That Argentina has suffered from excess fiscal spending for years is no secret: the state doling out far more than it receives is one of the reasons its economy is in such a parlous state.
Then along came newish president Javier Milei, who campaigned in October 2023’s election with a chainsaw in a not-too-subtle symbol of his promise to slash spending and end the country’s fiscal over-indulgence.
Sure enough, the first two months of 2024 saw consecutive fiscal surpluses – for only the third time in a decade. The headlines have certainly impressed investors: Argentina’s sovereign debt spreads over US Treasuries are the lowest they have been since 2021.
But there is precious little to suggest that this amounts to real progress. It is the economic equivalent of a starvation diet in order to lose weight. The initial progress is impressive – how can it not be? Sadly, it is unsustainable.
Worse still, in both extreme dieters and economic basket cases, the approach suggests an inability to think clearly about how to properly address longer-term goals.
Initial progress is impressive – how can it not be? Sadly, it is unsustainable
Milei’s fiscal results are illusory. First, they have been largely driven by cuts to state transfers to the provinces, as well as to capital expenditures. Both, surely, will need to rise.
State transfers will soon have to reflect the practical political realities of his narrow base and his need to build political capital with the financial kind. Capital expenditures, meanwhile, will be a necessary lever to provide some positive GDP and employment momentum in an economy that is experiencing an inflation shock.
And that inflation shock is the second driver of these unsustainable surpluses. Government revenues have risen in line with inflation that has spiked to over 250%, a trajectory that is itself a product of the currency devaluation that Milei introduced in his first days. At the same time, spending on social programmes has seen large real cuts. That, too, looks unsustainable.
Inflation will likely – hopefully – fall, but that will simply take away the biggest positive driver of revenues. The room for further social cuts looks limited: in fact, there is more likely to be popular pressure to reinstate some of the budget that Milei has axed.
In short, Milei’s initial success has been eye-catching, but the policies that have enabled it must surely end soon.
Argentina’s fiscal fast is likely to do little more than cause its economy to faint from hunger. If he is inclined to listen to advice, Milei would be better scheduling fiscal surgery to impose mandatory spending bands.
As with diets, so it is with budgets: the key is balance.