Argentine economists loyal to the government’s economic ideals meet in Buenos Aires on Monday for a three-day congress of the Economic Association for Argentine Development.
One of the issues they are likely to be chewing over is one of the big questions Argentina faces after October: how to keep growing, but spend less.
Cristina Fernández, the president, looks on course for a landslide victory in October 23 polls, if a primary election this month, in which she trounced rivals by nearly 40 points and won with more than 50 per cent of the vote, is anything to go by. That means people want the status quo – high growth – to continue, and that, so far, has meant high government spending.
But with the world facing choppy times ahead – Argentina is exposed if there is a global slowdown because it relies heavily on trade with Brazil and China, though prices for its key food commodities are strong – it will need to rein in spending that has been growing at above 30 per cent this year.
As Luis Secco, an analyst, noted:
According to recent official data … the National Public Sector had a primary surplus in July 2011 of 338 million pesos, well below the saving registered in the same period of 2010 (during July 2010, the primary saving had been 3.913bn pesos). The reason for this deterioration is very simple: for the sixth consecutive month, the year-on-year rate of growth in primary spending exceeded that of total income … While primary spending expanded at an interannual rate of 35.3 per cent, total income grew at 20.3 per cent.
The government last week announced a deal had been reached between the government, labour and business representatives to increasing the minimum wage by 25 per cent to about $520. Fernández says Argentina’s minimum wage is both the highest in the region and offers the highest purchasing power. That is good news in helping many combat inflation that private economists, in the absence of credible inflation figures, believe is running at more than 20 per cent.
Alberto Ramos, an analyst at Goldman Sachs, noted that the deal was lower than the 41 per cent originally sought by the main labour confederation, CGT but
…the 25 per cent minimum wage increase is much higher than any reasonable estimate of productivity growth and is therefore likely to contribute to keep consumer price inflation entrenched at around 20 per cent in 2012 and to put added pressure on the authorities to depreciate the peso at a faster pace after the October presidential elections.
So perhaps it is not surprising that the government is already crunching some numbers ahead of next year. According to this report in El Cronista Comercial, a business daily critical of the government, the president has already imparted orders to ministries to keep public spending rises to 20 per cent compared with last year when putting in their requests for the 2012 budget.
Argentina has made a habit in recent years of deliberately underestimating such things as growth, so as to be able to reassign the “bonanza” that is gained when revenues are higher. The government also has used so-called “super powers” enabling it to reassign budgetary funds without recourse to Congress.
Reining in runaway public spending will be one of the politically unpalatable conundrums facing Fernández in her likely next term. The government’s advice to other countries facing crisis, such as in Europe, has always been not to tighten belts but to spend to spur demand. How much Argentina – which for now remains outside international capital markets – will be able to follow its own advice remains to be seen.
Source: Financial Times Blog