The disorder of the state is the economic "bomb" - IDESA

Report Nº: 100414/02/2023

The disorder of the state is the economic “bomb”

The accusations between the government and the opposition about who is responsible for the public debt and who should bear the explosion of the “bomb” miss the focus. The excess of debt is the result of the chronic accumulation of fiscal deficits derived from the bad organization of the State.

There is a resounding discussion between the ruling party and the opposition regarding the accumulation of public debt. The controversy revolves around its sustainability, i.e., whether it is at a level that the State can pay, on the contrary, it constitutes a “bomb” that cannot be paid. The latter inevitably leads to a non-voluntary rescheduling or the loss of its real value through an inflationary shock. The timing of the explosion of the “bomb” is not trivial since it implies paying the political costs.

Underlying the controversy is that the culprit who generated the debt should be responsible before society for its consequences. This belief loses sight of the fact that debt is not an exogenous phenomenon, but a direct consequence of the accumulation of fiscal deficits in the past. There is no debt without previous fiscal deficits.

From this perspective, it is possible to evaluate –objectively– the contribution made by the last three governments to the expansion of public debt. According to data from the Ministry of Economy, it is observed that:

  • Between 2012 and 2015 the fiscal deficit was 2.9% of the annual average GDP.
  • Between 2016 and 2019 the fiscal deficit was 5.1% of the annual average GDP.
  • Between 2020 and 2022 the fiscal deficit was 5.6% of annual average GDP.  

These data show that there was no difference in the generation of fiscal deficits, which are the ones that feed the public debt. Systematically during the last three governments, and notwithstanding their ideological or discursive differences, there were fiscal imbalances. Therefore, rather than looking for culprits, what is pertinent is to adopt self-criticism and look for the reasons why the public sector suffers from an innate tendency to spend in excess of available fiscal resources. 

There is little point in discussing who contributed the most to increase the debt or its characteristics (terms, currency, interest, type of creditor, etc.). It is also irrelevant to discuss when the “explosion” should occur. Experience shows that whatever the timing, these are always very traumatic events. Most importantly, they are events that do not solve the problem. With the inflationary shock or a rescheduling, debt, and public spending are temporarily reduced. The factor behind this is that with the current organization of the State, it quickly returns to the generation of deficits and the accumulation of new debt. The economic decline of the last decades is associated with repeated cycles of crises where adjustments are powerless to correct the natural tendency of the State to operate with financial and management deficits.

The economic “bomb” is generated by the fact that the three levels of government (nation, provinces, and municipalities) overlap in the collection of similar taxes and expenditures for the same services. The overlaps are the main factor that explains the burdensome tax burden and the tendency to overspend with very low efficiency. Fiscal adjustment –be it through inflationary shock, spending cuts, or tax increases– is unable to correct this organizational deficiency. 

For this reason, much more conducive than arguing over who got into more debt or who must shoulder the explosion is to outline a strategy for the integral organization of the State. To leave behind the logic of adjustment and go to the unification of taxes, the elimination of tax co-participation –replacing it with the distribution of tax sources–, and eradicating the overlapping of public spending among jurisdictions. Under these conditions, it is feasible to eliminate in a sustained manner the propensity of the State to generate chronic financial and management deficits.


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