If there are two unquestionable achievements that President Milei had in his first year of government, they were the impressive reversal of the fiscal deficit and the equally impressive elimination of the infamous liquidation letters (LELIQS) of the Central Bank.
In just 12 months The government went from a financial deficit of the national treasure of -4.6% of GDP in December 2023 to a 0.3% financial surplus of GDP in December 2024. This was the product of the primary result (before payment of interest ) which went from -2.9% in 2023 to a surplus of 1.8% of GDP in 2024 and interest payment was reduced from -1.7% to -1.5% of GDP.
To this is added that, a snowball that seemed unstoppable, which were the Leliqs of the Central Bank, was quickly disjointed clearing all fear of a “Bónex Plan” or hyperinflation. The Leliqs are forced debt of the Central Bank with commercial banks (that is, with the fixed deadlines of the people) produced because the market did not want to finance the treasure more. This is how in December 2023, Milei inherits a 67% treasure debt of GDP plus the “snowball” of the LELIQS for another 10% of GDP, whose interests were an autonomous machine of monetary emission. Therefore, the consensus between economists was that it would end in a “Bónex Plan” or hyperinflation.
As soon as the Government dropped the interest rate of the Leliqs, liquefying them with inflation and the confidence generated by the fiscal surplus recovered the public credit of the Treasury. This ended 2024 with the LELIQS at zero and the treasure with a debt of 69% of GDP, a fairly low cost in terms of increased debt, without “Bónex Plan” and no hyperinflation. You have to get your hat for these two huge achievements, but now the other challenge comes: keep them.
Sustainability to fiscal balance. The Leliqs disappeared thanks to the fiscal surplus and it was achieved thanks to a huge liquefaction of public spending. In particular, in 2024 public spending was liquefied for inflation in an equivalent to 5% of GDP. All spending items made their contribution to the Government’s liquefaction and strategy would be to freeze said liquefaction.
The issue has its edges. Retirement, public salaries and economic and social subsidies can be kept frozen with the simple process of updating them only by inflation, thus freezing liquefaction.
But there are two expense items that, to keep them smoothly, you have to apply another strategy. This is the national public investment, which fell from 1.2% of GDP in 2023 to 0.4% of GDP in 2024; Discretionary capital transfers to provinces that fell from 0.4% to 0.0% of GDP and discretionary transfers current to provinces that fell from 0.8% to 0.3% of GDP between 2023 and 2024.
Keeping frozen, without more, these expense items is not viable because it erodes the competitiveness of the economy prolonging the recession, deteriorating the balance of payments and, ultimately, questioning the sustainability of the fiscal balance itself.
The mechanism operates as follows: the drastic low of inflation was achieved with exchange appreciation. The actual multilateral exchange rate today is equal to the decade of the ’90s. To this we must add the fall in public investment, both national and provinces, to close the fiscal accounts, which becomes a decrepita public infrastructure that adds to the Argentine cost. To this is added the risk of the “drowned slot” of the provinces and municipalities that, before the abrupt cut of discretionary transfers, the already highly high distortive taxes that are gross (provincial) and industry rates and industry rates and Trade (municipal). This is an explosive cocktail for the poor competitiveness of the Argentine economy.
Fiscal sustainability with competitiveness and fiscal correspondence. The way to get out of the crossroads is with a fiscal coordination agreement between the nation and the provinces that should translate the passage of “adjustment” to the “order” of the State in its three levels of government: national, provincial and municipal.
This agreement must have two components. The first is the functional order: to clearly establish which functions the Nation fulfills exclusively and which the provinces with their municipalities exclusively comply. We must eliminate all overlapping of roles between the nation and the provinces and its municipalities to make public spending efficient and forever banal the discretionary transfers of the nation to the provinces and municipalities.
This order should be:
a) The nation is concentrated in interprovincial public spending;
b) The provinces with their municipalities do so in local public spending, without aid of the nation.
The second component is the tax system: to clearly establish what taxes they finance exclusively to the Nation and which ones finance only the provinces with their municipalities. Here we also have to eliminate all tax overlap between the Nation and the provinces and its municipalities to make taxes efficient and banish tax duplications between the Nation and the provinces and municipalities. where the most serious is the overlap of VAT, with gross income and municipal industry and trade.
The order should be:
to) The Nation is financed with foreign trade taxes and the entire income tax;
b) The provinces with their municipalities are financed with the entire VAT, of gross income and municipal rates, unified in a “super -iva”, that is generated in its territory. This implies that there is no more tax co -participation. The provinces recover their power to tax sales in their territory (today delegate with VAT to the nation) so that each province is the only one that taxes sales in the territory, with a “super -iva” to simplify the system Tax, and self -confinance with the provisions of the sales tax.
And the fiscal cost of this change? In principle there is no fiscal cost of the tax system where the nation stays with all profits and the provinces remain with all the VAT. The reason is that currently VAT and profits be co -participate between the nation and the provinces (primary distribution). With the aggregate that the nation, receiving all profits, is in a situation similar to the current one receiving part of profits and part of VAT; And the provinces, receiving the entire VAT, are in the same situation as receiving part of profits and part of the VAT.
In other words, instead of raising VAT and profits and distributing the collection between the nation and the provinces, taxes must be distributed directly: profits for the nation, VAT for the provinces and the situation remains neutral.
In this way, the functional order explains that local functions have to be served by the provinces and their municipalities and for this they would have the entire VAT that will be unified with the current gross income and municipal rates in a “super-oh”, No help from the nation (that is, without discretionary transfers). In this way, there is fiscal co -responsibility. Taxpayers would pay the “super-iva” to their province and their municipality and they should receive quality public services. In other words, provinces and municipalities should account for citizens for the use they make of the taxes they charge.
The poorest provinces. If you go from the co-participation to fiscal correspondence, there is a doubt what is done with the northern provinces that today live mostly of the co-participation and do not yet have sufficient tax base to finance with their own “super-oh”. The solution is a Convergence Fund that guarantees to the northern provinces what they receive today of co -participation, but conditioned to investment plans to converge to the development of the rest of the rest. Not as a “blank check”, as it is and will always be co -participation.
*Jorge Colina is an economist and president of IDESA
By Jorge Colina
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