More than an orthodox adjustment, the country is facing a liquidation of public spending without a horizon for GDP growth

Member of the Academic Council of Libertad y Progreso. Degree in Economics from Universidad Católica Argentina. He is an economic consultant and author of the books "Economía para todos" (Themes, 2002) and "El SindromeArgentino" (Ediciones B, 2006). He serves as a columnist in the newspaper La Nación. Previously, he worked the same task for the newspapers La Prensa (1985-1992), El Cronista Comercial (1992-2001) and La Nueva Provincia de Bahía Blanca (1992-1998). He's the host of the cable TV show "The Economic Report." Lecturer in Applied Economics of the Master of Economics and Administration of ESEADE, senior lecturer in Macroeconomic Theory of the Master of Economics and Administration of CEYCE. President of the Center for Economic and Institutional Studies. He was Economic Adviser to the Argentine Chamber of Commerce (1983-2002) and to the Argentine Chamber of Importers (1992-1993).

INFOBAE – The Minister of Economy announced the objective of reducing the fiscal deficit, but did not specify a comprehensive plan. The Central Bank maintains the pace of issuance to assist the Treasury through the turnover of accounting profits

In some media it is read that the government decided to apply an orthodox economic policy because it chose not to resort to monetary issuance any more and to lower the fiscal deficit by adjusting spending.

It would be necessary to see what is understood by orthodox policy, but in any case the government is faced with the harsh reality of having worsened the economic inheritance left to Cambiemos and that Cambiemos was in charge of financing it with public debt and returning what they had left it , except on the issue of utility rates, which Cambiemos had partially fixed and now we have returned to the starting point with the new rate delay.

Regarding the monetary issue, the Ministry of Economy issued a statement a few days ago in which it affirmed that it will cease to be financed with the monetary issue that the BCRA makes via the Transitory Advances. What he did not clarify is that it will continue to be financed with monetary issuance from the transfer of profits from the BCRA. It should be noted that the monetary issue to finance the treasury made by the Central comes from two accounts:

1) Temporary Advances that have a limit set by law and

2) transfer of profits, which is monetary issue based on profits arising from accounting creativity by the way in which the BCRA values ​​some treasury bonds that, by the way, are useless.

Precisely, in November the BCRA issued $ 60,000 million for transfer of profits to the Treasury, with which it continued to finance the deficit with monetary issuance.

So far in 2020 and until November 20, the BCRA issued $ 1.7 trillion to finance the treasury, of which $ 1.3 trillion were issued by transfer of profits and $ 0.4 trillion by temporary advances. Thus, affirming that the Treasury is not going to resort to more temporary advances from the BCRA says nothing about monetary discipline. What’s more, the statement said it was until the end of the year, with which there is only one month left to “sell” monetary discipline. And then?

Finally, in the first 10 months of the year, the monetary issue to finance the treasury was equivalent to 49% of the treasury’s tax revenues. Seeing, then, that monetary expansion was getting out of hand, they decided to take their foot off the gas and try to lower the fiscal deficit.

Now here comes the second point. The way to reduce the fiscal deficit. In the first place, the three items in which public spending to the government spiked the most in the first 10 months of the year is in: 1) social benefits with an increase of 75%, not only due to retirements, but also due to the IFE and ATPs, 2) due to economic subsidies with a 110% increase, as a result of the delay in public service rates and 3) transfer to the provinces outside of the federal co-participation, whose amount increased 201% in the first 10 months of the year.

Of the $ 2.3 trillion increase in current spending in the January-October period, $ 1.9 trillion correspond to the three items mentioned.

With strong inflationary pressures, the government will have to use the monetary issue less and, even so, monetary stability is not assured if the demand for currency falls to lower levels.

Limited on the revenue side, despite trying the wealth tax they just passed, the government has to resort to the damn adjustment. The one who always denounced and says he is not going to accept it from the IMF. The truth is that they have already announced that the 5% increase that they will give to retirees in December is on account of the adjustment of the retirements that will occur in March with the new system of adjustment of pensions, if it is approved. in Congress. In other words, the first major adjustment comes from the retirement side, without distinguishing between those who contributed to the pension system during their working life and those who did not contribute. They even all down.

The other adjustment is to suspend the IFE and the ATP that were established at the beginning of the quarantine and there is no longer any margin to sustain them.

Two other important adjustments are coming in order to reduce the deficit to try to postpone the total lack of control of the economy. The increase in the rates of public services to reduce expenses in economic subsidies and transfers to the provinces.

In the first case, it would have to do something similar to what Cambiemos did but paying the political cost that Cambiemos paid for the adjustment of public service rates. The funny thing is that Macri had solved part of the problem and Alberto Fernández returned to complicate that point by delaying rates so that people have artificially cheap utility rates. Making that adjustment in an electoral year, in principle it was going to be from January but perhaps it will be postponed until March, it will fully impact the electoral year.

And finally, the issue of the provinces. With the fiscal deficit they have, it doesn’t look like they can balance their accounts so they don’t have to receive extra support from the government.

The fiscal problem is due to two factors: 1) the phenomenal increase in public spending by the government and 2) the fall in tax revenues as a result of the quarantine. So it is not only a matter of lowering public spending somewhat to reduce the deficit, but as long as collection does not recover, tax revenues (national and provincial) will continue to be very poor. For that, the economy should take a path of recovery that is very tenuous at the moment and only due to the lesser demand for quarantine.

The monthly estimator of economic activity is still 7% below February, the month before the quarantine began, and 7.5% below November 2019, Macri’s last full month in government. By the way, that November came with an economy in free fall after the elections. As of September, the level of activity was the same as in October 2017. In other words, the economy went back 13 years in its level of activity, when public spending was at 33% of GDP, instead of the current 47%. In other words, the economy shrunk to levels 13 years ago with a much higher weight from the state. This gives an idea of ​​the magnitude of the decline in public spending that must be faced in order to bring order to public accounts.

But, ultimately, there are two points to highlight about this adjustment that the government does not want to recognize. The first point is that it is not an adjustment framed in a general economic plan that generates confidence. A plan that includes monetary, tax, labor reform, etc. Therefore, it limits itself to doing what it always does, changing relative prices, temporarily liquefying part of public spending, attacking the bulk of spending, which is retirement and pensions.

The second point is that there is no orderly adjustment of spending in such a way as to make spending more efficient. It is only limited to liquefying part of the expense but leaving its inefficiency intact.

In short, everything seems to indicate that it is an adjustment of the traditional ones, liquefying some expenses, but of doubtful results and short duration.

Far from being in an orthodox adjustment, we are facing the typical liquidations of spending as Duhalde did in 2002, that is, an economic carnage.