Argentina: EconMin aims to erase 5.2% of GDP fiscal deficit in 2024, outlines big reforms

• Revenue-enhancing policies would combine for 2.2pps of GDP, spending cuts would reach 3.0pps

The Economy Ministry announced Wed. that it aims to reduce the overall fiscal deficit from 5.2% of GDP to zero in 2024 and outlined the reforms that would deliver that result, according to an emailed explainer and a message on?X. Revenue-enhancing policies would contribute 2.2pps and the remaining 3.0pps would come from spending cuts. This is a more ambitious fiscal consolidation proposal than expected, which is a strong positive, but doubts about the government's ability to carry out the reforms and about social tolerance will persist until there is more delivery.

Revenue-side policies

We understand that most of these policies would require the approval of laws, though it is possible that the country tax can be hiked and expanded with the use of executive powers only. The issue here is that President Javier Milei campaigned on the promise of slashing taxes, so it is possible that tax hike proposals get pushback from ruling party legislators. Adding an automatic expiry date to the bigger tax changes, like the Economy Ministry is apparently proposing, would help.

The main revenue boost would come from new taxes on external trade. The so-called country tax that applies on most imports of goods and services would be hiked by 10.0pps to 17.5%. There would also be an export tax hike to 15% for goods that are paying a smaller tax (basically everything except soy). There are conflicting reports on whether this new 15% tax will apply for exports that were not taxed so far.

The government would also propose the reversal of the infamous personal income tax reform approved?earlier this year, which was supported by Milei at the time. The reform significantly hiked the floor of the income tax, which was a senseless move when the country is going through a big fiscal crisis.

The ministry also mentioned it could raise the equivalent of 0.5% of GDP with a combination of wealth tax changes, a tax pardon, and a capital repatriation. The wealth tax reform would be a proposal to gradually reduce the rate, and with an option of early payment of future taxes to access the reduced rate immediately.

Spending cuts

In the case of pensions, welfare with intermediaries, and operation costs, the Economy Ministry is signaling that they will let rising inflation erode the real value of outlays. Pension payments are currently linked to wages and stable tax revenues with a lag of six months, which is too long for the current inflation process. The previous government handled this by delivering arbitrary bonuses every other month. The Milei administration will allegedly propose Congress to approve the end of the automatic link of pensions to wages and revenues, instead allowing the government to use its discretion for hikes until the inflation crisis is resolved. Congress may not be inclined to give these powers to a government that is openly saying it will cut pensions.

The reduction of welfare with intermediaries is important but will be politically difficult. These intermediaries are powerful Peronist organizations that have been using clientelist practices to command thousands of people. Cutting these transfers off is a good way to reduce the deficit and undercut bad institutions that shouldn't exist, but the organizations will take their fight to the streets.

Capital spending would get slashed and the government would look for private financing of infrastructure projects instead. Following the Chilean model of concessions, the idea would be for the government to tender infrastructure jobs of interest to the private sector, attracting interest by allowing the private bidders to reap the full commercial or financial benefits of their investment.

Energy and public transportation subsidies would be slashed but wouldn't be fully eliminated, which is surprising. We assume the government wants to eliminate the subsidies gradually with an eye on the inflationary impact.