Argentina: Budget 2025: Milei promises zero deficit for second year in a row
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
The federal government submitted Mon. the?2025 Budget Bill to Congress?and it was written with a target of achieving an overall fiscal balance for the second year in a row, as was expected. The concern is that the macroeconomic assumptions underlying the budget process deviate significantly from the market consensus, and some of the revenue projections look inconsistent with the macro forecasts. However, budget laws don't carry the same weight in Argentina than they do in other countries because the volatility of the macro makes it impossible to project the evolution nominal variables one year in advance, and because the federal government has the powers to amend the budget pretty much at will if it undershoots with the CPI inflation forecast, which is what happens every single year.
What matters the most about President Javier Milei's budget proposal is the statement of intent regarding the fiscal balance target. The government deserves the benefit of the doubt since their?whatever it takes?approach is already advanced in slashing the fiscal deficit from 5.9% of GDP in 2023 to 0.0% in 2024. The budget bill also matters in what the macro forecasts reveal about the government's views and policy plans. The bill also contains a new attempt at building a fiscal rule for expenditures to adjust automatically in case of deviations from expected revenues, but for now it is a single article long.
Macro framework - optimistic forecasts and no FX policy changes
The macroeconomic forecasts underlying the budget draft are significantly more optimistic than the market consensus, and entail that the FX policy regime remains pretty much unchanged through the end of 2025.
The GDP growth forecast for 2024 is a contraction of 3.8% of GDP, which is right in line with the consensus arising from the BCRA's latest consensus poll. But for 2025, the budget assumes real GDP growth of 5.0%, which is well above the 3.5% consensus. The government also projects 5.0% growth for 2026 and 5.5% for 2027, though these forecasts have no bearing on the budget. The difference between the market consensus and the government's forecasts appears in every component of the GDP, with the official forecast foreseeing stronger growth for private consumption, investment, and net exports.
The end-of-period CPI inflation forecasts contained in the budget will were 104% for 2024 and 18% for 2025, which compares against a market consensus of 123% and 38% respectively. The CPI inflation forecasts used for budgeting are always set well below the consensus, usually because this is a way for governments to ensure budget flexibility. If inflation exceeds the forecast and this leads to extra nominal revenues, the law dictates that the executive has a lot of flexibility to decide how to spend the excess income. In this case, the strong GDP forecast for 2025 already leads to revenues that rise significantly in inflation-adjusted terms, reducing some of the scope for budget flexibility created by inflation.
Another element that explains the gap between the government's and the market's inflation forecast is how expectations differ for the exchange rate. The budget bill contains a forecast for the nominal exchange rate that pretty much entails the current 2.0% m/m crawling peg holds, until at some point next year it is reduced to 1.0%-1.5% m/m. This forecast could be interpreted as the government expecting to hold on to the current scheme of FX controls pretty much without changes, or the government believing that a historically strong REER will somehow hold in place with FX controls lifted.
The budget balance
The core element from the budget proposal is that the overall balance needs to be 0.0% of GDP. The revenue projections and spending caps are necessary by law, but these are secondary to the balance target. Government officials have said that the overall balance will be zero or a surplus no matter what, and have shown this year they have the legal tools and the willingness to do it. Thus, even though some of the revenue and spending projections contained in the budget bill may raise questions, it is important to keep in mind that the Milei administration should be expected to adjust on the fly to meet the balance target, no matter how big the deviation from the revenue forecasts. After all, they are slashing the deficit by 5.8pps of GDP this year while dealing with a steep recession.
The government estimates a primary surplus of 1.5% of GDP will be needed to keep the overall balance at zero in 2024. The expected required primary surplus falls to 1.3% for 2025. Interest payments are hard to project though, since a lot of public debt is very short term, subject to changes in interest rate policy or an unwinding of T-note holdings as the economy normalizes.
领英推荐
Budget revenues
The revenues of the national public sector are projected to decline by 0.2pps of GDP, but would still grow considerably in inflation-adjusted terms. Notably, the decline in terms of GDP is mainly linked to the tax revenues received by the national administration, even though total tax revenues are set to rise, albeit minimally. This is because one of the main y/y changes is the full elimination of the tax on FX transactions, known locally as Country Tax, which collects 1.1% of GDP and is fully received by the federal government. The elimination of the Country Tax is mitigated by an expansion of the personal income tax base approved this year, but PIT revenues are subject to the revenue-sharing system between the federal and provincial governments.
The tax revenue projection includes a few that don't seem consistent with the macro forecasts. For example, fuel tax collection is seen rising 155% y/y in nominal terms, which seems a bit much for the inflation forecast, even if we assume the government corrects the fixed tax after lagging in the adjustments for inflation control purposes.
Another big case is the export tax projection. Export tax revenues are seen rising 100% and 0.4pps in terms of GDP, which, again, doesn't seem consistent with the forecasts for inflation, the exchange rate, and exports. One official from the Economy Minstry said on X that export tax proceeds in 2024 are artificially low because exporters registered a lot of 2024 sales in 2023, looking to pay taxes in advance of a devaluation that was seen coming.
As for the non-tax revenues of the national public sector, social security contributions are projected to rise by a big 0.5pps in terms of GDP. The government is probably assuming growth based on a recovery of real wages, a rebound in formal jobs, and an increase in the social security contributions charged on people registered under a simplified single-tax regime.
On the other hand, property rents are seen declining by 0.3pps of GDP next year. It's hard to tell exactly what is the driver, but we would assume there could be a consolidation of the portfolio of the social security agency Anses.
Budget expenditures
The expenditures of the national public sector would decline by 0.2pps of GDP next year, with current spending down by 0.3pps and capital spending up by 0.1pps from historic lows. Capital spending would still be just 0.7% of GDP next year. The Milei administration wants to implement a system of concessions so that the private sector takes charge of public infrastructure investment as much as possible, while the federal government only invests to finish a few priority projects, most of which are ongoing.
The decline in current spending would take place mainly in interest payments and transfers to the private sector. In particular, the budget foresees a nominal 43% cut in transfers to private companies. This signals that the government intends to keep moving forward fast with the elimination of subsidies for electricity, natural gas, and public transport.
Spending on social security would increase in terms of GDP, reflecting an increase in the number of retirement and childcare pensions paid. Retirement pensions are supposed to adjust with inflation, and whether the budget assumes an increase childcare pensions or not is hard to tell with the way the information is presented.
Spending on consumption would go up in terms of GDP, largely pushed by an economy-wide expected recovery for wages that would reach state workers too.
A fiscal rule proposal
Milei presented the budget bill with a speech in Congress and talked about implementing a fiscal rule that would automatically adjust spending caps if revenues ran above or below expectations. He said that if revenues exceeded expectations, there would be a share of expenditures that would adjust up automatically, and a share of discretionary expenditures that would remain unchanged. Milei said the savings produced in periods of growth would be returned in the form of tax cuts if the revenue growth proved to be sustainable. On the contrary, if revenues come in lower than expected, automatic expenditures would decline on their own and the government would also reduce discretionary spending, to ensure that overall fiscal balance never swings into deficit.
The budget bill submitted to Congress does not contain most of the innovations proposed by Milei and the writing also entails that the rule would work differently. The first article of the bill says that the national public sector needs to run balanced accounts or a surplus, so any negative deviation from expected revenues needs to be compensated with equivalent spending cuts. It adds that budget lines not subject to a minimum execution rate by the law would need to be cut in the necessary proportion to restore the fiscal balance.
The fiscal rule as written in the budget bill would not be more than decoration. It contains a government statement of intent, but doesn't do anything to change the fact that budget execution remains nearly 100% based on government discretion.