The solution is no the fiscal adjustment but the state's reorganization - IDESA

Report Nº: 100603/03/2023

The solution is no the fiscal adjustment but the state’s reorganization

The fiscal deficit jumped sharply in January. It is the consequence of delayed payments in December to show a decrease in the deficit in 2022. Another evidence that the fiscal adjustment cannot fix the financial and management deficits caused by the Argentine State’s deficient organization.

The Ministry of Economy celebrated the primary fiscal deficit of 2% of GDP, as agreed with the IMF. The situation was controlled in the 2nd semester of 2022, reducing the fiscal deficit which in the 1st semester was in the order of 3% of the GDP with an increasing trend. This generated a positive expectation given the resistance in some sectors of the government to lower the fiscal deficit, in general, and against the IMF agreement, in particular. The achievement is attributed to the political expertise of the Minister of Economy, one of the leaders of the ruling coalition who took charge of the situation when it was out of control.

However, in January 2023 the fiscal deficit increased 12-fold. While tax revenues increased by 93%, in line with inflation, primary public spending grew at a rate of 111% year-on-year, i.e. above the increase in prices. This raises concerns about the sustainability of the reduction of the primary fiscal deficit. What was a good end of 2022, is a worrying beginning of 2023.   

The question is what happened for the fiscal deficit to take such a leap. To shed light some light, it may help to look at which expenditure items grew the most year-on-year. According to data from the Ministry of Economy and taking the variations to the same month of the previous year, it can be seen that:

  • Welfare spending in December had grown by 54% and in January by 415%.
  • Energy subsidies in December fell 60% but in January they rose 119%.
  • Public investment in December had grown 55% and in January it increased 152%.  

These data show that one of the strategies used by the government for fiscal adjustment and IMF targets comply in 2022 was to postpone payments. As the IMF monitors cash accounting, deferring payments reduces the fiscal deficit. Delaying payments, especially in a context of high inflation, causes distortions, hidden costs and is not sustainable. The jump in spending in January is evidence of this. 

Postponing payments is a fiscal adjustment modality that has been applied for a long time by different governments. There are other ways to adjust with similar limitations. Manipulating pensions indexation allows savings in the short term, at the cost of generating lawsuits that in the future must be paid with retroactive payments, interest, and fees. Postponing road maintenance reduces current spending, at the cost of deteriorating infrastructure that demands more investment in the future. Increasing or creating distortionary taxes generates quick but transitory revenues until they have an impact on the increase of informality and/or the fall in economic activity produced by such bad taxation.   

What experience shows is that fiscal adjustment is ineffective in solving the organizational problems of the Argentine State. An irrational conformation, plagued by overlapping and bad practices, leads to the Argentine public sector being structurally and chronically in deficit. With the current structure of the public sector, the political leadership can modify nuances, but not get rid of its strong propensity to operate with financial and management deficits. Adjusting when the State is organized to operate with deficits is a task with assured failure. 

Instead of squandering efforts in unproductive fiscal adjustments, the way out should be to attack the problems of the State’s bad organization. This is the way to generate the conditions for achieving and sustaining fiscal balance by improving the quality of public management. To this end, it is necessary to address a comprehensive organization of the public sector that includes, among other issues, the simplification and unification of taxes, the elimination of co-participation so that each province and municipality is financed with what it generates in its territory, and the organization of functions so that the three levels of government do not overlap each other in the services they have to provide to the citizens.


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