The Chainsaw plan, as the president-elect called it, which will be implemented as of Monday, will be a litmus test for the government of Javier Milei. The slogan of drastically cutting public spending appears to be the "first task" among his economic reforms and, due to its magnitude, represents a challenge without precedent in recent history.
Although his platform expresses the aspiration to "reduce expenditures by 15% of GDP," the president-elect specified that his idea is to reduce the quasi-fiscal deficit by 10 points of GDP through the rescue of the Central Bank's Leliqs and cut 5 points of primary spending to achieve fiscal balance in the public accounts in 2024.
With spending at 19.5% of GDP, this level of adjustment is higher than anything known in recent decades. According to the historical series of the Ministry of Economy, we have to go back to the last military dictatorship in 1982, when primary spending fell in one year by 4.36 points (25.02 to 20.66% of GDP) due to devaluations.
The other blow occurred after the collapse of convertibility and the crisis in 2002, as a result of the devaluation and jump in inflation during the government of Eduardo Duhalde, which reduced spending by 3.63 points (25.58 to 21.95% of GDP) in one year. This was followed by the exit from the pandemic, with 2.6 points in 2021 (25.2 to 22.6% of GDP).
"Normally, when spending was reduced, it was not so much due to cuts, but by liquefaction due to inflation or maxi-devaluation, and since pensions have already been liquefied quite a bit, if we compare them with 2013 they are almost 50% down, and it is the main expense, there is no more to cut," said Marcelo Capello, vice president of IERAL.
Faced with this situation, the economist pointed out that Milei could aim for the "elimination of functions." In fact, the new government intends to eliminate 11 of the 18 ministries and create a new one, as well as close public companies. The question is whether, along with that restructuring, it will reduce the 340,000-employee workforce.
The focus is also on other items such as discretionary transfers to provinces, public works and energy subsidies. Those close to Caputo believe that the Transitory Contributions of the Nation, together with social programs destined for the provinces, could mean the saving of 5 points of GDP.
For the consulting firm Analytica, the "draconian adjustment" will focus on capital expenditures, operating expenses and social benefits, including for retirees. In other words, the adjustment will not only fall on "the caste", but the acceleration of inflation opens the door to a reduction in spending in real terms, based on its liquefaction.
Far from the campaign speech, Milei announced that a very hard period will come, with "stagflation". This is recession and a rise in prices that could exceed 20% in December, if they devalue and unfreeze prices. In this context, the rate of increase in pensions and public sector parity will be decisive.
"The fiscal shock will be the key to the adjustment by not allowing the treasury's expenditures to grow at the rate that prices do," the consultancy forecast. Precisely, Sergio Massa's administration managed to liquefy spending by removing subsidies, but also by updating social spending below inflation.
Despite these measures, the fiscal deficit (including debt interest) this year will be around 5% of GDP, up from 4.2% in 2022, due to the fall in revenue in the context of the drought and debt interest (2% of GDP). For this reason, economists do not rule out that Milei will shore up revenues to reduce the red in the accounts.
"If the adjustment is by liquefaction, it's temporary, it's to gain time. What needs to be done is structural and 5 points in a national expenditure of 21 or 22% is enormous, I don't think they can do everything by spending, but also by income," explained Daniel Artana, chief economist at FIEL and one of those who received an offer to occupy the Treasury.
According to a report by IERAL based on the book "Two Centuries of Argentine Economy" (Fundación Norte y Sur), the three years with the greatest fall in total expenditure (including debt interest) were 1986 (2.3 percentage points of gross product), 1990 (3.9 p.p.) and 2002 (2.3 p.p.).
To set new taxes, the government would have to approve them by Congress, but it has room to modify some perceptions by decree, as Massa did with the PAIS tax. However, this alternative, which represents 1 point of GDP, would be discarded if the foreign exchange market is unified.
On the other hand, if it devalues, the new management will have more resources due to the improvement in the real exchange rate in withholdings, but stagnation will also imply less income due to the fall in consumption. On the other hand, if it stabilizes the economy, indexed spending would rise and neutralize the liquefaction effect of inflation.
"The challenge for the next national administration is significant, since a reduction in the fiscal deficit of 5% of GDP in one year has never been achieved in recent history. In addition, only in the period between 2017-2019 was there a decrease in the fiscal deficit (2.2% of GDP) in which the only explanatory factor is spending," said Iaraf.