The ruling party’s illusion of being able to put the economy back on track without reaching any substantial agreement with the rest of the non-governmental forces lasted even less than the previous utopia of being able to issue happily without impact on prices during the pandemic. If there was a complete plan, anda was transformed into a more “realistic” version that takes note of an unappealable fact: the numerical fragility of the legislative force of the Government.
The origin. During the 2020 health crisis, the central bank launched a monetary tsunami for 7.8% of GDP. Hastily, “heterodox” economists believed that, finally, the maxim of fiscal expansion was fulfilled: it did not generate inflation. The mirage ended when, once again, the blue dollar spiked and stretched the gap with the official dollar to 120%. From that moment (October 2020), controlling the price of the currency in the financial markets encouraged a race against time and a kind of short blanket where what could be covered exposed another hole.
The Economist Salvador VitelliHead of Research Romano Group, estimates that the final fiscal deficit figure for 2023 of 6.1% continues a long tradition of reds in the Treasury with an average of the last 60 years of 4% of GDP. Although last year’s figure was higher than what the economic team estimated before taking office, it reflects the result of the expansive policy during the election year. In reality, the large deviation of 2020 (more than 9% of GDP) could not be corrected in the following two years. That is why Luis Caputo proposed the need to reduce the fiscal gap before the other gap, the exchange gap, continues to reflect said imbalance and the devaluation becomes the true “plan B.”. “It is not a threat, it is confirmation that we are going to comply with the mandate that the majority of Argentines have given us to balance the fiscal accounts to end decades of inflation and economic scourge,” the Minister of Economy tweeted while in Deputies the negotiation was tense.
The equation is not easy: economic activity in November (the latest known data) fell 0.9% year-on-year and everything indicates that December and January will also see declines. This implies that one cannot expect, at the moment, an automatic stabilization of the economy or only on the basis of expectations. There is no good news there either: the January Consumer Confidence Index measured by the Di Tella University fell 10.6% compared to December and its Inflation Expectations Survey shows 230% as a projection for all of 2024.
“Basically what changed is the paradigm or at least the base scenario that the Government had proposed, with a deficit inertia that almost increased the final result by one point. This implies entering an even more swampy terrain in fiscal terms, to which is added the perspective of different concessions that are going to be made in the discussion of the “Omnibus Law,” details Vitelli.
The points of conflict. In addition to the core issue of electoral reform, which horizontally crosses all parties or except for the sale of YPF of permission to privatize, the discussions focused on three issues: the tariff treatment for exports (withholdings), the updating of retirement benefits and the reinstatement of the Income tax for individuals (now renamed “Income”).
In the case of the withholdings that were set to be 15% (except for soybeans, which were 33%), it was agreed to remove many products from regional economies from that list, but it still faces opposition from the representatives of the agricultural provinces. from the Pampa Húmeda, who are precisely close allies of the ruling party.
The restoration of income tax co-participation is the other carrot that the Government offers the governors to vote on the reforms. Of course, the discussion will focus on the scales and the way it is updated so that it is not, in fact, an abrupt jump from 0% to 35% (maximum percentage).
Finally, the other field of dispute is that of retirement formula, something very relevant in the fiscal result. The measure adopted to continue with the bonuses of $55,000 per month is flattening the bulk of the assets around $160,000 and the promise of updating them first with a different percentage each month and then with a figure quarterly sounds attractive, but it forgets a detail that It is the one that divides waters within the “friends” of the ruling party: retirees are one of the groups that have been suffering the most from the very high inflation of 2023 and this summer, without a solution to help them recover that loss. To measure it: in October 2020, total spending on retirement and pensions was 8.1% of GDP and at the end of last year it had fallen to 6.2%, which also required 2.8% contributions from the Treasury. The red is due to low collection due to the drop in the wage bill as a result of stagnant employment and low average salaries. Since 2012, formal private employment has grown only 5%, that is, almost 10% less than the growth of the economically active population.
The pension sector is the most sensitive, but other favorite targets of the red pencil without partisan distinction were discretionary transfers to the provinces, national public works and state salaries. For an economy that has not grown since 2012, the expansive spending policy forced tax pressure to increase, seek forms of debt or resort to monetary issuance. Since 2010, the Total central government spending in Latin America ranged between 20 and 22% of GDP, well below Argentine magnitudes.. It is not surprising, then, that last year Argentine inflation was not only the highest in the region but also in the world.
The trap. The maximalism enunciated by the President himself and his Minister of Economy, it is still not known if it is part of a great negotiation or is the DNA of his economic vision. For Javier Timermanmanaging partner of Adcap, that the Government sets out its objectives well and that greatly attracts the investor, who observes a paradigm shift when a different functioning of the economy is proposed. But that is not enough and he cites as an example a “libertarian” hero, Ronald Reagan, who was only able to draft a tax law four years after starting his first term that contained the heart of his proposals. “The strategy and success of the economic plan will be evaluated in terms of how it generates political support at different stages of the implementation of this economic plan. Anyone who understands risk knows that when you go all or nothing, you go all or nothing. And the Government believes that it is going to everything or ‘more or less’. And that is very difficult“he” concludes.
In short, a high-tension game in which the sustainability of the program itself is at stake if the ruling party itself does not prioritize objectives and celebrate what it managed to achieve with its mini legislative blocks.
