The 2019 budget and the real effects of austerity



by Federico Poore
The Essential, 22-11-2018

President Mauricio Macri gained a key victory in the last year of his term by securing congressional support for his latest budget proposal -- the most debated since the beginning his administration. It came as a sign of relief for both the Cambiemos camp and the International Monetary Fund, which has bailed the country out twice in a period of months amid an emerging market sell-off that has shaken developing countries.

But now that the initial waves of ease and fruition have ceased, it’s time to take a closer look at the numbers and sectors most affected by the proposed austerity measures.

The 2019 budget bill marks a significant departure from Macri’s original fiscal strategy. Until now, the government’s main goal has been to gradually reduce the fiscal deficit by lowering spending while at the same time reducing certain taxes, all this while diluting the relevance of the deficit by driving economic growth and relying on external funding. But now that certain financial markets have closed for the country, Macri is forced to abandon his gradualist approach and instead carry out a major fiscal adjustment — the very thing he had been trying to avoid during the first part of his term, according to the Argentine Association of Budget and Public Finance Administration (ASAP) in a recent report.

The Senate-approved budget sees primary spending (that is, all spending other than interest payments on debt) reducing by a huge 7.7 percent, a fiscal effort almost 10 times greater than that made by the Macri administration in its freshman year.

Transport, energy face biggest cuts

According to ASAP, cuts are affecting almost all areas whose budgets aren’t set for automatic increases, such as pensions and the country’s universal child allowance (best known as AUH). In fact, all ministries’ budgets will shrink next year in real terms compared to the estimated average inflation of 34.8 percent.

Austerity conditions will become the new norm in agriculture and energy. The CIPPEC think-tank estimates a whopping 40 percent cut in state-led investments and a drastic cut in subsidies. “The government acknowledges that the largest cuts will affect energy and transport projects, but it is determined to leave water and sanitation projects less affected,” maintain economists Ricardo Carciofi and Pablo Carreras Mayer in a recent report.

In order to reduce energy subsidies, the government will continue to raise the price consumers pay for electricity and natural gas, something that Cabinet Chief Marcos Peña said was “a necessary path” for untangling the energy crisis it inherited from the Cristina Kirchner administration. A second measure, already agreed upon in July, is the transfer of the power distribution companies Edenor and Edesur to the official jurisdiction of the City and Buenos Aires provincial governments. A similar move was agreed upon for transport in the Buenos Aires metropolitan area: starting in January Mayor Horacio Rodríguez Larreta and Governor María Eugenia Vidal will pick up a $270-million bill for “social tariffs.”

As for new investment projects, Macri appears to be heavily reliant on public-private partnerships (PPPs) to make up for projects that will lose government money. Under PPP programs, private firms finance the project and enter into a long-term contract with the state to recover their investment.

But this bet involves significant risks.

“From an economic point of view, these PPP projects may affect public sector accounts depending on how the exchange rate varies between the moment the contract is signed and the issuance of the investment payment title (TPI),” said CIPPEC. Moreover, PPP contractors may seek compensation in the case of discrepancies regarding Argentina’s country risk before the project is granted.

In any case, replacing a huge reduction (8.6 percent) in government investment with PPP will also be difficult because of the massive corruption scandal unveiled in August that implicated most of the country’s public works companies.

Less money for schools, public workers

Other sensitive government programs also suffered heavy cuts. Funds for school infrastructure, that is, the building of new schools and kindergartens, will be reduced by up to 79 percent in real terms.

There will also be less allocations for science and technology. When adjusted for estimated inflation, budget cuts in this area are down 7 percent. Earlier this year, as part of the austerity package agreed upon with the IMF, the Science and Technology Ministry was downgraded to a secretariat. “With monthly stipends lower than 24,000 pesos ($600) for postdoctoral fellows, meager salary increases for young researchers and a de-hierarchized scale for more senior researchers, a new exodus of highly trained scientists is foreseen,” read an open letter signed by 1,200 international scientists and 11 Nobel Prize winners.

Finally, public workers will also be among the budget’s biggest losers. Their salaries have been suffered steep drops relative to inflation ever since Cambiemos rose to power (having suffered a loss of purchasing power of at least 19.7 percent by the end of this year alone,  according to the Public Policy Observatory, a research body housed at the National University of Avellaneda), and it looks like 2019 will be no exception. In its message to Congress during the introduction of the budget proposal, the Macri administration reiterated the provisions of Decree 632/2018, which prohibits the hiring of new staff over the next two years -- including replacements for those who retire or leave government service. The declared goal is to reduce state employees by 2 percent.