Perhaps as never before in the last century, Argentina faces the chance to overcome the greatest obstacles to its economic growth in this period: the budget deficit, which led to inflation and debt, and the balance of payments deficit and the crises due to the lack of foreign exchange in the BCRA, which repeatedly led to macrocrises, breaches of contracts, sharp currency devaluations and a decline in the population’s income.
Achieving fiscal balance came about as a result of a firm determination since the first month of the current national government. Although it still needs to be endowed with more quality – with greater investments in infrastructure, the deepening of long-term reforms and the consolidation of an institutional rule so that financial sustainability does not depend only on the will of one person – it is undoubtedly an extremely important achievement given Argentina’s history of fiscal irresponsibility, which required a 180-degree turnaround to be credible.
The trend towards a chronic foreign exchange deficit in the BCRA was brought about by economic policies that led to structural problems of competitiveness and a loss of credibility, often accompanied by a strong lag in the exchange rate. Such problems can be avoided in the future, including due to the drastic change in economic policy, which tends towards a larger openingwith Trade agreements and new geopolitical positionsbut particularly due to the current and expected development of oil and gas production in Vaca Muerta and copper, gold, silver and lithium mining in several mountainous provinces.
In the energy sector alone, public and private forecasts estimate $30 billion to $40 billion in additional oil and gas exports within five years, with a significantly significant increase starting in 2027 when LNG exports begin.
Do these numbers move the macro ammeter? In addition to the direct and indirect impact on GDP, The balance of payments will make the largest contribution to export growthas they would make it possible to offset current account deficits such as those that occurred in years of good economic activity and exchange rate lags, such as in 2017 with an imbalance of $31 million.
If long-term fiscal balance and strong export growth are consolidated and access to international credit markets is normalized, Argentina will be able to stabilize its economy and avoid the typical balance of payments crises that could ensure sustainable growth.
Of course it would be so Economic growth is not spared from negative effectsbecause the greater supply of dollars for export will result in a relatively low real exchange rate even if Argentina changes its exchange rate system, without stocks and with a floating exchange rate, as would be desirable. Since there is an inverse relationship between salaries and the real exchange rate, the country could have relatively high salaries in dollar terms in the future, which would encourage the substitution of capital for labor, in a situation where, in addition to cheaper capital, due to the appreciation of the peso, there will most likely be better access to credit.
Relatively high dollar labor costs would make the industry and labor-intensive tradable services difficult to competeespecially considering that some of them will enjoy less commercial protection. Jobs could be lost here, as well as in some companies. A typical problem of the “Dutch disease”.
From a sectoral perspective The importance of mining and hydrocarbons will increase and industry participation will decreaseparticularly activities that have replaced imports in recent years. From a regional perspective The economic contribution of some Patagonian provinces will growespecially Neuquén, and those of some mining provinces in the Andes, and The weight of some provinces located in import-substituting industries will decreaseparticularly large urban agglomerations such as the greater Buenos Aires area.
Therefore, the main upcoming reforms (including labor and taxation) are necessary not only to ensure the dynamism of sectors that will have more opportunities in the future, but also to mitigate the negative impact on activities that are most likely to reduce their economic contribution. The latter is likely to be of interest to provinces such as the Pampas and the NEA, which will benefit comparatively less from the new model from the outset.
Reforms and a lot of fine-tuning are required for the economic and social sustainability of the “new” economy. To offset the dollar increase in wages, labor reform and a reduction in employer contributions are requiredand so promote labor recruitment in winning sectors and mitigate losses in losing sectors. Tax reform is needed to eliminate the anti-export bias of DEXs and the distortions of the check tax, as well as the anti-competitive bias of the provincial and municipal gross receipts tax.
Vaca Muerta’s high gas reserves and local production, which will far exceed domestic demand, would justify a policy in which Argentine production (compared to our competitors) uses relatively cheap gas and electricity as inputs, which would help partially offset the difficulties caused by the “Dutch disease”. In addition, larger and better investments in infrastructure are needed, while maintaining fiscal balance. In addition, achieving a budget surplus and creating a countercyclical fund would help avoid excessive appreciation of the peso against the backdrop of growing exports.
Also Measures to retrain workers and facilitate internal migration are welcomedfrom the large urban centers to the provinces with the greatest expansion of energy and mining production. This is where vocational training and social housing programs could be very useful.
Many of the necessary reforms also require action by provincial governments, such as gross income replacement, stamp duty elimination, labor justice reforms, and greater investment in infrastructure, among others. All this in a pact in which the nation and the provinces commit to freezing public spending at current levels (in constant values) for a certain number of years. If the economy and revenues grow during this period, fiscal space will be created to complete tax reform at both levels of government..
However, the governors are clear that contributing to solving the problems of macroeconomic instability and lack of competitiveness would entail political costs, while the political benefits of eventual success would be mainly for the national government. Therefore, they will only actively commit to the above-mentioned reforms if an incentive to do so is found. In the past, this has traditionally been done through the transfer of national resources to the provinces in the form of transfers or public investments. Weight: This time not too many tax resources need to be distributed.
What tools does the federal government have at its disposal to encourage the provinces to implement the reforms?
- Discretionary distribution of ATN to provinces;
- Distribution of funds to finance investments and maintain infrastructure in the provinces;
- Authorizations for states to take on new debt;
- Involve provinces in financing programs with international organizations.
Additionally, there are two possible strategies that could encourage provinces to implement their reforms as well. On the one hand, Condition for the validity of national tax cuts announced in the future (export duties, employer contributions) so that the provinces can also change their old local taxes (and thus also in their municipalities). On the other hand, Creation of a fund from part of national tax revenues to promote the expansion of energy and mining production in the futureto finance important infrastructure works and improving the quality of education in the provinces that join the agreement. In the second case, for example, with the accelerated implementation of school day extensions in public provincial schools.
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