August 23, 2014
Back to black?
Budget surplus mooted at price of doom and gloom
For perhaps the first time ever in this presidency an official other than President Cristina Fernández de Kirchner herself has announced good news ahead of the event — Cabinet Chief Jorge Capitanich began the week by forecasting that January’s budget figures would be printed in black ink for the first time in ages. Just when black has faded out of the presidential wardrobe, it is apparently making a refreshing reappearance in a fiscal scenario dominated by red and green (not to mention blue) for far too long.
Or so Capitanich would have us think — seeing is believing, of course. Yet Capitanich placing his credibility on the line (scant though it may be) and the steady gains for the peso against both the green and blue shades of dollar in the last fortnight seem too much of a coincidence. The Central Bank is continuing to withdraw billions of pesos from circulation at a pace which could almost halve money supply expansion from the 35-40 percent of recent years — forcing the banks to shed most of their dollar futures and bonds has created the leeway to sterilize the local currency at that rate
As last week’s column asserted, the government does finally seem to have succeeded in buying time and it is a question of what it finally intends to do with it.
One of the best ways of making that January surplus promised by Capitanich more permanent would be finally to implement the “fine-tuning” promised by CFK after her 2011 landslide some 28 months later by downsizing the subsidies for transport and public utilities. Last year’s close proximity between the three figures for the fiscal deficit, the fall in Central Bank reserves and the subsidy bill was highlighted by some economists to imply that the problem was basically the latter — the insistence on subsidizing transport means that the soaring fuel import bill (the biggest negative change in the equation in recent years) not only translates into a loss for the national economy as a whole but specifically for the Treasury.
Weeding out these subsidies would not only be fiscally healthy but also socially corrective — as well as federalist, given how much of the benefit accrues to this prosperous metropolis. The post-devaluation spurt in an already high inflation was obviously harshest for the lowest incomes (just think of those poor pensioners who have had to pay price rises well in excess of 11 percent for their groceries far ahead of their retirement benefits rising by that percentage at the end of March).
And whatever the respite gained for money markets, there is no happy ending for this year’s real wages. The government’s populist laxity has finally landed it between a rock and a hard place. Allow the trade unions to project the brand-new official nationwide inflation index of 3.7 percent in January for the rest of the year and a chaotic wage-price race potentially ending in hyperinflation is unleashed — defend a ceiling of, say, 25 percent and purchasing-power crumbles, thus shrinking the consumer market at the same time as soaring interest rates are hitting investment. Given this choice, a real wage loss of up to 10 percent seems the only possible outcome.
Damage limitation here will surely centre around whether or not employment levels also suffer — the more so because in the last six years job creation in the public sector has grown at over twice the pace of the private, a trend which the slightest attempt at fiscal consolidation would make unsustainable. The government is bent on holding down wage increases in the public sector (including the provinces) more than anywhere else.
The prospect of shrinking purchasing-power strikes at the very core of the Kirchnerite “model,” whose main thrust (amid countless variations) has always been an electorally successful consumer-led growth fed by real wage gains year after year while Argentina rode the global commodity price boom — if the price was inflation, all the better since it compelled people to spend instead of save. But since neither investment nor productivity was ever given priority over the consumer boom, this model effectively mortgaged the future — a future which is rapidly turning into the present. The disincentives for investment and productivity killed any chance of supply keeping up with demand — inflation (in the form of the pesos printed to fund a growing fiscal deficit) has thus spiralled from the point where it encourages spending to a level where it erodes purchasing-power.
These problems have been accumulating for so long that their solutions only make things worse in the short run. Thus the government was unanimously urged towards last month’s devaluation by the full chorus of orthodox economists in order to save the competitive health of industry in general and regional economies in particular. And quite rightly too but it is wishful thinking to imagine that a significant devaluation is possible without any inflationary consequences. Ditto for the subsidies. It is sheer folly to subsidize the most energy-guzzling (and hence richest) households while the stunted transport fares and utility rates contribute massively to the disarray of relative prices which is cancer for the economy. And yet bringing these prices closer to their natural levels would obviously be inflationary too.
Not only is inflation worse in the short term. The orthodox economists forecast that only if their medicine is taken (rising interest rates, honest inflation data, wage restraint and sorting out all pending foreign debt), the reward would be a stagflation which would make the cure seem worse than the disease — inflation of around 35 percent and possible negative growth which could be as steep as -3% along with further devaluations of 20-25 percent (although both the foreign trade surplus and Central Bank reserves would then pick up). What these economists are not saying is what would happen if their recommendations are not followed, perhaps because they cannot — the most unimaginable chaos could result. Which is probably why most of these policies are being implemented by the CFK administration under leftist Economy Minister Axel Kicillof while protesting the contrary.
On the price front, space precludes serious analysis this week but just one comment from this columnist’s neighbourhood — by far the most outrageous price increases in our area are coming from a greengrocer of Andean immigrant origin who does not seem subversively anti-democratic or even greedy but simply confused.