Monday, July 15, 2024
Perfil

ECONOMY | 25-09-2023 09:15

How Javier Milei would cut Argentina spending by 14% of GDP

Javier Milei’s fiscal belt tightening would focus on slashing expenditures on subsidies for utility bills, like gas, electricity and water, as well as federal government transfers to poor provinces.

Argentine presidential candidate Javier Milei often says he plans to make steep government spending cuts as part of an ambitious austerity program to balance the budget in a country infamous for chronic deficits. 

Milei’s fiscal belt tightening would focus on slashing expenditures on subsidies for utility bills, like gas, electricity and water, as well as federal government transfers to poor provinces, according to a person with direct knowledge of the campaign’s economic strategy. 

While Wall Street investors would applaud moves by Argentina to balance the government’s books, many observers doubt that the 52-year-old economist can achieve such dramatic results so quickly. Previous austerity campaigns, such as one in 2019, only drove the economy further into recession as subsidy cuts fuelled inflation, reducing consumers’ purchasing power as unemployment climbed.

And a cornerstone of Milei’s budget proposal — rolling back total outlays for family social subsidies nationwide while focusing on the low-income households that really need it — has proven technically problematic. President Alberto Fernández’s government long promised to strip out subsidy spending for the wealthy but was never successful. 

Milei has discussed cutting expenditure equivalent to 15 percent of gross domestic product but so far the tally is closer to 14 percent as estimates continue to evolve, according to the person, who asked not to be named discussing Milei’s economic strategy. Either way, it would be one of Argentina’s most ambitious austerity programs. 

Here how Milei would cut spending if he wins the presidential election October 22. A new government takes office December 10.

– five percent of GDP to be cut from federal government transfers to provinces
– two percent of GDP to be eliminated by privatising public works
– five percent of GDP to be adjusted in an overhaul of the subsidies program, directing support to the neediest households, rather than companies
– one percent of GDP to be cut by eliminating privileged retirement packages granted high-ranking government officials
– one percent of GDP to be reduced by selling or closing unprofitable state-owned companies

Milei already has compiled a list of companies that his administration is likely to consider selling or closing. In his ‘top five’ are Aerolíneas Argentinas, state-owned television channel TV Pública, state news agency Télam, the National Radio and state-owned energy company Enarsa.

The sale of the state-owned oil company YPF would not happen right away: Milei’s team would first conduct a thorough financial analysis so as to be in position to sell it well above its current book value. This may take more than a year, the person said.

Crucially, the Central Bank will stop issuing pesos  from “day one” of a Milei administration. If the official peso has not been adjusted by then, the government will devalue it to a level close to its current market level — the parallel dollar level — and impose a fixed exchange rate. 

Additionally, Milei’s team plans to send Congress legislation to legalise the currency’s free float and voluntarily propose dollarisation.

 

by Ignacio Olivera Doll, Bloomberg

Comments

More in (in spanish)