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The Government wants to lower total public spending to 25% of GDP: how much is missing?

The Government wants to lower total public spending to 25% of GDP: how much is missing?

The postponed May Pact which the Government convened, which still cannot be sealed due to lack of agreement regarding the Bases Law, foresees that the sum of the national, provincial and municipal spending does not exceed 25% of the Gross Domestic Product (GDP). That would be, in the opinion of the libertarian administration, the optimal level of the weight of the consolidated public sector on the economy.

So, Reaching that objective implies that once the adjustment scheduled for 2024 closes, the “chainsaw” will continue to be passed about the public sector. It must be remembered that public spending was equivalent to 25% of GDP in the 1990s, with the rise of convertibility and the backward exchange rate.

According to an analysis carried out by the Argentine Institute of Fiscal Analysis (IARAF), the various levels of government should reduce most of the different expenses by 81%. The report takes as base 2004, a year in which, after the exit of convertibility and rearrangement of macro numbers, the economy had reached that expenditure floor.

The study prepared by the economist Nadin Argañaraz Possible paths are projected to achieve the goal of the May Pact, an effort that also requires a political agreement that goes beyond the current administration. For example, if the Government assumes that the economy must be managed with a slightly backward exchange rate, the scheme requires a reduction in taxes, and to do so, a reduction in spending.

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The starting point is that at the spending levels of the national government, the provinces and CABA and the municipalities, The relative weight of consolidated spending in 2023 would have been 39.5% of GDP.

The structure of expenditures by level of government allows us to affirm that half of the expenditure was carried out by the Nation and the other half by the provinces, CABA and the municipalities. Specifically, between the provinces and CABA 40% and the municipalities 9%.

The other aspect that is relevant for Argentine society is the destination of public spending. The main one is the one intended for payment of salaries and State contracts, which represents 12.2% of GDP. 65% of the expenditure is concentrated in the Provinces and CABA, being in charge of the provision of labor-intensive services such as health and education. The second most important expense in Argentina is on Social Security Benefits, with 9% of GDP. In this case, $75 of every $100 spent by the State is concentrated in the national government.

First of all, the IARAF indicates that to go down to 25% of GDP, “the largest real decrease would be spending on operating deficits of national public companies (with a 100% reduction”).

After that, another item of very strong expenditures corresponds to “capital transfers from the municipalities (with a decrease of 86.4%), and real direct national investment (with a fall of 57.4%).”

In contrast, the report indicates that “The three expenses that would need the least variation would be current transfers from the provinces (with a minimum decrease of 2.3%), spending on interest on provincial debt (with a decrease of 9%), and provincial spending on goods and services (with a reduction of 20.7%).”

If the three levels of government are considered, in the national public sector the three items that require the greatest adjustment are the operating deficit of national public companies, real direct investment and spending on current transfers from the nation (-54.7%).

On the other hand, in the provincial public sector, it would be salaries with 39.9%; provincial social security benefits, with 34.3% and real direct provincial investment, with an adjustment of -31.7%.

In the sector municipal public, would be capital transfers, real direct investment with 45.8% and spending on goods and services, with 35%.

Milei and the objective of the Pact

According to the Sarandí Consultant, “the President declared in his official speech at the beginning of the ordinary sessions that had the objective of reducing the weight of the consolidated public spending of the Argentine State at only 25% of GDP.”

“Under your criteria, it would be an acceptable parameter in relation to the coverage capacity through genuine resources and without overwhelming the private sector with excessive tax pressure,” says the consultant.

The report considers that “the austerity measures of his first months in office go in the same direction, since the applications of funds in the first four months of the year verified a cut of 1.5 points in GDP in relation to the end of 2023.”

Source: Ambito

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