The Government´s plan need 50% inflation - IDESA

Report Nº: 92212/08/2021

The Government´s plan need 50% inflation

The very high inflation in Argentina is not an undesired effect but the instrument that allows reducing public spending in real value. The reduction is for the excess of the level that can be financed with taxes and debt. Delaying the State’s reform will keep inflation making the adjustments on the public finances.

The INDEC reported that the increase in consumer prices in June was 3.2%. This implies that inflation remains in the order of 50% per year. This is a level much higher than the one recorded in other countries and it disturbs the government’s expectations to reach a 29% inflation rate in 2021. The negative implications are manifold, particularly on the social situation. The government, recognizing these consequences, encouraged the reopening of collective bargaining negotiations and announced a bonus to pensioners.

Among the government officials’ diagnoses, inflation appears as an exogenous factor. Speculation, lack of competition, the increase in international prices (imported inflation), etc. are some of the facts used to explain the increase in domestic prices. The most emphatically roused aspect is that inflation is an undesired phenomenon that conspires against the government’s objective of improving the income distribution through increases in salaries, pensions, and other social benefits.

The diagnosis does not mention the impact of inflation on public finances. To address this issue, it may be useful to analyze the main component of national public spending, which is, the pensions paid by ANSES. According to data from the Secretariat of Social Security and the INDEC, it is observed that:

  • The average benefit at present is AR$ 35,200.
  • In 2019, at current prices, this amount was AR$36,700.
  • This implies a drop of AR$1,500 in each pension due to inflation.

These data show that inflation generates significant savings for the State due to pensions’ loss in real value. Considering that ANSES pays 6.7 million pensions, the total savings generated by inflation is equivalent to about AR$130 billion yearly. A similar phenomenon occurs with public salaries and with the rest of the social benefits. For example, the Universal Child Allowance (AUH) which is currently at AR$4,500 lost AR$700 due to inflation with respect to 2019. Multiplying by the 4.4 million benefits gives a savings of AR$40 billion per year.

With very little margins to raise taxes and increase debt, inflation is the tool used by the government for public finance adjustment. It is the way to reduce the real value of public spending to the levels of available financing. Therefore, from the point of view of public finances, inflation is not an exogenous and undesired fact, but a phenomenon intrinsic and functional to the official strategy. Added to this, there is political functionality. Thanks to the loss in the real value of spending, opportunities for demagogic announcements emerge. For example, after the pensions’ loss in real value, the government announced a one-time bonus of AR$5,000 for retirees earning up to 2 times the minimum benefit. Those who receive the bonus will compensate part of what they have lost with inflation. But that will be thanks to the “generosity” of the government and not because of the right to pension indexing set in the Constitution. Those who do not receive the bonus will continue to lose against inflation.

Adjusting public spending in this way is politically attractive but very inefficient and inequitable. It is also not sustainable over time because it demands increasing inflation rates. More damage is done when the government tries to repress inflation by delaying the official exchange rate, utility tariffs, and other regulated prices, or by hindering exports. These distortions damage export capacity and add pressure on public finances because they demand increasing subsidies.

The public sector disorder is what forces fiscal adjustment. The adjustment can be done explicitly or by means of inflation adjustments as the government is doing. In both cases the productive and social costs are enormous. An alternative path is to address an integral reorganization of the State. That is, to balance public finances and increase the quantity and quality of public goods based on better practices in the public sector management.


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