Our very own Aldo Abram spoke to “Enfoques Positivos” about employment, public debt, investment, the exchange rate, taxes and public spending.
Aldo Abram’s willingness to answer our questions on the many economic problems our country faces made him familiar to our readers. His answers are invariably sensible, concrete and correct.
We are grateful for his continued involvement regarding the doubts the public manifests now that it’s realizing the big economic changes we were expecting with the new administration have not arrived. Of course, something similar is happening with politics.
Abram has been, like few other pundits, a good forecaster during the Kirchner administration. He also serves as Executive Director at Libertad y Progreso Foundation.
Q: One of the most frequent criticisms regarding the style of economic leadership Mauricio Macri imprints on his government is that there is a big number of officials making decisions in the area, causing a great dispersion in terms of policy. What do you think about that? Do you know if any changes or reductions in the number of positions are taking place?
A: “In general terms, there are economists who prefer that the tasks of the Treasury, the Ministry of Finance and the Ministry of Economics be handled together. Looking at Argentina’s history, every crisis had its origin in an excess of public spending that, since it cannot be covered by current income, ends up being financed with debt (which ends up in default) or by the Central Bank, which eventually leads to bankruptcy. This bankruptcy results in situations like the one Venezuela is going through or hyperinflations like the one Argentina went through in the 80s. Hence, I would prefer a joint Treasury and Ministry of Finance that has domain over everything that concerns the authorization of expenses, their financing and the structure of the State. The ministries for Modernization of the State and Infrastructure should be secretariats under it. Besides, we should have an Economic Ministry with secretariats for energy, agroindustry, commerce, industry, mining, transport, environment and sustainable development under its tutelage. This way, the administration of public affairs and the taxpayers’ resources would remain in the hands of a Ministry that could control the expenses, subsidies or reductions in discretionary taxes in other areas of the State, prioritizing a well-functioning structure. Today, Sectoral Ministries compete to get benefits for the development of their sector without worrying about harming other sectors or destabilize the budget. If they all depended on a Ministry for Economics, when a secretary asks for something for their sector that could affect others, he will have to face the secretaries representing them.This check and balances of sorts would help to avoid bad decisions.
It is likely that after the midterm elections some measures to merge ministries will be taken, even it I think it would be difficult for them to approach what we are proposing. I belive Finance and Treasury will continue to be divided and some sectoral ministries will remain.”
Q: The most skeptical factions fear that certain economic measurements will lead to complications in terms of certain indexes and lose the confidence abroad. Do you visualize risks for employment, an excess in debt or the discouragement of investments?
A: “The biggest risk for Argentina has to do with fiscal solvency and with the Central Bank’s solvency, which means that the country would be left in a complicated situation to face any external shock. If this were to happen during the current administration, they won’t be able to cover the high deficit and the strong maturities of the debt for both the State and the Central Bank by taking new debt. This could make it necessary for the Treasury to issue money to cover a large part of those maturities, at a moment in which the demand for the peso would be decreasing causing a sharp decline in value. Thus, the exchange rate will rise with the risk of spiraling into a vicious cycle which leads to the peso’s continuous decline, incentivizing an even lower demand for local currency and lowering its price even more. This would derive in new lows of hoarding preferences and so on. This dynamic is extremely difficult to stop in the middle of an international crisis. In a country with Argentina’s record, many will take for granted that it may reach a point where it won’t be able to pay the debt or it will decline into hyperinflation. Therefore, we have always argued the government should be more austere regarding public spending and that the Central Bank should not finance the State or sustain the exchange rate by buying reserves and instead focus exclusively on meeting inflation targets. By doing this they would have avoided having the current remunerated liabilities.
Another problem is the high tax pressure at all three levels of the State. This pressure means we are currently ranked in 12ve place among the countries that drain their businesses with taxes the most and 2nd among those with higher taxes upon profits. It is obvious that this works against investments from local and international businesses, explaining why there is still no availability of long-term capitals and only financial capital arrives. To solve this problem, the government has to face a significant reduction of national public spending and its structures, creating incentives for provinces and municipalities to do the same. At the moment, there are no significant advances in the area. However, it is likely that some degree of austerity will be decided upon for 2018s expenditures.
Our diagnosis is that the Argentine State today is not only impossible to pay for but unable to perform the functions it is supposed to carry out. Thus, we propose a quick and pervasive reform. We should decide what State we can pay for and which functions it should carry out so we can design a structure that would allow us to comply with those objectives efficiently. Since many public employees would be left without anything to do, they should gradually be relocated. The reform will be implemented immediately and if an office is legally suppressed, the employee remains available for other functions within the State and will receive a salary for 2 years even if they are not working. At the same time, we should create opportunities for these individuals to be absorbed by the private sector. For example, we propose if businesses hire people that used to work in the public sector the social charges should be paid by the State. This way, both sides win and if the employee accepts the job s/he will also be better off. The State can save in that person’s gross salary and society as a whole improves because people who were employed in useless jobs now contributes creating goods and services that increase the wealth and well-being of the country as a whole.
This concept is similar to the one applied to a business that needs to be reestablished. The necessary adjustments have to take place to show the will to change course. This generates the financing necessary to relieve the cost of restructuring. In a country with a record of a bad balancing of the budget, it is unlikely that someone will be willing to bet without knowing what’s in store.
Since the federal government believes the main problems with excess in spending lie in the provinces, it is likely it will try to manage them with a law forcing fiscal responsibility. The problem is that two similar laws have failed in the past and nothing guarantees this won’t happen again.
In our opinion, the only way to solve the public budget at a provincial level is eliminating the current system of tax distribution among provinces. This system encourages waste since the federal government pays the political cost of determining and collecting taxes and the provinces have the benefit of expenditures. Our idea is to achieve a real fiscal federalism, where the federal government would raise certain taxes to finance itself and the provinces would raise others. Since some provinces cannot finance themselves, we propose to put the revenue from the fuel tax in a fund that compensates them in such a way that when this policy is implemented nobody wins or loses. From this moment on, the more each administration collects the more it has to spend. They will also face a restriction when increasing expenditures because they would have to face the political cost of increasing taxes, which should make them more austere.”
Q: Is the number of economic policies that a government can apply on an electoral year scarce? Are elections as conditioning as many seem to think?
A: “It is true that right now the government cannot face a reform of the State right now, but they should be in the process of planning this reform in order to implement it as soon as the electoral season is over. They propose to be austere in the budget for 2018 and to merge certain ministries. However, it will still be difficult to balance the numbers with a primary deficit of 3,2%. The problem is that adjusting the bare minimum in order to reduce fiscal imbalances implies that no margin is left to decrease tax pressure. In fact, taxes will increase over the next few years. Thus, even in the best case scenario, the perspective for growth will be bleak. We will continue to force the productive sector to pay for a huge and useless leviathan. At worst, we will have another crisis in the face of any irrelevant external shock.”