Buenos Aires Times

opinion and analysis ECONOMIC QUESTIONS

Must budget always mean ‘fudge-it’?

If you just look at the draft Budget, debt would indeed seem to be its main glue (not that 31 percent of GDP seems dangerously high by current world standards).

Wednesday 4 October, 2017
Next week, Argentina will be debating its annual budget at Parliament.
Next week, Argentina will be debating its annual budget at Parliament. Foto:Cedoc.

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Dr Hale (the New England academic with an insatiable curiosity about the Argentine economy) was kept at bay last week for the 141st anniversary tribute to the Buenos Aires Herald but no such excuse this time round. Herewith our most recent email exchanges:

Dr Hale: “It’s a pity you ignored me all last week because I received a semi-urgent request from the Website for Extreme Economic Positions (WEEP) where you could help. That name should speak for itself but I’ll throw in a couple of examples to make the nature of the group’s membership even clearer.  One is Red Hal, a fanatically Communist renegade Englishman who conceals his true identity because of the paranoid conviction that MI5 would then promptly bump him off. And then there is H. Adler (who has some typically German first name like Helmut or Heinz but refuses to divulge it because he wants everyone to imagine that he’s really called Hitler) – he argues that toxic globalisation became irreversible from the day national socialism was denied its legitimate right to rule the world.

“They’ve invited me into their group in order to represent the most extreme monetarist and ultraorthodox ideas of the Chicago Boys and the Washington Consensus and I must say I’m strongly tempted. You might wonder why I should want to join such a bunch of losers but they make a change from mainstream economics where everybody seems to end up saying more or less the same thing if you know what I mean. In a way it’s like smoking – you know it’s bad for you but it’s fun.

“But I’m digressing from WEEP’s request and how you could help. Quite simply, the members unanimously believe that their spectrum would be incomplete without Kirchnerism and, knowing my Argentine interests and contacts, they’ve asked me to fill that gap. So please help me out here – remember I’m not just looking for some common or garden ‘national and popular’ economist but a real wacko.

My reply: “Anything I can do, Dr Hale. Guillermo Moreno obviously springs to mind and I also see that Roberto Navarro, who has always fancied himself as an economist, has just lost his job at C5N – both would suit your purposes admirably. But I’ll take a couple of days to assemble a full list for you to vet. Yet I also note that “Red Hal” and “H. Adler” are both anagrams of your own name, Dr Hale – are you sure you’re not just making all this up?

DH: “Oh ye of little faith, are you accusing me of post-truth? Along with this email you’ll find enclosed various attachments irrefutably proving this group’s existence – read them and WEEP.

“Yet before I get angry, let’s get back to what we should always be doing – namely discussing current economic topics.

“My choice for this week is the 2018 budget, punctually submitted in mid-month (a punctuality shared by the governments of all stripes as far as I can see). In a way this issue ties in with WEEP’s request since it raises the question of why they want Kirchnerites rather than anybody from Mauricio Macri’s economic team, who are being accused of the most destructive and heartless austerity. Rather than any such extremism, I would read this budget’s message as gradualism coming here to stay.

“But my main question for you would be how they propose to square the circle without going too far down the dead-end debt road. They plan to reduce the fiscal deficit from 4.2 to 3.2 percent of gross domestic product (a steeper cut than it sounds since there will be no tax whitewash windfalls next year) but they will neither cut taxes nor lower spending to any significant degree.  On the contrary, the tax burden is to inch down by 0.2 percent of GDP – hardly the supply-side revolution an overtaxed Argentina needs but still a cut . At the same time social spending is projected to rise 21 percent as against 15.7 percent inflation (the midpoint of the forecast range), advancing from around three-fifths  to twothirds or even three-quarters of the total Budget. Furthermore, infrastructural spending is to advance from 2.6 to 3.5 percent of GDP. Nor will there be any surgery to lower a swollen public-sector payroll.

“To be sure, the overall spending of some 2.5 trillion pesos is supposed to drop one percent of GDP like the deficit, thanks both to 3.5 percent GDP growth and to reducing energy bill (and also transport) subsidies by around 20 percent – although higher energy and transport pricing will also complicate inflation strategy, pressure interest rates and thus threaten that 3.5 percent growth. But there is no doubt in my mind as to the bottom line footing the bills – jacking debt up almost 30 percent to some 285 billion pesos, taking it from 28.5 to 31 percent of GDP (the potential Kirchnerite critiques are too obvious to need repeating).

My reply: “If you just look at the draft Budget, debt would indeed seem to be its main glue (not that 31 percent of GDP seems dangerously high by current world standards). But I would also like to draw your attention to some parallel legislation simultaneously sent to Congress, adjusting accountancy and assessment techniques to end a quarter-century of inflation denial – this might well prove the secret weapon to square the circle once the debt option has been exhausted. Ignoring inflation meant that companies were being taxed on paper profits, effectively being required to pay money before earning it (the occasion of loud complaints) – but it also meant that the taxation fell on often absurdly undervalued assets. By adjusting both profits and asset values to inflation, the taxman both loses and gains but not equally – the Treasury stands to benefit by 20-30 billion pesos.

“I would also like to point out that this Budget does not simply bill the massive surge in infrastructural spending to the Treasury but sets high hopes in the public-private partnerships facilitated by recent reforms.

“My big doubt would be whether the outside world will appreciate the subtleties of this strategy toward balancing the budget or whether the absence of the usual fiscal corrective action like significantly raising revenues or cutting spending will cause investors to continue reserving judgement as to the Macri administration’s orthodoxy. The final upshot of the federal revenue-sharing tussle will also be absolutely central to budgetary balance.

“This Budget may or may not carry the seeds of taming the deficit but an even bigger doubt of mine would be the mushrooming quasi-fiscal deficit –  far too big a subject for the tail end of a column.”

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