Both Javier Milei and Sergio Massa promised a fiscal surplus as one of the pillars of their economic policies from the start of their administration.
Both presidential candidates recognized, to a greater or lesser extent, the problem of the fiscal deficit and they outlined, without further details, that they would move towards balancing the fiscal accounts. What’s more, both Javier Milei and Sergio Massa promised a fiscal surplus as one of the pillars of his economic policies since the start of his administration. But given that neither of the two provided guidelines, details or details of how they would approach the adjustment of fiscal accounts, it is interesting to delve into world historical experience to glimpse what may come, its consequences, and what the International Monetary Fund (IMF) in a new negotiation. To this end, we resorted to an investigation by the Fund itself, “Experience with Large Fiscal Adjustments”, by economists G. Tsibouris, M. Horton, M. Flanagan, and W. Maliszewski who analyzed the design and implementation of adjustment on the sustainability of fiscal consolidation and the macroeconomic results of 165 countries during 1971-2001 , adding 13 case studies from developed, emerging, and primary resource producing countries. As a preview, the consulting firm Ferreres quantified some conclusions of the study: fiscal adjustments improve, on average, the primary result in 1% of GDP; 30% of the fiscal adjustment is usually achieved with an increase in taxes and 70% with a reduction in spending (out of 154 cases, the 25 least successful were due to more taxes and the 66 most successful were due to lower expenses); shock plans use tax increases to a greater extent than gradual plans; and that forced adjustments resort heavily to lower spending. Let’s see then what were the main IMF research findings.
Large adjustments have occurred with relative frequency during the 70s, 80s, 90s and 2000s. Some 300 consolidation episodes exceeding 5% of GDP were identified, almost half of which involved an adjustment in a relatively short period of one or two years.
Macroeconomic conditions at the beginning of the large fiscal adjustments were relatively difficult. Thus the countries that Undertook major adjustments had significantly higher debt and inflation ratios at the beginningas well as slower growth in GDP, private consumption and investment, compared to countries that undertook small fiscal consolidations. Restoring sustainability and ensuring access to short-term finance proved to be pressing needs. The structure of the fiscal accounts of countries that undertook large fiscal adjustments showed greater dependence on donations and relatively volatile non-tax revenues, less dependence on domestic indirect taxes, and more capital investment outlays in the pre-adjustment period.
The large lasting fiscal adjustments were based mainly on reduced spending. Statistical and econometric analyzes suggest that a balanced reduction in capital and current spending, with an emphasis on a lasting reduction in the wage bill, worked best in these situations. A high interest burden proved relatively difficult to overcome and led to a lower incidence of success.
There were also cases of lasting fiscal adjustments based on rising incomes, particularly in countries with low initial income/GDP ratios and where the pace of adjustment was more gradual. This allowed for sustained implementation over time of tax policy and administration reforms.
High political risk had an adverse impact on the duration of the adjustment. The case studies confirm that political support was a key element in achieving sustained fiscal adjustments.
Large adjustments, as opposed to small consolidations, generally had a positive macroeconomic impact. Among the major adjustments, a more gradual pace of implementation appears to have led to better macroeconomic outcomes.
We then have that the spending measures seem to offer the greatest probability of success, in terms of durability of the favorable macroeconomic adjustment and impact, that fiscal adjustment based on income growth also offers prospects for durability and greater efficiency, particularly in countries with a low initial income/GDP ratio; but when countries face solvency and liquidity crisis, spending-based adjustments appear to be the dominant strategy, likely reflecting the difficulty of raising revenues in an environment of sharp declines in private economic activity. Some measures, such as fiscal responsibility laws, have had a significant and measurable impact on the durability of large adjustmentsand finally, the case studies and duration analysis point out the importance of political support for fiscal adjustment.
Source: Ambito
