2023-12-04 19:44:00
The orthodox fiscal and monetary adjustment shock planned by president-elect Javier Milei, together with the “correction” of relative prices (such as fuel or public service rates) suggests a depreflation scenario, that is, a fall in economic activity. with acceleration of inflation rates, according to a report by the Scalabrini Ortiz Center for Economic and Social Studies (CESO).
“There is going to be stagflation, because when you do the fiscal reorganization that is going to have a negative impact on economic activity. That’s why I say that the only wallet that will be open is Human Capital to support the fallen. Inflation has to do with what you did in monetary policy 24 months ago and that has already been decided, it has already been done. “Monetary policy acts with delays,” Milei said recently.
Nevertheless, Andrés Asiaindirector of the CESO, indicated that the correct name for the consequences of Milei’s economic program is depreflation, a term coined by Milton Friedman, father of monetarism and one of the libertarian references.
“Stagflation is stagnation with inflation, a situation in which Argentina already finds itself. “When economic activity falls in an inflationary context, we speak of preflation.”Asiain explained.
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In this sense, inflation reaches 142.7% annual and according to the latest data available from Indec, in September the Monthly Economic Activity Estimator (EMAE) recorded a drop of 0,7% in the interannual comparison, and remained unchanged compared to August in the seasonally adjusted measurement.
Perspectives
Meanwhile, the Organization for Economic Cooperation and Development (OECD) projected that Argentina’s GDP will contract 1.8% in 2023 and 1.3% in 2024.
“What is coming in the coming months is not encouraging at all. The breaking of price agreements under the idea that the State should not intervene, together with the expectations of an exchange rate jump in the official exchange rate, “They produced price increases that reached up to 40% in some cases”indicated the CESO report.
In this regard, Asiain said that “We see an acceleration of inflation in these two months for more political reasons linked to the dismantling of price agreements and a signal in the context of the change of government giving free rein to businessmen.”. But this not justified by the costs because if we analyze the evolution of the dollar and costs, there is no strong increase. Even parallel dollars have fallen and yet prices have accelerated.”
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In short, according to the Study Center, inflation projections for the coming months place the Consumer Price Index (CPI) back on track. above double digits.
The consequences of Milei’s economic plan
“The loss of purchasing power of income and the orthodox shock of spending adjustment and the increase in rates, fuel, food, and exchange rates to the detriment of salaries, will generate a recession scenario in the coming months, but not a solution for inflation“, they stated from the CESO.
It is in this framework that they foresee a depreflation scenario. “Although the spending cut will be less than promised during the campaign, adjusting public spending by five points of GDP does not seem easy to achieve. Milei promises to do so by cutting spending on ‘politics’, reforming the State and eliminating public works.”
For reference, the personnel expenditure of the entire National Public Administration was $2,940,920 million accumulated as of October 2023, the 1.8% of GDP.
“Although a sharp cut in salaries and public employment is expected from a State reform that is still being studied, “It is difficult for this item to decrease significantly”he added.
“Capital spending, which can be understood as a proxy for public works, represented 1.2% of GDP in October. However, eliminating it completely might have undesirable effects on the economy in general, and on the objective of achieving fiscal balance in particular,” he specified.
“First of all, Capital spending is one of the State expenses that generates the greatest dynamic effect on economic activity., something that in economic literature is known as the multiplier effect. There is abundant empirical evidence that capital spending has a multiplier greater than unity, which means that for every point that this spending grows, activity grows more than proportionally,” the CESO stated.
It should be noted that the multiplier effect also acts in the opposite direction, that is, a reduction in public works induces a more than proportional reduction in economic activity.
Stagflation: what should be invested in according to specialists
It was also highlighted that collection is usually pro-cyclical due to our tax structure, in which a relevant part of taxes depend on consumption and income -VAT, Income taxes, Gross Income, etc. – and not so much regarding wealth or heritage.
“In short, if we say that the elimination of capital spending might generate a more than proportional drop in economic activity, and that therefore, revenue collection will also fall, The paradox might arise that the adjustment in spending as a tool to achieve the long-awaited fiscal balance is not as effective because tax revenues also fall. Hence, the adjustment in spending must be greater than what was initially foreseen, to compensate for the drop in revenue caused by its contractionary effect on economic activity,” the report added.
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