The problem is not the level of debt, it is the level of spending

Punto de Vista Económico – Argentina´s government keeps saying that the nation’s debt problems are due to the fact that it is unsustainable. That is, as if fallen from the sky, Argentina has too much debt. The words used, especially in politics, matter. Argentina’s problem is not the level of debt, it is the level of public spending.

Below some specific data on public spending. It can be seen that, in real terms, it has increased significantly. Whether looking at the “public expenditure” account in the GDP on the total or the evolution, in real terms, of the National Treasury expenses.

In terms of GDP, public spending is significantly above historical values. The evolution of treasury expenses (adjusted for inflation) shows a fall with the Cambiemos government, but it is still at high levels. In fact, it has returned to levels similar to those of 2010.

Except for the 2007 crisis, Kirchnerism has consistently increased spending in real terms. The problem of debt is a problem with the level of expenditure. The debt problem is not solved with “cutting the debt” or exchange of bonds, it is solved with a structural reform of the state that reduces spending to sustainable levels.

This unpayable level of expenditure is observed in the structural deficit of the government (at all levels).

How is the deficit financed?

The deficit (D) is the difference between expenses (G) and tax collection (T). Given the already excessive tax burden in Argentina, we could say that the collection is already at its maximum value (T MAX). It is difficult to pay the debt with more taxes.

The deficit is covered with the issuance of bonds (B), monetization of the deficit (M), or “others” (X).

G-T MAX = D = ΔB + Δ M + X

Among others are “less conventional” financing methods such as expropriations, nationalizations, privatizations, etc.

If Argentina falls back into default, then \ Delta B = 0. Since T is already at its maximum values, the remaining options are:

Higher inflation (increase of ΔM)
Greater expropriations, etc.
Downward adjustment of G

Kirchnerism will not want to admit it, but since they began the new administration they started to work on T and to some extent on G. The latter via pensions, not via unproductive state spending.

What is still unclear is what position the government will have regarding the monetary issue. On the one hand, Minister Guzmán said in his first press conference that monetizing the deficit is not a good idea. On the other hand, the rest of the government maintains that the emission does not generate inflation (or that it is necessary to encourage consumption). It is not yet clear which of these two visions will prevail.

Another problem: “original sin”

Argentina cannot issue debt in its own currency. This is called the “original sin (original sin).” Therefore, the Treasury needs to make dollars in order to pay its debt obligations.

However, so far the measures taken by the government of Alberto Fernández have the effect of reducing the entry of dollars instead of encouraging it.

Argentine history

Argentina has a sad track record in terms of defaults and debt restructuring. Since its independence, Argentina has spent 30% of its time in default (or restructuring). Value comparable with other countries in the region. However, since the end of World War II it has been in default (or restructuring) almost 40% of the time, while the rest of the countries in the region have reduced their debt problems.


By Nicolas Cachanosky

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