In the analysis of Argentina’s fiscal and monetary policy, orthodox and monetarist economic theories have played a central role, especially since December 10, 2023, when fiscal consolidation and inflation control have been priority objectives of the government. The orthodox theoretical framework focuses on the stability of public accounts, maintaining that fiscal discipline is essential to guarantee long-term economic growth. According to this perspective, a prolonged fiscal deficit generates distrust in the markets, increasing country risk, interest rates and, ultimately, the public debt burden. Economic orthodoxy emphasizes the need to achieve fiscal balance by adjusting public spending and maximizing income, without resorting excessively to debt or monetary emission.
On the other hand, the monetarist approach, based on the ideas of Milton Friedman, maintains that inflation is, ultimately, a monetary phenomenon. In this framework, the uncontrolled growth of the money supply, driven by the issuance of money to finance the fiscal deficit, is the main cause of inflation. Monetarism advocates policies that limit state intervention in the economy and promote price stability as a fundamental condition for sustained growth. In the Argentine context, monetarist policies have translated into attempts to control the deficit through a strict reduction in public spending and a restriction of monetary issuance by the Central Bank.
Argentina’s recent fiscal evolution, with an accumulated primary surplus of 1.6% of GDP in September 2024, reflects a significant effort towards fiscal consolidation, in line with orthodox recommendations. However, this effort has been accompanied by an adjustment in primary spending, which has mainly affected social transfers and retirements, generating social tensions and calling into question the political sustainability of these measures in the long term. From the monetarist perspective, this adjustment has been crucial to avoid further expansion of debt and to reduce inflationary pressure, although challenges remain related to the government’s ability to finance its needs “below the line”, that is, the refinancing of debt in pesos and capitalized interest payments.
This article explores the implications of the orthodox and monetarist policies applied in Argentina – without making history -, examining the sustainability of recent fiscal improvements and the challenges that the country faces in maintaining the balance between fiscal consolidation and economic reactivation. Likewise, the limits of an adjustment based exclusively on reducing spending are analyzed, in a context where social demands and the need for economic growth require an evolution towards more comprehensive and long-term policies.
Fiscal consolidation and the primary surplus
The concept of primary surplus is key to evaluating the fiscal sustainability of a country. According to Maurice D. Levi in International Finance (2009), the primary surplus represents the difference between government revenues and expenditures, excluding interest payments on public debt. This indicator is particularly relevant in economies like ours, with high levels of debt, since a positive primary surplus makes it possible to stabilize and eventually reduce debt in relation to GDP.
In the case of Argentina, the accumulated primary surplus of 1.6% of GDP until September 2024 reflects a significant effort in terms of fiscal consolidation, compared to the deficit of (-1.4%) of GDP the previous year. As Levi highlights, in environments of high financial volatility, the management of this surplus is crucial to maintain the confidence of international markets and avoid external financing crises.
Public debt management and fiscal sustainability
Efficient management of public debt is essential to ensure macroeconomic stability. In this sense, James Van Horne, in his work Financial Management and Policy (2001) emphasizes that a country’s debt policy must be aimed at minimizing debt service costs without compromising the capacity for economic growth. Argentina has managed to reduce its general fiscal deficit to 0.4% of GDP, a notable advance compared to (-2.5%) of GDP in 2023.
However, according to Van Horne, the challenge lies in properly managing “below the line” financing needs (debt amortizations and maturities), which in the case of Argentina could reach a high percentage of GDP in 2025. Here, The risk is that debt financing does not become a “snowball”, where the increase in interest payments transferred to LEFI and LECAPS leads to an unsustainable debt situation, something that already represents 1% of GDP. in capitalized interest payments until September 2024.
Impact of fiscal and income policies on economic growth
Economic growth is essential to sustain an expansionary fiscal policy and maintain fiscal balance. In Principles of Corporate FinanceBrealey and Myers (2003) highlight that a combination of effective fiscal policies, such as increasing revenue without compromising GDP growth, is essential to avoid the accumulation of deficits. In the Argentine context, the elimination of the PAIS tax as of December 2024 and the absence of the extraordinary increase in the income tax in 2025 can reduce tax revenues by approximately 2% of GDP, which puts pressure on fiscal sustainability .
The fiscal package approved in Congress, which includes a tax moratorium and an advance payment of the personal property tax, has made it possible to partially offset these losses in 2024, contributing 0.22% of GDP. However, Brealey and Myers warn that relying exclusively on temporary tax measures to raise revenue can have a negative impact on long-term economic growth, reinforcing the need to find a balance between revenue collection and stimulating growth.
Restructuring public spending: efficiency and equity
In the analysis of the restructuring of public spending, Fischer, Dornbusch and Schmalensee (2005) in Economy They emphasize that efficiency in spending allocation is as important as its reduction. In the case of Argentina, the contraction of primary spending by 25% compared to the levels observed in 2023 has been led by a reduction in social items, particularly in retirements (36% of the adjustment). This approach has allowed for considerable fiscal consolidation, but at the same time, it generates significant social tensions, since the real decline in wages and pensions can limit aggregate demand and ultimately slow economic growth.
Stanley Fischer warned that, in election years like 2025, real declines in pensions and salaries are less likely to be repeated, due to the political need to avoid social conflicts. This presents an additional challenge for Argentina’s fiscal balance, since the capacity for adjustment on the spending side appears to have reached its limits.
Future projections: the balance between growth and sustainability
The projected fiscal balance for 2025, in which an annual primary surplus of 1.7% of GDP is estimated, will depend largely on economic growth and the implementation of structural reforms. In Levi’s approach, opening the economy, including the elimination of exchange controls (stocks), would be crucial to stimulating GDP growth. However, as Van Horne points out, confidence in the government’s ability to efficiently manage its debt will be a determining factor in ensuring that fiscal consolidation efforts are not undermined by a new crisis of confidence in sovereign debt markets.
In this context, Brealey and Myers emphasize the importance of maintaining a prudent approach in the renewal of debt in pesos, which could generate a financing gap of up to US$ 7,000 million if at least 90% of the debt is not renewed. same. This deficit will have to be covered either through a greater primary surplus or through external financing, such as the IMF, which highlights the fragility of the current fiscal balance and the need for coherent and sustainable fiscal and monetary policies in the long term.
Director of Esperanza Foundation. https://fundacionesperanza.com.ar/
UBA Postgraduate Professor and Master’s Degrees at private universities. Master in International Economic Policy, Doctor in Political Science, author of 6 books
Source: Ambito
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