By Dr. Sebastian Galiani, Professor of Economics, University of Maryland ¹

The present government in Argentina inherited a particularly high level of public spending compared to the country’s own history. Consolidated public expenditure for the three levels of government − nation, province and municipalities − reached 42.2% of Gross Domestic Product (GDP) in 2015. This is an almost 17 point hike from before the 2001-2002 crisis when this expenditure was 25.6% of GDP.

Three areas drove such growth in public spending. First, the public wage bill grew 4.8 points of GDP since 1998 − mainly driven by the provinces and municipalities. Second, pension benefits grew 4.7 points of GDP since 1998. And third, private transfers increased 5.0 points of GDP, of which subsidies to public services represented 3.6% of GDP. In contrast, public investment almost did not grow during 1998 to 2015, at 1.4 points of GDP. The end result was a level of primary spending that is higher than that of all Argentina’s Latin American neighbors, and up to 8 percentage points above what is expected for a country at its level of GDP per capita.

The current government is working to gradually stabilise the level of public spending at reasonable and sustainable levels for a country at Argentina’s level of development. Starting from the peak reached in 2015, primary expenditure fell by almost 2 points of GDP during 2017. This was achieved despite the increase in social protection spending carried out by the national public sector during that period.

So, what is the plan going forward?

In addition to making public spending more efficient, modernising the state and removing inefficient economic subsidies, stabilising real public spending is necessary. Towards this, both the nation and provinces negotiated and agreed to a new Fiscal Responsibility Law in 2017. It establishes that current primary expenditure cannot be increased above inflation, or above primary expenditures in the case of provinces with high deficits or indebtedness. The law also caps any increases in the number of public employees to population growth. In this way, together with the economy’s growth, the weight of public spending on GDP will be reduced gradually, creating the fiscal space to also lower the tax burden and improve the tax system. The new Fiscal Consensus, a pact between the nation and provinces to cut taxes in the provinces, adds to these efforts.

Assuming that primary expenditure remains constant in real terms, something more demanding than what the Fiscal Responsibility Law requires, the consolidated primary public expenditure would have dropped by approximately 10 points without any crisis (see figure) towards the end of the next presidential term. This is something not only unprecedented in Argentina, but also very rare worldwide.

Figure 1:

^{Note: * Nation meets the spending targets until 2019 and then freezes in real terms. Provinces keep spending constant in real terms. Transfers to provinces are not counted.
Source: Ministerio de Hacienda of Argentina.}

This is a very important challenge for Argentina. If achieved, it would mark the first time in the country’s history to have overcome a preoccupying fiscal trend without any economic and/or political crisis. Not only that, but meeting this challenge means continuing to grow while reducing the weight of the state in the economy significantly. This also requires considerably improving the efficiency of the state. To this end, the nation, provinces and municipalities must continue working on such basic agreements as those that led to the approval of the Fiscal Responsibility Law and the Fiscal Consensus recently legislated.

^{1.↩ Dr. Galiani is on leave from teaching at the University of Maryland to currently serve as the Secretary of Economic Policy, Deputy Minister of Treasury, in Argentina.}