Inflation, fiscal deficit and economic direction: Javier Milei’s perspectives for 2025

In this context, the head of state made a publication in which he announced his projections for the economy for the coming months.

Below is the complete opinion column published this Friday by the president Javier Milei in the newspaper La Nación:

“When you review economic growth books, they all have something in common and it is a quote from Robert Lucas Jr., taken during a conference in Cambridge in 1985, in which he stated: “Per capita GDP growth rates are diverse. … While India’s income doubles every 50 years, Korea’s does so every 10. The situation of an Indian, on average, will be 2 times better than that of his grandfather, while that of a Korean 32 times better …I don’t understand how They can look at figures like these without seeing that they represent possibilities. Could the Indian government take any measures that would allow the Indian economy to grow like that of Indonesia or Egypt? If yes, what exactly? Is there anything in the ‘nature of India’ that prevents it? The consequences that these types of issues have on human well-being are simply shocking: when you start thinking about them, it is impossible to think about anything else.

Naturally, the question about India also applies to the case of Argentina and any country that seeks to improve the standard of living of its citizens. What’s more, in our case it makes even more sense, since when Argentina entered the 20th century it was among the five richest countries in the world, while by 2023 we were in 113th place in the world GDP ranking. c, with poverty and indigence levels of 54.8% and 20.2% respectively. Therefore, these data are more than enough on the importance of economic growth.

The issue is not new. Already in 1776, Adam Smith had pointed out that the conjunction of free markets (the invisible hand and its correlate with property rights), increasing returns (pin factory), technological progress, learning by doing (specific human capital), In a context of a minimal State and a pristine monetary policy (gold standard), it would bring us the desired well-being. However, this flame of hope was extinguished by the dark vision of diminishing returns of Thomas Malthus and his followers. What’s more, when at the end of the 19th century and the beginning of the 20th the profession was taking account of the error, the arrival of the Great Depression and John M. Keynes diverted the debate for half a century, until Paul Romer and Robert Lucas Jr. brought back to the center of the scene (without underestimating great contributions such as those of Harrod, Domar, Solow, Swan, Usawa, Hahn, Phelps, Cass and Koopmans), so that in 1989 Mankiw, D. Romer and Weil gave an empirical closure to the debate, putting not only the accumulation of physical capital but also human capital at the center of the scene.

Therefore, based on this debate, what lessons have we learned to get the country out of the hole into which the socialist populism that has prevailed during the last century has put us? First of all, We have learned that stability is a necessary precondition for growth, since the systematic presence of fiscal deficit, inflation resulting from monetary issuance to finance the treasury, and external imbalance combined with an exchange gap, loss of reserves and indebtedness constitute an explosive cocktail that It made us live on the edge of the abyss and thereby destroyed any type of vision that exceeded day-to-day life. In this sense, the elimination of both the fiscal deficit (Treasury) and the quasi-fiscal deficit (BCRA) has allowed the issuance of money to be cut, causing wholesale (retail) inflation to go from levels of 54% (25.5%). monthly at levels of 1.4% (2.4%), which was achieved: (i) without expropriating assets; (ii) without price controls; (iii) recomposing rates and (iv) without fixing the exchange rate. That is, everything has been done respecting the right of property and, if the effect of inflation induced by the crawling peg is subtracted, wholesale prices would be in deflation and retail prices would be neutral. Therefore, inflation is disappearing and therefore the distortion that it causes on the population’s income and on investment is ending.

At the same time, The reduction of the fiscal deficit has generated an abrupt drop in the country’s risk, which at the time of the victory of La Libertad Avanza was around 3000 basis points, fell to 1900 at the time of taking office and today, after a year complete fiscal balance in the financial line, is around 600 basis points. This point is not minor, since as country risk falls, the domestic interest rate also falls and thereby reduces the cost of capital for companies, which increases their value (200% during the last year) and stimulates the arrival of new investments. As a result, the stock of capital per capita increases, thereby increasing labor productivity and the end result is higher wages that lead to a fall in poverty and indigence. However, this is not just a rhetorical question. A recent work by Juan Pablo Nicolini shows that the mere fact of achieving fiscal balance ensures an annual growth rate of 4.5% per capita, that is, in 15.6 years we would double our GDP/c.

However, as the author himself points out, the work only considers fiscal balance without any mention of how it is achieved. That is, it is not the same whether the fiscal achievement has been achieved by cutting public spending than if it had been achieved by raising taxes. Not only because of the implications in terms of allocation and happiness (utility), but also because the consolidated fiscal adjustment implied returning (or stopping stealing) 15% of the GDP from Argentines. Naturally, not all of this improvement will be saved, but beyond that the savings will increase and that will allow greater investment and growth. That is, the fiscal improvement provides an enormous floor for growth in light of Argentine history. In turn, as the economy grows, this will allow taxes to continue to be lowered and therefore give greater impetus to growth and freedom.

Finally, we have the structural reforms. Only considering DNU 70/23 and the Base Law was a structural reform eight times larger than that of Menem implemented, which has meant that Argentina rises 70 places in terms of economic freedom. It goes without saying that this is not a minor point, since those freer countries not only grow twice as much as the repressed ones, but at the same time have a per capita income 12 times higher and with 50 times fewer poor people in the format extreme. However, the reform did not end with these two great milestones, but also removed 3.5 regulations per day, which thus increases our freedom and income.

Therefore, we are facing the most ambitious transformation process in Argentine history and which, complemented by our reforms in health, education, work and legal matters, in a context of greater internal and external security, made 2024 not only been the pivotal year in our history, but also, simply maintaining what has already been done, 2025 will be the beginning of the reconstruction of Argentina so that after 40 years we will once again be at the top of the world.