monetary issuing sent by the Central Bank to the Treasury.
  • In April 2020, 51% came from taxes and 49% from monetary issuing.
  • In May 2020, 47% came from tax and 53% from monetary emission.

These data, although approximate because they neglect other smaller sources of financing, show that monetary expansion became the mainstay of federal public finances. Although Argentina has a long tradition of covering fiscal deficits with money issuing, this level of monetary expansion is unprecedented. The fiscal situation was already very precarious before the Covid-19 isolation. Confinement paralyzed the economy, making tax collection fall and public expenditure to expand to compensate for the economic stagnation losses.

Taxes are a genuine source of state financing. Through taxes, the State appropriates part of the income generated by the private sector that returns to society through public goods. For example, someone makes the sacrifice of paying VAT so that someone else can enjoy the benefit of free education. Issuing money means the opposite since this equivalence does not occur. The State provides public services –for example, paying for pensions– without anyone making an effort to finance them. The State thus creates purchasing power, without the equivalent of more goods and services. When more money is available but not more goods and services, there is rising pressure on prices. The relationship is neither exact nor immediate, but sustained money emission is inflationary.

Isolation contains the impact of monetary expansion on prices. That is why most developed countries also called for monetary emission to sustain the critical productive and social consequences posed by the COVID-19. However, there are substantial differences with Argentina. On the one hand, developed countries do not have the fiscal weakness or the long history of high inflation as Argentina does. On the other hand, they issue money more moderately than Argentina because they have fluid access to credit, more robust and efficient tax systems, and more prudent conduct in terms of public spending.

Freely monetary emission generates the false sensation that isolation does not demand sacrifices. While in the private sector, there are business closures, wage cuts, and job losses, in the public sector, inertia and little vocation for structural reform prevail. This conduct will make it much more difficult to overcome the economic consequences of lockdown, to the point that the post-pandemic can be worse than the pandemic itself.

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