“We do not come to Argentina with the idea of cutting spending even more.” This is what the Managing Director of the IMF told CNN in Spanish. Obviously, Kristalina Ivanova, does not know the numbers of the Argentine economy, nor what is happening. Therefore, with all due respect, it seems appropriate to inform you of the situation.
Between 2003 and 2015 the public spending in Argentina grew approximately 20% of GDP. However, this phenomenal increase in public spending did not translate into sustained growth or improved welfare. On the contrary, after the “glory period” of the commodities boom, since 2011, the economy is stagnant, and GDP per capita is in sharp decline, no quality private jobs are created, and poverty increased, even before the COVID-19 crisis.
This increased public spending was allocated only very partially to “help” the sectors with the lowest resources and to improve State services. A good part of it leaked to other sectors, or was used to sustain the distortion of the prices of public services, via economic subsidies. Another part, it is already known, ended up in surcharges for public works and other purchases by the State, client public employment in many provinces, political spending of different kinds, etc.
Of course, the need to finance this public expenditure led to the expropriation of pension funds, the attack on the capital market in local currency and the emptying of the Central Bank’s assets. The rest was more inflation and more tax pressure to the formal sector. A matter that, despite the good intentions of the “fiscal pacts”, lasted during the 2016-2019 period, where economic subsidies were partially reduced, and spending in general decreased, basically due to inflationary liquidation. With more inflation, more poverty. With more tax pressure on the formal sector, less investment, less profitability, less exports, less growth.
Due to its tax system, Argentina “exports taxes”, taking Argentine companies out of competition, or forcing a strong depreciation of the currency, which, in turn, generates more inflation, more poverty, more flight from the peso. The greater tax pressure ends, in short, in a large tax on poverty.
My friend Kristalina, in her defense, could argue that did not refer to the structural problem of public spending Argentina, if not only to the situation of pandemic and confinement, which forces many States to expand their spending, to replace confined private activity. However, in the Argentine case, he is also wrong. Indeed, since in Argentina, the only source of financing for the fiscal deficit is the issuance of pesos that nobody wants to have, it was necessary to be much more careful in increasing pandemic spending, or offsetting it with the decrease in other expenses, to prevent that excess pesos from being transferred to the exchange market and attacking the Central Bank’s reserves (already greatly reduced by the unjustified payment of US $ 4.6 billion of debt in the midst of a uselessly extensive renegotiation). That is why, since April, we suggested, together with other colleagues, the reduction of the salaries of public officials at all levels, from a certain amount, and / or the payment in bonuses of part of that salary that this people “saved” on travel expenses, consumption outside the home, clothing. And pay, also in quasi currency, other public expenses. On the contrary, the government decided not to adjust, to issue without control and, now, try to stop the exchange pressure with “the police” and increase the tax pressure, with new taxes, while proposing a 2021 budget that assumes that there are no more pandemic expenses, that increases non-covid spending by 2% of GDP, and that finances 60% of the deficit fiscal with more monetary emission.
It is clear that the IMF does not have to put together a credible plan for Argentina, that is the responsibility of the Argentines. It is also clear that, to the extent that it does not have to provide fresh funds, and in “pandemic mode” it can turn a blind eye to the clear macroeconomic incoherencies in Argentina. However, it would be good if the little reputation that this Institution has left was not squandered. On the contrary, it could genuinely help, if it “blessed” a coherent monetary and fiscal program that will generate the trust that the government alone does not generate.