How much, where and how to adjust government expenses

When a debtor shows up requesting a restructuring, his creditor must receive elements that will ensure compliance with what can be agreed. Argentina has been a repeated defaulter, that is why it is obliged with more reason to prove that it will be able to pay. The government should not only expose a credible program, but it may be asked to start its execution. Now, which component of the program is the first that creditors will look at? Without a doubt, the fiscal result, to verify that the financial surplus (primary surplus minus interest) will make it possible or not, to pay what was agreed. If that result were zero, the debt stock would be maintained. This would be the acceptable lower limit for Argentina, since we are most likely to be required to reduce the debt in the coming years, and without granting discount of the debt now.

Given the current fiscal situation, what should be the magnitude of the fiscal correction and how to achieve it? The starting point is the financial result of 2019. The number declared by the government was a primary deficit of 0.44 points of GDP, plus interest by 2.9 points. In total a financial deficit of 3.4 points of GDP. However, there was underestimation in the figures. When using cash accounting and not for accrual, the increase in current operating debt was not considered, which was relevant. The amount of the expense was also favored by a relative delay in public salaries and retirement that are not sustainable for a long time. Corrected for these effects, the 2019 primary deficit would have been 3% of GDP and the financial one would have reached 5.9% of GDP. These values ​​give an idea of ​​the necessary correction, which cannot and should not be done by increasing taxes, but by reducing spending. The tax pressure has reached a record level, not sustainable, that prevents any increase. Rather it requires a decrease in order to get out of the recession. Therefore, all adjustment should be made on spending and the objective should be to reduce it by 6 points of GDP in two years.

Many think that this is not possible without creating a severe social reaction. This type of fear was what inhibited the former president Macri to go deep and chose to postpone or soften the necessary measures. He chose the path of gradualism by covering the strong inertial deficit with indebtedness. In a couple of years he found the limit and the economy suffered the consequences. For the Macri government it meant an economic disqualification and a political defeat. Peronism managed to regain power despite the guilt it entailed.

The Government that began on December 10, 2019 has only the option of an orderly fiscal adjustment if it does not want to repeat a default against rules that isolate us again from the world. The first problem of President Alberto Fernández is ideological. It acts representing a political coalition that combines populism and the left. It is the worst combination to support the program that is needed.

The magnitude of the reduction in expenditure necessary to support a debt agreement is 6 points of GDP. The feasibility of this objective should not be doubted if one considers that public spending (nation, provinces and municipalities) went from 27.1 to 45.4 GDP points between 2003 and 2015. The analysis of the areas of greatest Increased spending during this period allows identifying which components are susceptible to reductions.

The proposal of Fundación Libertad y Progreso is as follows:

Savings in % of GDP

  • National Government administrative rationalization: 0.8%
  • Provincial administrative rationalization: 1.7%
  • Debugging social plans: 1.0%
  • Reduction of energy and transport subsidies: 1.0%
  • Reduction of economic subsidies and tribal expenses. 0.6%
  • Suppression of non-priority public works: 0.9%
  • Total 6.0%

Of the total of 18 points of increase during 2002-2018, 3.4 correspond to the increase in pension expenditure due to the increase in the number of retirees and pensioners as a result of the moratoriums. This expenditure component cannot be significantly reduced, but it can gradually correct the imbalance of the system in the future. Among other measures is the increase in the retirement age.

Libertad y Progreso proposed in November 2019 a set of structural reforms that must be executed in coordination to make the reduction of 6 GDP points feasible.

Only with a strong recovery of private investment in a framework of competitive rules can the crisis be transformed by transforming the vicious circle of poverty and fiscal imbalance into a virtuous circle that results in sustained development and monetary stability. One million private jobs must be created per year. This would allow to absorb the young people who will enter the labor market, in addition to one million public employees in four years, a substantial part of recipients of social plans and people who are today in the informal economy.

To achieve the adjustment of spending and its sustainability, the following reforms that free the forces of the private sector are necessary.

1 – Reform of the national administration. Its objective is to substantially reduce the number of employees of the National Administration and achieve greater efficiency and effectiveness in management, ensuring that no person loses income immediately and has the opportunity to reintegrate and progress. It includes:

i) Changes in public sector labor standards to incorporate results management. Continue with digitalization and improvements in computer technology.

ii) a Decree with a new structure (there is a proposed organizational chart) within the framework of the attributions established in Law 25,164, on Public Employment. The administrative units dependent on each of the eight ministries will be defined, up to the level of national directorates, general directorates and decentralized agencies. The decree will establish the staffing of each administrative unit, by category.

iii) Appointment of the ministers of the new structure. Transitionally, for 90 days, the administrative units of the old structure are assigned to each of the new ministries. In that period each new minister covers the charges of the new structure giving priority to the personnel in availability. Once the staff typesetting is completed, those who have not been relocated to the new structure will remain in the condition of availability established by Law No. 25,164 Art 11 (They do not fulfill tasks; but they collect salaries for one or two years. avoid the social cost of running out of income.).

iv) Incentives for companies that hire them: ex: exemption of employer contributions over a period of two years and subsidy on training expenses in new employment. Early retirement to those who, being available, would not have obtained employment in two years and are over 60 years of age.

2 – Labor reform. Privilege labor agreements at company level over collective agreements at the activity sector level. This will require that the representation of the company’s workers be unified. This reform requires a change in articles 17, 18 and 19 of Law 14,250 of Collective Conventions (by Presidential decree or by Law). Ensure freedom of association. Deregulate and simplify the administrative controls of the enforcement authority, and of the labor police. Modify by regulation decree, Article 84 of the Labor Contract Law to increase productivity and reduce cost overruns and labor risk. Reduce the cost and risk of dismissal, respecting the acquired rights, through the suppression of severance pay (reform of articles 231 to 255 of the Labor Contract Law, by Presidential Decree or Law) by compensating it for a fund and insurance of unemployment. The example applied in Austria, known as the “Austrian backpack”, can be taken as an example.

3 – Gradual reduction of social plans for those who do not need them and seeking to encourage the search for employment, for example, by generalizing the “Splicing” plan Suppression of funds allocated to the Popular Economy. International audit to review the excesses committed in the fraudulent allocation of disability benefits.

4 – Continue with the reduction of energy and transportation subsidies, normalizing tariffs and prices within a reasonable period of time, so that they cover costs plus a profit that encourages investment in the sector. The impact on the lower income strata should be selectively buffered with demand subsidy instruments (Social Rate).

5 – Raising the retirement age in a process that will begin by matching women and men in 65 years announced to reach 70 years for both in a decade. Mothers will be recognized the equivalent of two years of contributions for each child up to a maximum of 7 years.

6 – Sending to Congress a Law for the reform of Federal Co-participation. Return of tax powers to the provinces (Income tax, Fuels, Personal Assets Tax, other Internal taxes). Replacement of Gross Revenue by Sales (are provincial) and calibration of this with the VAT rate (national) to join with current primary distribution. Suppression of vertical co-participation. Compatibility with the current secondary distribution through a Horizontal Redistribution Fund that produces a splice with a current system, but when these percentages are immovable, it must accompany any increase in expenditure of a province, with additional provincial taxes. That way the incentives will be aligned and will tend to spend less and better.

While it is possible to modify the federal co-participation and without waiting for this to happen must ratify and extend the Federal Agreement signed in 2016, setting goals for the rationalization of provincial administrations

7 – Announce the gradual elimination of the check tax and export duties as public spending decreases, but with a course pre-established by law.

8 – Work on the realization of the Mercosur European Union free trade agreement. Agree with Brazil and the other two Mercosur partners how to reduce the common external tariff. Start the negotiation of other bilateral free trade agreements.

9 – Correct the regulations that prevent the use of other currencies, repealing the forced legal course of the peso. Facilitate the use of electronic money.

10 – Regulatory deregulation and simplification of the tax swarm. Particularly of the AFIP (Argentina IRS Office), the BCRA (Central Bank) and other regulatory bodies. To disrupt the interventionist norms (Ex. Rent Law, Gondola Law).

Measures 1, 3 and 4 have the direct objective of reducing spending and achieving a fiscal (financial) surplus that will reduce tax pressure and restructure public debt. That achievement, accompanied by 2, 5, 6, 7, 8, 9 and 10 will constitute the axis of the plan to be presented to the IMF and creditors

These economic measures must be accompanied by the consolidation of efficient and independent justice, for better security and for political stability. This will boost investment, competitiveness and the creation of private employment. The latter will make the reduction of public employment and social subsidies feasible. In this way, the current vicious circle of stagnation, deficit and inflation will become the virtuous circle of growth, employment, improvement of real wages and stability.

By Manuel Solanet

(*) Fundación Libertad y Progreso

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