Report Nº: 110519/01/2025
In 2024, the chronic fiscal deficit was reversed. The challenge for 2025 is to make it sustainable. This requires a Fiscal Coordination Agreement between the Nation and the Provinces to eliminate overlapping functions and taxes. This Agreement is also urgent in recovering the drop in infrastructure investment.
In 2024 there was an impressive reversal of the fiscal dynamics. From a financial imbalance equivalent to 4.6% of the GDP in 2023, a financial surplus of 0.3% of the GDP was achieved in 2024. This is an increase in the financial surplus of almost 5% of GDP. The adjustment is explained by a fall in all components of primary expenditure (i.e., outlays excluding interest). While public revenues remained constant at 16.8% of GDP, all components of primary spending fell in real terms, for a total reduction of 4.5% of GDP. The key was the real loss in value of fiscal expenditures thanks to high inflation.
The challenge now is to sustain this surplus in the context of low inflation. In some expenditure items, it is enough to follow the same strategy, such as sustaining the reduction in the wage bill with the reduction of public employees and an austere salary policy. In the case of pensions, with the index rule establishing increases based on inflation, expenditures will be controlled in the short term, if the moratoriums that expire in March are not renewed.
But there are other expenditure items where an urgent change of strategy is needed. These are the cases of discretionary transfers to provinces and infrastructure investment. According to the Ministry of Economy between 2023 and 2024 it is observed that:
These data show that more than a third of the reduction in primary spending was thanks to the reduction in non-automatic transfers to provinces (current and capital) and investment directly executed by the Nation. In the case of national investment, the government’s announcements go in the direction of seeking mechanisms for private companies to take charge of the maintenance and development of new infrastructure. However, the great challenge arises from the drastic reduction of non-automatic transfers to the provinces.
The reduction of transfers to the provinces goes in the right direction of eliminating overlaps that are sources of inefficiencies. However, as it has been done unilaterally, there is a risk that the provinces and municipalities will react by increasing taxes. It is important to note that two of the worst taxes –provincial sale taxes and industry and commerce municipal taxes– are the main sources of local financing. Thus, a powerful factor of erosion of competitiveness is the combination of exchange rate appreciation with increases in provincial and municipal taxes and the further deterioration of infrastructure, because the three levels of government have reduced public investment.
To preserve the fiscal surplus and address the competitiveness problem, a Fiscal Coordination Agreement between the Nation and the Provinces is essential. The first component of the Agreement should be the functional reorganization of the public sector. This means clearly specifying the functions of each level of government: the national State executes interprovincial functions and the provinces and their municipalities take charge of local functions. The objective is to eliminate overlaps that damage the quality of public management. The other component must be tax regulation. Tax overlaps must also be eliminated and which tax finances each level of government must be clearly established. In this way, co-participation is replaced by fiscal correspondence in which each level of government attends to its functions with the taxes produced in its territory.
The strong fiscal adjustment overcame the critical situation reached by the end of 2023. But it is very important to avoid that, for the elimination of transfers to the provinces, the reaction is to increase provincial and municipal taxes, aggravating competitiveness problems. Therefore, it is important and urgent to sign a Fiscal Coordination Agreement.