Red tax and foreign currency: without sustenance, there is no paradise

Argentina's national per capita income in 2019 will be lower than in 2007. We have degraded economic growth, inflation and other significant variables. Over the four-year period from 2004 to 2007, GDP per capita grew by almost 8% per year. in 2008-2011, it slowed to 2% per year; in 2012-2015, the inhabitant fell by nearly 1% per year, and in the current period (2016-2019), the fall is around 2% per year. Meanwhile, inflation is accelerated: between 2004 and 2007, this average was 12% per year; in 2008-2011, it rose to 22% per year; in 2012-2015, it exceeded 28% per year; and between 2016 and 2019, it probably exceeds 35% per year.

The 1980s were described as a "lost decade" as several Latin American countries, burdened by huge external debts in a context of rising international interest rates, were experiencing economic turmoil that led to inflation and recession. But in this decade, only Argentina and Venezuela they suffer simultaneously from these problems. What happened to us?

The frustrating economic evolution nor this can be explained by an international crisis, a legacy received or drought, much less by a change in inflation targets. The underlying problem is the lack of sustainability of implemented macroeconomic policies, which were "bread for today and hunger for tomorrow". The public sector is in deficit and private savings are not enough to finance it. So, the country spends more than it could on the basis of its real income and covers the difference with the debt (as long as there is someone who lends).

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When those who lend to us stop doing so and ask us to repay them with interest, the expenses go down because there is no way to finance them. In both a house and a country, If you spend more than you actually enter, you will have to "tighten your belt" at a time, with loss of well-being and fighting the costs that everyone will have to pay. In the country, this adjustment usually involves a combination of low public spending, tax increases and the devaluation of the currency, which is very traumatic.

It would be best to combine an increase in production and private consumption (which generates higher tax revenues) with cost control; but this requires time and relative prices which, in a consistent way, encourage more production than consumption. When you have to make a big adjustment in a short period of time, because imbalances are very important, you can only cut expenses and / or raise taxes., which discourages production destined for the domestic market, causing a recession and a hardening of the distributive supply in the short term.

When there are imbalances, governments usually try to postpone corrections; but savvy investors know that there will definitely be an adjustment, which will include large changes in relative prices and the recession, to avoid taking risks. Uncertainty leads to a lack of long-term investment incentives, which is necessary for growth. Development occurs only with sustainable policies, fiscally (not to accumulate unpayable debts, nor to emit a surplus of money), external (not to cause economic strangulation for lack of currency) and social (to reduce poverty).

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The country has repeatedly suffered the consequences of unsustainable policies. The end of convertibility was very traumatic. voters seemed to be aware of this, and in the 2003 election the majority of votes were for candidates who preached fiscal balances or practiced in their provinces. And, after the strong adjustment that corrected the imbalances, economic policy sought to preserve "double surpluses integrating social inclusion", to reduce the external debt, to accumulate international reserves and to reduce poverty. A "cushion" was created to allow for an expansive (countercyclical) fiscal policy in 2009, during the international financial crisis, to counter the depression of private spending.

Manias Then, the old methods were repeated: public expenditure continued to increase, while private expenditure was already rising sharply (procyclical policy). He had two deficits (fiscal and external).or) in growth, financed by reserves, a monetary issue and a debt (for example, the Chinese exchange).

Upon taking office, the current government seemed to think that Argentina's main problems were the state's intervention in the markets, the tax burden on high-income sectors and the profitability energy companies. And the budget deficit? It would not be a problem, it would be financed by external investors. His "gradualism" accentuated the imbalances. Many badysts have applauded it and the IMF has estimated that deficits would not cause problems until at least the next decade. Tens of billions of dollars in announcements of productive private investment have been announced, even though direct investment income has never exceeded the low levels of management of the old management.

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In 2018, the capital markets warned that this could not be followed and, because of their reluctance to continue to grant loans, they forced an adjustment (devaluation, low power to purchase wages, pensions and social schemes) and asked the IMF to replace the government. market financing.

In 2019 Falsely speaking of "zero deficit"; but the financial deficit (the corresponding amount) proposed by the budget is 3.2% of GDP, which would already be high. But:
• The budget allocates as a resource for the year the sale of part of the FGS portfolio, which is conceptually a financial disinvestment, since the resources (pension contributions and their income) have been collected before. By charging correctly, the deficit would be 3.7% of GDP.
• the 2019 budget resources seem overrated; in particular those derived from taxes on foreign trade ("withholding taxes" and "tariffs"). It was expected to reach 3.37% of GDP; but the projection of the last months of 2018 (already in force the generalized withholdings on exports of goods) suggests that even by calculating the deductions on services exports and the impact of the largest expected harvest, the income would be less than the official calculation of at least 1% of GDP.

Thus, to obtain the necessary financing and not to make more adjustments than those already announcedthe actual national fiscal deficit could be equivalent to 5% of GDP. This is not a level that private international capital is willing to finance, given a public debt with private and international organizations exceeding 50% of GDP. In 2015, when the deficit reached 5% of GDP but was mainly financed by monetary issues, this debt was less than half. And the expenditure structure was more flexible, which facilitated its reduction. It therefore seems clear that we are far from completing the fiscal adjustment.

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In red The external deficit is also a concern. It is measured primarily by the current account of the balance of payments, but also by purchases of dollars of individuals clbadified as "Training of external badets" (AWF) which, at least in part, also represent a permanent outflow of foreign exchange.

In the third quarter of 2018 the current account deficit amounted to $ 7,600 million (about 6% of GDP) and the number of AWFs exceeded $ 8,000 million: an unsustainable level. In the fourth quarter, the deficit was reduced, in a context of strong recession and very high interest rates in pesos. But this does not mean that we are reaching an external equilibrium: if the economy were normalized, the demand for dollars at the current exchange rate would increase. For reference: the January 2019 multilateral real exchange rate is below the 2011 average, a year of growing external deficits (to such an extent that it led the authorities of the time to impose the exchange rate trap "in order not to devalue the peso) and when interest payments on external debt were considerably lower than current ones.

The correction of deficits (fiscal and external) involves very significant costs, but it is inevitable. When the IMF funds are exhausted, if the adjustment has not been made in an orderly manner, it will be done in a disorderly manner. The real problems are not adjusted or not, but when to do it (the more it will take time, the worse it will be) and how the costs of adjustment are distributed. By proceeding in an orderly manner, the most disadvantaged sectors could be better protected, which would require them to pay more to be able to do more.

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We will listen to the campaigners say what their electorate wants to hearthat there is no need to cut public spending, raise taxes in sectors with fiscal capacity, or devalue the peso. They will do it not to scare voters with "bad waves"; but, consciously or unconsciously, they will act in favor of the possibility of a disorderly adjustment, in which the majority of the Argentineans will come out less well, but in better of those who know how to fish in troubled waters.

* ECONOMIST and professor at the National University of La Plata.

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