Report Nº: 96701/07/2022
The public finances in the first four months of the year show a growing fiscal imbalance. While tax collection varies at the pace of inflation, spending increases well above prices. With this bad management of public spending, inflation will inevitably continue to accelerate.
The results of the public finances of the national public sector corresponding to April 2022 were published. The primary fiscal deficit for the first 4 months of the year was $272 billion. This is equivalent to 72% of the public accounts’ imbalance ceiling agreed with the IMF. Formally, the government can show that it is complying with the commitment assumed.
However, when the information is disaggregated, it appears that this result depends decisively on the strong increase in income from “Other rents”. The explanation for the increase in this item is the massive issuance of public debt with yields higher than the market interest rate. Although this type of computation is an accepted practice, the fact is that it went from representing 0.3% of GDP to 1.3% of GDP in the first four months of 2022. Without accounting for this extraordinary revenue, the primary fiscal deficit would be 40% higher than the IMF ceiling. The situation is so atypical that the Ministry of Economy clarified that from now on it will apply, for compliance with the IMF, a ceiling of 0.3% of the GDP in this item.
Given this situation, it is increasingly important to analyze the dynamics of the main components of public accounts. In this sense, according to data from the Ministry of Economy, in the first four months of 2022, it is observed that:
These data show that tax revenues have been growing in line with inflation. The destabilizing factor is public spending, which is growing above prices. Although the growth in public spending is generalized, particularly important are energy subsidies, which in the first four months of the year increased 166% year-on-year. This increase in energy subsidies is equivalent to 1% of GDP. This amount is similar to the extraordinary income recorded under the item “Other rents”. Given that as of May this item will be capped at the level it usually was (0.3% of GDP), energy subsidies alone are already causing non-compliance with the targets agreed with the IMF.
The other main expenditure items –social benefits and public salaries– have also been growing above inflation. In the first four months of 2022, social benefits (pensions, family allowances, and welfare programs) are 66% higher than the previous year. Taking spending on welfare programs (delivered by the Ministry of Social Development among the piqueteros organizations), it grew at a rate of 90%. Public salaries, on the other hand, increased by 71%. The fact that these items of public spending are expanding at this rate implies a very high floor for inflation. In order to devalue in real terms these expenditures, and thus contain the increase in the fiscal deficit, higher inflation rates will be required.
Within the multi-causality that explains inflation acceleration, the disorganization and mismanagement of the State are the most important. In particular, the bad management of public utility rates. Months ago, a segmented update has been announced. That is to say, differentiated increases according to the socioeconomic level of the households. The proposal is politically attractive but difficult to implement given the very low management capacity prevailing in the public sector. The result is that subsidies continue to increase because the implementation was delayed for several months and ends up being improvised with increases that are poorly segmented and well below the cost of public services.
It was foreseeable that the IMF targets would not be met. The IMF authorities will find a way to forgive non-compliance. Where there is no escape is with the acceleration of inflation. The demagogy, inaction, and improvisation with the energy tariffs is a very illustrative example that there is no intention to curb inflation.