Provinces show that fiscal surplus is not enough

Inflation causes serious productive and social damage. Although many factors explain the persistent increase in prices, in the case of Argentina there is a strong and close association with chronic fiscal deficits. Decades of spending in excess of public revenues led to excessive public debt and monetary expansion. This is the main reason why Argentina’s economic history is plagued by economic crises resulting from repeated public debt defaults and high inflation.

In view of this situation, a consensus is beginning to converge around the need to balance public finances. Although there is a mix of opinions within the ruling party, the current Minister of Economy is making strenuous efforts to show a reduction in the fiscal deficit. Among the economic referents of the opposition, the fiscal deficit is the central point of criticism and the main objective they set themselves if they have to govern. In other words, the idea that the fiscal deficit must be eliminated or substantially lowered is becoming more common.

The question is whether eliminating the fiscal deficit is enough. In this sense, it is useful to analyze the different fiscal behaviors shown by the national government and the provinces. According to information published by the Ministry of Economy for 2022 it is observed that:

• The consolidated fiscal deficit between the national State and the provincial States amounts to 2.8% of GDP.
• The deficit of the national State is 3.8% of GDP.
• The provincial States, on the other hand, present a surplus of 1.0% of GDP.  

These data show the enormous contrast between the public finances at the national level and that of the provinces as a whole. While the national State is suffocated by the fiscal deficit, from which high public debt and monetary expansion derive, the provinces show plenty of fiscal space. Although there are differences among provinces, it is very suggestive that in the aggregate they show surpluses. To such an extent that provinces help the national State by subscribing national Treasury bills or fixed terms deposits which –through Leliqs– also end up financing the Nation. 

Several factors explain the contrast between national and provincial fiscal performance. But a very important one is the role played by high inflation as an instrument of fiscal adjustment. While tax collection tends to grow at rates similar to inflation, public spending is updated with lags. Public employees’ wages lag inflation the most. The delay in salary adjustments has a decisive impact on provincial finances since half of the expenditure is on salaries. The Nation also reduces the real value of expenditures with inflation, but with less intensity since its main expenditure is on pensions, which are indexed quarterly by law.

The fiscal adjustment of many provinces is not very sustainable because it depends on inflation remaining high. A drop in inflation would reduce or directly eliminate the surpluses of several of them. But the most relevant aspect of this experience is that it shows that achieving financial balance does not imply eliminating management deficits. The provinces are responsible for basic education, public health, housing, urban infrastructure, social assistance, justice, and security, functions in which management deficits were not reversed. For example, more than half of 15-year-olds do not have reading skills due to management deficits in basic education or the infant mortality rate in the provinces is higher than in Chile and Uruguay, for example.

The national fiscal imbalance is very harmful. But the inflationary fiscal adjustment or an orthodox fiscal adjustment –as proposed by sectors of the opposition– is not the way out of the decline. In order to initiate a cycle of sustained social progress, it is necessary to correct both financial deficits and public management deficits. The only way to achieve this is with a comprehensive reorganization of the State.