I. Fiscal Stability
The fiscal challenge ...
The fiscal challenge that Milei's administration faces is enormous:
- Milei inherited a public debt of more than 60% of the country's Gross Domestic Product (GDP), a recent history of defaults, and international organizations such as the International Monetary Fund (IMF) among its creditors of last resort.
- Milei inherited a government that spent significantly more than it took in, a highly deficitary budget, and a high interest burden on the accumulated debt.
- Milei inherited a repressive tax system with a tax burden of almost 30% of the GDP, which left a dysfunctional economy that punishes and disincentivizes the country's production.
Public Debt to GDP
One of the most used indicators to contextualize the level and sustainability of public debt is public debt over the Gross Domestic Product (GDP).
According to Reinhart and Rogoff (2010), public debt greater than 60% of GDP reduces economic growth and puts at risk the public debt of an emerging economy. Therefore, when there is a lot of debt or its sustainability is questioned, the risk of default increases, and consequently, the country risk also increases.
In the case of Argentina, this metric includes the debt of the Central Government but not of local governments (provinces).
There are other important details about Argentina's public debt, such as maturities, currency denomination (local versus foreign), type of creditor (domestic, foreign), and type of interest rate (variable, fixed).
II. Fiscal Management
Primary Budget Deficit/Surplus of the Argentine Central Government
The primary deficit (or surplus) is the deficit (or surplus) before interest payments on the debt, meaning it exclusively measures the fiscal performance of the Government, isolating it from the debt accumulated by previous governments and/or market conditions.
For example, if the Argentine Government collects 100 billion in taxes but spends 120 billion, not counting the interest expense on the debt, then it has a primary budget deficit of 20 billion. This indicator is crucial, as it reflects the Government's ability to cover its current expenses with its current income, without depending on loans or one-time revenue, offering a more transparent measure of its fiscal management.
Budget Deficit/Surplus of the Argentine Government
Over time, one of the main problems in Argentina has been the constant fiscal deficit. Over the last decade, Milei's predecessors have resorted to progressive borrowing to finance excessive public spending.
The true fiscal deficit (or surplus) of a government, known in Argentina as the "financial" deficit (or surplus), includes both current spending and interest payments on existing debt.
Achieving a financial surplus is more challenging than obtaining a primary surplus, as it requires a fiscal effort that not only covers current expenses but also generates enough revenue to meet interest payments, especially in cases where public debt is significant, such as is the case of Argentina.
III. Fiscal Pressure
Tax Burden
The tax burden on the Gross Domestic Product (GDP) shows what percentage of national production is absorbed by the State and held out of the hands from private initiative.
A high tax burden damages economic growth, as it leaves fewer resources to private enterprise.
Formal Tax Burden
In Argentina, due to high barriers to formalization and low labor productivity, there is a considerable informal sector.
At the end of 2023, more than 40% of salaried workers are in informal employment. These workers produce approximately 30% of the Gross Domestic Product (GDP).
If we adjust the tax burden for this informality and calculate the tax burden on the formal sector of the economy (which bears a variety of the current taxes), it will be seen that the true tax burden is higher.
Tax Burden on Imports and Exports
In general, there are two ways to measure a country's tariff barriers: first, the weighted-average tariff of a country, Or, second, the fiscal revenue over the total value of imported (or exported) goods.
The disadvantage of the weighted-average tariff is that this data will always be outdated. For instance, the latest data from Argentina is from 2020.
Therefore, we have estimated the tax burden on imports and exports using monthly data of fiscal revenue on imports/exports and the balance of payments (specifically, total goods imports or exports).
Public Debt Monetization
Monetary backing since the 20th century has largely consisted of public debt. An excessive amount of public debt, along with its monetization, is the main cause of inflation in the last century, especially in emerging markets.
The monetization of public debt is one of the main reasons why inflation appears. When the demand for public debt is concentrated in the central bank, inflation skyrockets.
For Argentinians, in addition to taxes and public debt and its interest, inflation is yet another tax and, surely, the most damaging one to the poorer population.
