Argentina: Federal govt runs ARS 518bn overall fiscal surplus in January, first since 2011

• Primary surplus hits ARS 2.0tn
• Spending plummets 39.4% y/y mainly on transitory inflation impact, govt also slashes capex and cash to provinces
• Revenues up 0.7% y/y thanks to devaluation and tax hike
• Impressive January balance shows govt can deliver on fiscal consolidation, the battle is just beginning

The federal government ran a primary fiscal surplus of ARS 2.0tn and an overall fiscal surplus of ARS 518bn in January, according to data published late Fri. by the?Economy Ministry. This was the first overall surplus for any month since August 2012, and the first for a January since 2011.

Non-interest spending plummeted an unprecedented 39.4% y/y in January. The key driver was the acceleration of inflation, which led to every category of primary spending declining at least 28.0% y/y. Many of the spending categories have automatic links to inflation or other variables and are unlikely to decline this much again, but there are also areas that reflect the government's political decision not to spend. For example, capital spending fell 86.0% y/y and transfers to provinces fell 72.0%.

Subsidies paid to control the price of public transportation and utilities declined 64.0% y/y. The government wants to take these subsidies to a minimum and is willing to let prices rise in order to slash subsidies. However, prices have not adjusted yet, so the 64.0% y/y decline in subsidies should have an equivalent increase in floating debt. It is fairly common for the federal government to settle subsidy debts with energy companies with large quarterly payments.

Revenues increased 0.7% y/y, but with some heterogeneities. Export and import taxes propped up income thanks to the impact of the devaluation. Uncategorized taxes recorded a jump in revenues after the FX transactions tax was raised. On the other hand, income tax revenues plummeted due to a late 2023 reform to reduce the PIT base. Both income tax revenues and social security contributions were also hit hard by the acceleration of inflation (real wages?in particular felt the impact).

Overall, this is a very strong start for the government that will be celebrated by markets. The January surplus is not as high as necessary to meet the zero-deficit objective for 2024, once we take into account the usual seasonality of budget execution. However, the outcome and the expenditure breakdown remain a very strong signal of the government's commitment to fiscal restraint and its ability to deliver on this commitment. That said, the fiscal work to reduce the deficit is far from finished. The main driver of the fiscal improvement seen in January was the acceleration of inflation, which helped reduce outlays in real terms for most categories. For many spending categories, this is only a transitory decline that can disappear due to inflation triggers, and the decline can even be reversed if inflation were to be put on a downward trajectory.