ZERO DEFICIT IS NOT ENOUGH TO STOP THE ECONOMIC DECLINE

The Ministry of Economy published the fiscal result of the national public sector for 2023. The primary fiscal deficit reached 3% of the GDP. If interest payments on public debt are added, the imbalance rises to almost 6% of GDP. This is the so-called “financing need”, i.e., the spending gap to revenues that the State must finance with public debt or with monetary issuance. Since the Argentine State has practically closed its access to credit, there is no other option but to finance it by printing money. Adding the Central Bank’s losses explains the very high inflation.

This panorama justifies the high priority the government endorses to achieve fiscal balance. With this objective in mind, it introduced the fiscal chapter of the omnibus law in the parliamentary debate. Among other measures related to public revenues, it proposed an increase in export duties and a new opportunity for laundering capital. On the expenditure side, the only proposition was to suspend pension indexation. Eventually, this chapter of the bill was withdrawn from Congress due to the political disagreement it raised, although the government emphatically stated that the goal of zero fiscal deficit is kept alive.

How do the fiscal results for 2023 fit in the dynamics of public finances in recent years? According to data from the Ministry of Economy, it is observed that:

• The average financial result between 2000 and 2023 was -2.2% of GDP.
• The average financial result of the last 10 years was -5% of GDP.
• The financial result for 2023 was -5.9% of GDP.  

These data show that the imbalance in the national public accounts is chronic and growing. The only positive financial results were between 2003 and 2008 explained by the increase in public revenues derived from a very favorable international context and for not recording in the public accounting the expenses of the interest accrued by the defaulted debt and the lawsuits filed by aggrieved retirees due to the non-compliance with pension indexation. 

With the chronic accumulation of financial imbalances, other no less negative phenomena were developing. On the one hand, a tendency to create and increase bad taxes. Only one-third of the national tax collection comes from VAT and Income Tax, the taxes on which well-organized countries rely. The remaining two-thirds come mainly from taxes that punish production and employment (social charges, tax on the use of checks, export and import duties, and internal taxes). On the other hand, woeful practices in the management of public spending have become entrenched. The allocation of public funds in non-priority areas and disregarding efficiency are commonplace in the public sector. 

The long decline and the current deep crisis is not only because the State spends more than its revenues. It is also because the State applies very bad taxes and manages spending with carelessness. Emphasizing exclusively the financial aspect, underestimating qualitative issues regarding the quality of taxes and management of public spending is a dangerous misdiagnosis. Traditional fiscal adjustment strategies are based on this mistaken vision. All attention is focused on showing balance in public accounts, assuming that this is enough to automatically reduce inflation and reactivate economic activity.

In the traditional fiscal adjustment underlies a risky simplism. For example, closing the deficit with more distortionary taxes, such as export duties, is an unproductive strategy because it curtails production. The same happens when trying to lower public spending by manipulating pension indexation since it exacerbates legal litigiousness. The government’s setback in Congress should not motivate the emphasis on reaching the zero deficit goal (which in isolation will lead to a new frustration) but on achieving financial solvency and also management solvency based on an integral organization of the State.