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The Challenge of Fiscal Responsibility

January 23, 2017 7:06 pm A+ / A-

 Our director Manuel Solanet analyzes the economic state of Argentina.

  Over the last 70 years Argentina has lost its fiscal discipline. There were moments in which the government tried to recover it, but once and again it kept falling into the same trap. If fiscal deficit is thought of as a chronic disease, inflation would be fever and hyperinflation could be considered an acute episode of septicemia. When convertibility corseted inflation subsequent fiscal deficit was financed through debt, causing our country to default. It was thus shown that without fiscal equilibrium the consequences are always paid for in one way or another.

  We are once again facing a worsening of the infection. Our deficit is growing increasingly quickly. This hasn´t happened because tax revenues are down. On the contrary, they are up. Tax pressure has reached record levels. Furthermore, since evasion is still high, those who pay their taxes are submitted to a veritable levying of taxes and rightly demand they are reduced. Higher taxes won´t solve the problem. If anything evasion, should be lowered. Indeed, one of the ways to solve the problem is to lower the abusive nominal tax rates. Tax revenues tantamount to 40% of the GDP (federal, provincial and municipal) are high not only historically but compared to those in other countries and it would be difficult to overcome even going after evaders. Most of those who are not paying fail to do so because if they payed they would go out of business so going after them would reduce the taxable base.

  Between 2002 and 2015 Argentina´s public spending went up from 29% of the GDP to 46%. The federal government´s financial fiscal deficit for 2015 was estimated at 7% of the GDP but if we consider accrued or unpaid expenses and the lack of essential investments the real deficit would be 10% of the GDP.

  The following table explains the origin of the increase in public spending in terms of jurisdiction and motive:
cuadro i

 The growth in public employment has been the main motive behind the increased spending. It grew from 2,38 million public employees in 2003 to 44,23 million in 2015. Municipalities and provinces have been mainly responsible for this. While the federal government expanded its employees by 61%, the expansion in provinces as a whole was 72% and in municipalities 110%.

cuadro ii

   This increase in public employment has no other reason than populism and clientelism. Only in very few cases it is justified by an increase in services or activities. At any rate, even when this was the reason, there was no offset for this growth in the form of plant reductions that were widely possible at the beginning of the period under analysis. We have to say not all provinces are equally responsible, but it is important to stress that given the federal organization of our country it would be extraordinarily difficult to impose processes of administrative rationalization on subnational governments. The mechanisms to achieve this entail and alignment of rewards and punishments so governors and mayors themselves decide to reduce spending. Tax decentralization, increasing fiscal equivalence, is the way to go. Governors and mayors who spend unnecessarily should increase taxes so citizens can hold them accountable for their actions and use political pressure to correct unnecessary excesses.

  A first possible measure, though imperfect, could be ending temporary contracts, which in the federal government represented 18% of employees in 2015. In 2013 they represented 6% of government contracts and their number continues growing. However, the efficient process consists on carrying out an administrative reform based upon a resizing of government according to need that have to be covered. These same criteria should be used to design flowcharts, simplifying them as much as possible. This process should contemplate the mechanisms to solve the personal and social situation of surplus employees until they find a new job or are eligible for early retirement.

  The increase in pension costs is basically irreversible. Pensions constitute an acquired right and it would not be ethically acceptable to recommend liquidizing assets though a macro devaluation. Legislation, on the other hand, establishes a biannual adjustment in function of wage increases and the increment of social security contributions. In December 2002 there were 3 337 200 retired individuals receiving pensions. In July 2015 the figure was 6 140 000. To the normal vegetative growth, you have to add the beneficiaries of two moratoriums that didn´t require the usual antiquity or contributions to the system.

     The question of pension expenditure has another relevant issue, which are the medium and long term liabilities resulting from the nationalization of the funds managed by social security providers. This measure benefited the tax office in the short term by allowing authorities to dispose of personal contributions.  Furthermore, the government seized accumulated funds and basically spent them on loans to the Treasury and turning them into government securities. The solution a private capitalization system provided for long term imbalances has been lost. Even if they recovered contributions social security providers still receive 15% of the money collected from taxes shared between provinces. Now long term imbalances are once again a problem. The State, and not private funds, will have to pay for the retirement of the mass of pensioners it absorbed. Not only we currently have a big deficit but we also have massive long term liabilities that have a significant value today.

   Personal allowances can be lowered, but the pace will depend on the overall recovery of economic activity and employment. The most important allowance in Argentina is the “Universal Child Allowance” that the political platforms of all political parties consider non-modifiable. Furthermore, a biannual update was established using the same procedure used for retirement updates. Thus, the objective of reducing personal allowances can only be achieved through other programs and the so called family allowances. This should be done gradually, depurating clientelistic programs first. Afterwards plans should be revised and a timeline for reinsertion of recipients established.

    Subsidies for businesses and public services should be reduced faster. We refer to those subsidies to energy, transportation and certain productive activities. This process will imply normalization of prices and tariffs so production costs can be covered. They are not minor rises, so help should be given to those who cannot pay by subsidizing the demand, in terms of how much is consumed.

 Industrial activities that are still subsided should stop receiving them, eliminating the price controls and trade restrictions that motivated them.

   Social and political difficulties for the reduction of public spending are obvious. The objective should be to eliminate the deficit. Furthermore, this should be achieved diminishing fiscal pressure upon individuals and the productive sector in order to recover investments and the ability to accumulate savings. It is unthinkable to sustain a competitive export sector with export duties between 15% and 35% of gross sales.  The reduction of nominal fiscal burdens would also help to fight tax fraud.

   No government faced such a difficult situation, and one that is so hard to solve, as the current one.

The Challenge of Fiscal Responsibility Reviewed by on .  Our director Manuel Solanet analyzes the economic state of Argentina.   Over the last 70 years Argentina has lost its fiscal discipline. There were moments in  Our director Manuel Solanet analyzes the economic state of Argentina.   Over the last 70 years Argentina has lost its fiscal discipline. There were moments in Rating: 0

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