INFOBAE – There is no reason to suppose that high public spending will allow the long-term growth of the economy.
In principle, the agreement with the IMF allows the government to try to get out of the financial quagmire in which it got involved by not accelerating, at the time, the decrease in public spending.
Three simultaneous problems were presented to the government by the adopted hypergradualism. On the one hand, it was accumulating a phenomenal stock of LEBACs as a result of the dollars that the BCRA bought from the treasury to finance the fiscal deficit. That stock of LEBACs became a headache to resolve every 30 days. Secondly, the phenomenal interest rate that the BCRA had to put in order to stop the run towards the dollar, paralyzes any attempt at reactivation and investment. Finally, in the third place, despite the sterilization of a large part of the monetary expansion due to transitory advances to the treasury and the purchase of dollars from Finance Ministry, the rate of monetary expansion remained at 27% per year, sustaining high inflation.
If the two taps of monetary expansion are closed: 1) to finance the fiscal deficit and 2) to buy the dollars from Finance, then the rate of inflation should tend to decelerate quickly and the snowball in which the LEBACs were converted would stop becoming the avalanche of the past recent months.
It is still unclear how the Treasury will clean up the LEBACs of the market. There is US$ 1.3 trillion in circulation, that is, the equivalent of US$ 50,000 million at the exchange rate of $ 26, a figure that is received by the government in support of the IMF and still has to face debt maturities. external by capital and interests, plus the fiscal slump that remains for this year and next.
In principle, one should expect economic activity to slow down, particularly due to the lower rate of public works. Recall that the government maintained a good pace of work on routes, bridges, etc. Financing with external debt. That is to say, without the need to restrict domestic consumption thanks to the fact that it used the savings of the Americans, Japanese or Germans, it could finance more public works without domestic consumption being affected. Now, by cutting off the external financing of public works and the need to lower the fiscal deficit, this will no longer be the engine that moves the economy. In addition, the party of consumption during the K era no longer has the place to be motor and only the exports remain, to the extent that the real exchange rate improves. This means that the BCRA should let the exchange rate run a little more and put the brake on monetary expansion to curb inflation and let the real exchange rate rise. I hurry to clarify that I am not one of those who believes that devaluations generate competitiveness. If so, we Argentines should be champions in productivity with all the devaluations we had throughout our conflicting monetary history. But, I am also not one of those who believes that inflation is contained by artificially holding back the exchange rate.
We are now 17 months before Presidential elections, the government does not have much more room to bet on stopping inflation and trying to improve the real exchange rate to see if it can start moving the economy on the side of the external sector.
But in terms of long-term policies, there is still a long way to go. In addition to the labor, tax and public sector reforms, the government should rethink its strategy of believing that the growth of the economy is going to liquefy public spending on GDP.
In general, they tend to believe that, as elsewhere, public spending is also high, the problem is not spending but growing. At that point, they are committing a gross error of economic policy.
Graph 1 shows the evolution of public spending / GDP in the EU. It has clearly grown from 25 points of GDP since the early 70s, to stay in the range of 35 to 40 percent of GDP currently. Taking this data, we can assume that the problem is not in the level of spending but in the way it is spent.
But what happened to the growth of the EU as public expenditure / GDP increased? Clearly, the growth rates were decreasing, as shown in graph 2. A very clear downward trend in the rates of GDP growth was observed in the EU over the last 55 years until it reached stagnation levels.
If we do the same exercise for Argentina we see the following.
Taking the last 35 years, we see a public expenditure consolidation of the order of 30% of the GDP that accelerates in the Kirchner era, in particular with Cristina Fernández. The former president brought the level of consolidated public spending to record levels, making the state’s weight on the private sector so intolerable that the economy remains stagnant.
Strictly speaking, the economy remains stagnant in the last 35 years as can be seen in Graph4
Graph 4 shows artificial reactivation booms and falls in recession. It reflects a hysterical economy that goes from the artificial boom to the recession in a violent way.
Graphs 3 and 4 do not show that a high level of public spending has encouraged economic growth. Rather, stagnation is observed, which means that there is no reason to suppose that by freezing spending the weight of the state on GDP will decrease. It is not verified in the data of both graphs.
If we make the same comparison with the two periods of Cristina Fernandez administration, when the consolidated public spending skyrocketed, we see that there was not that relationship of higher public spending plus growth.
In the years of Cristina Fernández’s term, the consolidated public spending goes from 34% of GDP to 46%. 12 points of increase in public spending, record generated in a populist government. What happened to the level of activity? Let’s look at graph 6. The economy remained almost stagnant with strong variations and three years of recession. Such an increase in public spending did not produce an increase in economic activity at all. Directly drowned and left a line of poverty, inflation, exchange rate trap and fiscal deficit.
In short, there is no reason to suppose that high public spending will allow the economy to grow in the long term. It did not happen in the EU or here. In Argentina, it was even more pathetic because public spending led to recurrent fiscal crises that led to confiscations of deposits, savings such as the one with the pensions system, destruction of monetary signs, pesifications (compulsory changing dollar in the accounts of consumers to pesos), etc. That is, these levels of public spending destroyed legal security in Argentina as the state was a great confiscator, directly or indirectly, destroying the monetary system and the capital market (savings escaped abroad).
In short, the agreement with the IMF can serve to pass the storm of LEBACs, but the great challenge is not only to close the fiscal gap, but, directly, significantly lower public spending that is crushing the private sector and is the cause principal of our legal insecurity (populism must be financed as it is) and economic stagnation.
The drop in public spending will not bring a recession. It is demonstrated that no matter how much the economy rises, it does not react. What will bring us will be growth.
Written by Roberto H. Cachanosky
Academic Council, Libertad y Progreso