Report Nº: 95014/02/2022
Progress towards a new agreement with the IMF was announced. Once again, a gradualist strategy is chosen, which assumes that the fiscal deficit will be reduced because revenues will increase more than expenditures thanks to economic growth. It is the same inconsistency that led to the failure of the previous agreement.
The Argentine government has not yet reached an agreement with the IMF. What it did –which is not a few– is an understanding on the path to reduce the primary fiscal deficit and end monetary issuance. While the government proposed to reduce gradually the deficit reaching fiscal balance by 2027, the IMF’s position was to reach that goal earlier. The understanding concluded that Argentina commits to reach fiscal balance by 2025 and stop issuing money to cover the deficit by 2024.
The next step is for the Argentine government to present the plan to comply with this deficit reduction path. In this sense, the statements made by the Minister of Economy emphasizing that no structural reforms are contemplated are very suggestive. This implies that the gradualist strategy adopted by the previous administration will be repeated. The assumption is that the economy will grow and, with it, public revenues. By keeping the real level of public spending below revenues, the fiscal deficit will be gradually reduced.
In this context, the question is how much the economy must grow in order to comply with the agreed fiscal deficit reduction path. Using data from the Ministry of Economy, the following estimates can be made:
These data show that the path of fiscal deficit reduction requires a growing rise in GDP. The reason is that the only factor for deficit reduction is the increase in public revenues due to economic growth. Initially, since the deficit reduction is postulated to be small, the required growth is also low; but as more deficit reduction is committed to approaching fiscal balance, the required economic growth rates are higher. This is the essence of the gradualist strategy.
Gradualism is inconsistent because it is not possible to grow with such a disorganized public sector. The very high inflation resulting from the excesses of money printing to finance the fiscal deficit complicates the economy. In addition, high inflation leads to much of the savings fleeing and the few that remain are absorbed by the State to help cover the fiscal deficit. Furthermore, many taxes make investment projects unviable. State disorder leads to very low-quality infrastructure and public services as evidenced by high transportation costs and power outages. The same happens with regulations that promote monopolies and rent-seeking behavior instead of innovation and competition. Without changing this reality, the economy cannot grow, therefore, the fiscal goals will not be met. Non-compliance is not due to a lack of will but to a design error.
The goal that public spending should not grow above revenues is also hard to achieve without a State reordering. For example, pension mobility is based on wage increases (which, in general, are tied to inflation) and public revenues (which in the logic of gradualism are the ones that have to rise above spending). This implies that other expenditures, such as energy subsidies, will have to be revised downwards. In this sense, the government avoided talking about energy subsidies, but the IMF in its press release was very explicit stating that “… it was agreed that a strategy to reduce energy subsidies in a progressive manner will be fundamental to improve the composition of public spending”.
What the national government presents as a strength of the agreement is its main weakness: it does not address an integral State reorganization. Without reordering the public sector, no growth is possible, and inflation will remain very high. Under these conditions, it is foreseeable that the commitments with the IMF will be breached and, most importantly, that Argentina will continue in its long cycle of economic and social decline.
