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Without Fiscal Adjustments, We Will Suffer Inflation and Stagnation

The writer, Emilio Ocampo is economist who holds an MBA from the University of Chicago and taught emerging markets economy at NYU Stern. He is also the writer of several books on historical, political and economic issues.


 Some degree of confusion seems to reign in Macri’s cabinet regarding the need to reduce public spending and the fiscal deficit. On the same day and before the same audience, one minister stated that “there would be no fiscal adjustment” after the midterm elections in October another declared that the government would “keep lowering the deficit”. I doubt that such ambiguity will have any electoral benefit and it clearly conspires against the objectives of pulling the economy out of a recession and bringing down inflation.

 This communicational ambiguity (if not a contradiction) is a clear example of one of the disadvantages the current organization of the national cabinet: it doesn’t have a sole spokesperson for economic policy.

Beyond the anecdotical, the reality is that with the current level of deficit and public spending the Argentine economy is not viable and the fight against inflation will be condemned to failure. President Macri seems to know this very well. The faster the electorate understands it, the better. It is the job of the ministers to explain it clearly instead of increasing confusion.

A brief review of history can help us understand the importance of bringing down the deficit and spending. Since 1952 Argentina had, on average, one stabilization plan every 7 years. Some lasted only a few days (Pinedo´s in 1962), others a few months (Rodrigo´s in 1975) and others lasted for almost a decade (Cavallo´s in 1991).

 The following table compares the evolution of the average annual inflation and GDP growth rates and the level of fiscal deficit during the 3 most long-lasting and successful stabilization plans (Krieger Vasena, Cavallo and Lavagna), and the 3 least successful but more durable stabilization plans (Blanco, Martínez de Hoz and Sourrouille).

 The successful plans managed to reduce the annual inflation to a single digit and sustain economic growth in less than 4 years. The unsuccessful plans, failed on both accounts, either for political reasons (Blanco due to internal divisions in Aramburu´s government and Alsogaray and Alemann because a military coup overthrew Frondizi´s government) or for economic ones (Martínez de Hoz and Sourrouille). With the exception of Martínez de Hoz´s, none of these unsuccessful or failed plans reached their third anniversary, making the comparison for the last year irrelevant.

   Inflation Real GDP Growth Fiscal Deficit
Year Successful Failures Successful Failures Successful Failures
0 272% 459% -1,9% 2,8% 2,7% 7,6%
1 48% 155% 1,0% 0,8% 0,3% 4,4%
2 9% 91% 7,7% 2,9% -1,2% 1,9%
3 7% 131% 7,9% 5,5% -1,7% 4,3%
4 8% 223% 6,8% -2,1% -0,8% 4,9%

There are two things that can be seen clearly in this comparison:

  1. The unsuccessful plans faced higher inflation and a larger fiscal imbalance that they could not reduce in a sustainable way.
  2. The successful plans managed to reduce inflation and the deficit without sacrificing economic growth, refuting the notion that a fiscal adjustment in a context of high inflation necessarily brings about a recession. In fact, Argentine economic history shows that, in an inflationary context, recessions are caused by a restrictive monetary policy when both public spending and the fiscal deficit are growing. Such policy, and the inevitable exchange rate appreciation it produces, places the burden of adjustment on the private sector and have a negative effect on the long-run sustainable growth rate of the economy.

If we add the evolution of consolidated public expenditure to this comparison, we will see another significant difference between successful and unsuccessful plans.

                   Public Spending as % of the GDP


Year Successful Plans (Average) Failed Plans (Average)
0 28,3% 30,1%
1 27,9% 31,7%
2 27,0% 28,9%
3 25,9% 32,4%
4 26,3% 28,9%

  As can be seen, the most successful plans reduced the deficit fundamentally by reducing public spending (although they also required increases in tax revenues). During Lavagna´s tenure, tax revenues increased in great measure due to taxes on agricultural exports at a time when agricultural commodity prices were starting a boom cycle.

Failed plans couldn´t manage to reduce public spending, which over time exceeded the level prevailing at the outset. However, it is necessary to emphasize that in every case, consolidated public expenditure over GDP hovered around 30%.

The current situation is very different because, according to some estimates, consolidated public spending (including the interests of the public debt) exceeds 50% of Argentina´s GDP and tax pressure is at a peak. Tax increases would exacerbate the recession.

For the first two decades after the return to democracy, public spending was, on average, 30% of the GDP. From 2006 onwards, public spending increased steadily, reaching 47% by 2015. As the following table shows, during the Kirchners´ populist government Argentina went through a structural change:

Public Spending as % of the GDP in Relation to Argentina´s GDP


2003 2015 2017E
Chile 99% 63% 69%
Colombia 123% 75% 73%
México 102% 69% 64%
Peru 88% 56% 57%

This means that to be at the same level as Latin America´s most dynamic economies, public spending should be reduced by at least a third. And this figures, published by the IMF, underestimate the problem. Argentina won’t be able to escape the populist trap with a giant, corrupt, inefficient and unfinanceable state. This is the hard truth. The sooner and clearer this truth is communicated to Argentine society, the better chances it will have of escaping the decline brought about by populism.

Without Fiscal Adjustments, We Will Suffer Inflation and Stagnation Reviewed by on . The writer, Emilio Ocampo is economist who holds an MBA from the University of Chicago and taught emerging markets economy at NYU Stern. He is also the writer o The writer, Emilio Ocampo is economist who holds an MBA from the University of Chicago and taught emerging markets economy at NYU Stern. He is also the writer o Rating:
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