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You Can´t Tame the Deficit with Laws that Freeze Public Spending or Try to Ensure Fiscal Responsibility

January 24, 2017 6:32 pm A+ / A-

Increasing tax pressure, taking on debt and issuing money are the three ways, all of them destructive, to continue holding the current level of public spending. The extraordinary collection that resulted from a successful program for legalizing assets helps, but only once. Our public policy director Manuel Solanet explains why it is crucial to lower public spending.

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 Public spending results from paying for activities and programs, investments and paying interests. Spending levels, particularly if they have to be reduced, can´t be controlled by numbers drawn on paper – even if this numbers can be turned into law. Actual actions, such as lowering the number of people working for the government and decreasing the money spent on acquisitions and investments, are needed. In order to achieve this in an efficient way and avoid creating bigger problems, this actions should be part of a well thought out plan to rationalize and reduce the state apparatus. Historical experience shows that in successful cases this plans tend to be designed and executed at the center of governmental power and that asking each minister to propose and execute rationalization measure tend to be fruitless. The president asking his ministers to identify unnecessary or superimposed programs may result in a few answers but will usually encounter a plethora of pleas in favor of hard working government officials that want to justify their work and keep their jobs. The inevitable feelings of solidarity and protectiveness towards dependent personnel will also play their part. The motivations of public officials studied by Buchanan will have a big role. Only exceptionally the perceived blame will fall onto someone that is not the person making the decision.

 This proof of the motivation behind public official’s actions can explain why bureaucracy grows. Without strong discipline and compulsion at the top, public spending tends to grow. New needs are discovered at every level and new jobs are created for friends, family and party loyalists. Without budgetary charges or a decree that freezes spending, there is always a loop that allows to pass by the impediment: contracts, universities or cooperative entities. At a provincial level an additional factor influences the proliferation of public spending: the current regime for sharing tax-money between provinces many provincial governments allow many provinces to pay only a small part of what they spend with their own money. Governors then have the opportunity of increasing what they spend without having to pay the political cost of increasing taxes. This system should be change so spending can only be increased if the tax burden is also increased, aligning prizes and punishments. This reasoning can also be applied to municipal level and should ensure a reduction in public spending and an improvement in its quality.

 Bureaucratic overhauls have momentum during populist governments. The administration of Juan Domingo Peron between 1946 and 1955 and that of the Kirchner´s between 2003 and 2015 have been two paradigmatic cases. During the first public spending went up from 18% to 24% in terms of Argentina´s GDP. During the second it increased from 30% to 47%. This is our current level of spending, which is clearly unsustainable. Increased tax pressure, taking more public debt or issuing money are the three ways, all destructive, in which this level of spending can be sustained. The extraordinary income resulting from the program for the legalization of unclaimed assets the government has successfully applied will help. But just once. It is imperative to reduce spending.

  Two fiscal responsibility laws already exist in Argentina: law 25.152 in 1999 and law 25.917 in 2004. The first stated that the real rate of increase in public spending could not be bigger that the real increase in GDP. Fiscal deficit should not be above 1.9% of the GDP for 1999, going down to 0.6% in 2002. Law 25.917 established that the nominal rate of primary public spending at both the federal and provincial level could not surpass the rate of nominal increase in the GDP. Neither was fulfilled, and there were no consequences to successive administrations for this. An increase in public spending and the overflow of the confines to the deficit both laws settled were a logical consequence of not having acted physically on the functioning of the state. For the duration of this laws no measures were taken to physically affect the way the State works. Staff was not reduced, administrative units were not eliminated, the age of retirement was not increased, nothing was outsourced or privatized and labor laws were not made more efficient. In this circumstances the only way to reduce, or even maintain the same proportion between spending and GDP, was to lower salaries and retirements pensions in real terms. But this method, applied in practice with the devaluation of 2002, was not applied along with this laws and should never be used.

  As for the future, from now on, it is necessary to work on several fronts. The main one is the reduction of the state’s bureaucratic apparatus and a deep administrative reform. This should be done in tandem with measures to soften the negative personal effects that may result from this reduction and incentives to create new job in the private sector. It will take at least a couple of years for this changes to show measurable results. The fiscal cost of the transition will be high, and can be even higher if necessary social cushions are applied. For example, early retirement could be payed to employees of a certain age and could not find a job after a certain period. Another front is the modification of labor laws in the public sector to achieve greater mobility, lower absenteeism and greater productivity. One last front is gradually lowering state subsidies.

  Sanctioning a new fiscal responsibility law or a law that freezes spending could have a political effect. But it would only be optical and virtual if no work is done on the origins of spending.

You Can´t Tame the Deficit with Laws that Freeze Public Spending or Try to Ensure Fiscal Responsibility Reviewed by on . Increasing tax pressure, taking on debt and issuing money are the three ways, all of them destructive, to continue holding the current level of public spending. Increasing tax pressure, taking on debt and issuing money are the three ways, all of them destructive, to continue holding the current level of public spending. Rating: 0

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