Why is Javier Milei’s adjustment not sustainable?

Why is Javier Milei’s adjustment not sustainable?

The Government was exultant for having achieved a primary surplus of $1,232,525 million and a financial surplus of $338,112 million. Thus, two consecutive months of financial surplus for the first time since the beginning of 2011, of almost 0.2% of GDP in the first two months of 2024.

Beyond issues related to seasonality, generally the bulk of budget execution is in the second half of each year, it is important to analyze the economic dynamics to see sustainability. In fact, February compared to January reflects a 46% drop in the primary surplus and a 42% drop in the financial surplus.

During the first two months, the Government carried out a very low execution of spending, strongly limiting public works, transfers to provinces and universities, to CAMMESA (energy subsidies) and with a strong liquefaction of salaries and pensions. In the two-month period, floating debt due to unpaid accrued payments increased sharply.

It is not perceived that there is a significant structural reduction in spending but rather a brake on items that is unsustainable in political and economic terms and a reduction in income that may deepen.

Just as spending plummeted by 38% in real terms, income fell by 11% in relation to inflation. Although the drop in income does not seem so significant, it is necessary to differentiate the increase in the amount collected from withholdings and the very good functioning of the PAIS tax, given its extension to all goods and services, the increase in its rate and the improvement in agricultural exports due to the end of the drought and the sharp decrease in taxes linked to economic activity.

The further setbacks are observed in the VAT tax (unlike Customs VAT which reflects good numbers), Earnings, contributions and social security and fuel contributions that had a significant drop in real terms.

Forward It is expected that the recession will deepen the drop in collection. In this regard, the activity data, salary and retirement income, consumption, installed capacity, are consistent and conclusive in the deepening of the fall. In fact, the The decrease in inflation due to the recession will also reduce the growth of the nominal taxable amount that cushioned the drop in revenues these months.

Argentine history (see the graph below) reflects that it is only possible to sustain a sustainable fiscal surplus with a growth policy. If the last 50 years are analyzed, Argentina had two periods of fiscal surplus, between 1991 and 1994 and a longer period between 2003 and 2011. Favorable fiscal result that ended after the loss of growth in both cases. In the same sense, in the periods of fiscal adjustment as in the military government, 2001 and in the Macri Government, not only did public accounts not improve, but the recession deepened, which in turn aggravated the fiscal issue. These were times of a vicious circle of adjustment and recession, as could occur in the coming months if the Government does not change its economic policy.


The above is not only an Argentine phenomenon. There are very interesting examples in the world, such as the case of the United States, which in the last 50 years only had a fiscal surplus between 1998 and 2000 after years of growth.

There is another significant variable that we will analyze in a future article about the characteristics of a tax reform that ensures fiscal sustainability, growth and equity.

In the US, conservative periods (Reagan, Bush father and son, Trump) lowered taxes on the rich with the promise that growth would offset said reduction, but the fiscal deficit deepened. When Clinton reversed the regressive reforms of the 1980s he improved the fiscal outcome as we saw above.

The same thing happened in Argentina, Cavallo’s tax reduction in the 90s deteriorated the fiscal situation and the same thing happened in the management of Cambiemos.

The Milei government proposed reducing taxes, although in practice it has been sustained by increasing them (such as the PAIS tax) or proposing to reintroduce the income tax to the fourth category. In the world, on the other hand, the OECD (which the country wants to join) supports higher income taxes on large companies, with the determined support of the US Secretary of the Treasury. Janet Yellen.

Thus, Spain promoted an extraordinary tax on large fortunes, Italy (with a right-wing government chaired by Meloni) a tax on banks, a tax that De Guindos, the Vice President of the European Central Bank, supported and that Spain would adopt among other countries.

As we see, local and international experience clearly teaches that growth policies must be sustained to have macro balances and that fiscal sustainability requires – beyond equity considerations – the contribution of those who have the most, as both progressive positions in the world hold today. as conservatives. Argentina should settle the discussion over Profits with a tax on high incomes. Topic of a future article.

Source: Ambito

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