Interview with Nicolás Dujovne, Argentina’s Treasury Minister

What was the strategy behind the fiscal reform?

Minister Dujovne: When we came to power we inherited a large fiscal deficit, a high level of public spending and a heavy tax burden. All three have to be cut but the only way it can be done is gradually because if we cut taxes very quickly then the deficit will increase. It’s only by cutting public spending can we have room to also bring down both taxes and the fiscal deficit. So, we have committed to cutting consolidated public spending, which includes federal and provincial spending, by 2% of GDP per year. We achieved this in 2017 and are on target to do the same this year. Those savings are then split, with half being used to fund tax cuts and the other half going towards fiscal deficit reduction.

Even if the speed and scale of tax cuts are limited, we were determined to highlight the fiscal path that the country is following so that the private sector has visibility. Corporate tax is being reduced, to 25% from 35% over the course of the next two years. We are also reducing employment taxes over a five-year period. We would like to move more quickly because these taxes create distortions in the economy but they also collect significant funds so we have to remove them slowly to keep control of the fiscal deficit. We have also come to an important tax agreement with the provinces that will see them reduce their gross income tax, which hits almost every part of the productive chain.

 Argentina has a chequered economic history; why should my readers believe this government’s reforms will be sustainable?

MD: For the first time Argentina is carrying out a comprehensive economic programme that doesn’t look for shortcuts. We are looking for a deep fix to the structural problems of our economy. For example, normally Argentina has reduced inflation by fixing the peso to an artificially strong exchange rate. That works in the short term but then inflation shoots up when the peso breaks free of the artificial peg and devalues. This time we are cutting inflation while Argentina has a floating exchange rate, which makes it far more sustainable.

Our public spending cuts have already taken overall spending to 40% from the 42% that we inherited. By the end of 2018 it will be 38%, which will represent the biggest voluntary reduction in public spending in Argentina’s modern economic history. Indeed, according to the fiscal responsibility law that we passed in December 2017, if Argentina grows at 3% per year then in real terms public spending will remain flat, and it will have fallen to just 32% of GDP by 2023. That would represent a massive reduction in just eight years and it would mean that with the fiscal deficit eliminated we could get rid of all the illogical taxes that hamper the competitiveness of the Argentine economy.

"this government has shown that it is brave enough to continue with painful reforms during election periods…"

The key to all of this is growth, so we are going to create more opportunities for Argentine firms to export by signing new trade deals. At the moment our existing trade deals, which are dominated by our Mercosur membership, give us tariff-free access to just 9% of the world’s GDP. Whereas countries like Chile have signed so many free trade deals that they have preferential access to almost 90% of global GDP. Moreover, the problem with Mercosur is that it imposes high tariffs on imports from the rest of the world, which ultimately makes our manufactures less competitive internationally as we are paying more for the inputs. However, Mercosur is very close to agreeing a deal with the EU that would automatically give us easy trade access to 35% of the world’s economy.

Finally, I think that this government has shown that it is brave enough to continue with painful reforms during election periods. For example, we stuck with the normalisation of utility costs throughout 2017, despite the mid-term elections that year. Meanwhile the Argentine people have shown their willingness to support us. Our north is clear but we understand that we must be patient because our political opponent is populism and if we unleash a harsh economic shock we would allow it to return. However, if we go to slowly then the economy won’t heal. So, we are taking a steady approach. The more economic benefits that we can show to the voters, the more politically sustainable our economic plan becomes.

Inflation is the historic bugbear of the Argentine economy; how are you combating it?

MD: There are many different elements of our anti-inflation policy and all are working. The principal one is cutting the fiscal deficit. So, this year public spending will grow at 13% in nominal terms. That might sound a lot to a reader in the UK, but in Argentina that’s a big cut in real terms as inflation last year was 24.8%. Controlled public spending acts as an anchor on inflation. Secondly, we are being responsible in our salary deals with public sector unions.

Also, we have stopped using the Central Bank to finance the Treasury. Under the previous government the Central Bank transferred the equivalent of 5% of GDP to the Treasury, via money printing and asset purchases. We’ve already cut that amount to 1% of GDP and by 2020 it will have stopped completely. The only reason that inflation hasn’t come down even more quickly is because we are normalising utility prices, which led to increases that support inflation. But if we didn’t normalise utility prices then we wouldn’t be able to cut the fiscal deficit so it shows that we are not trying to take short cuts. I am confident that Argentina will arrive at single-digit inflation by 2020.

Another, longer-term measure, that won’t be completed by the end of this government, is that we’re trying to restore Argentinians’ belief in the peso. Sadly, this country has a history of ripping off savers because financial repression meant they often received interest rates that were negative in real times. Today the peso depositors are getting positive real returns and, if we are consistent, that will lead to a cultural change where people are willing to save in pesos.

Around 30% of Argentines live in poverty; what is this government doing to help them?

MD: The main thing you can do to help the poor is avoid an economic crisis. In fact, the majority of Argentina’s poor are in this state because of previous crises. Just by winning the election in 2015 and returning the country to financial normality we have probably helped the country avoid a Venezuela-style problem and the resultant poverty.

"we have probably helped the country avoid a Venezuela-style problem…"

The next step is to grow. During the last term the Kirchner government didn’t grow in real terms - in fact, GDP per capita fell by 5%. This year the economy is enjoying its second successive year of economic growth, the first time that’s happened since 2011. We’ve also seen a strong rebound in employment with 433,000 jobs created in 2017 - an increase of 3.8%. As a result, poverty has fallen, so it’s clear that our economic reforms are already helping the country’s poor.

Investment grew 11% in 2017, which is a great figure. Admittedly FDI growth was lower, at 1.7%, but we believe that will reach 3% in the coming years. Indeed, international investment will get a boost from the PPP financing for our infrastructure programme. Also, you must remember that in today’s global context, annual GDP growth of 3% is solid and makes us one of the better-performing economies in the Western Hemisphere.

How important is the G20 presidency and OECD candidature?

MD: If you remember that two years ago the country was in default and now we’re president of the G20, it’s clearly a massive improvement. We’ve been holding ministerial meetings already and I think the other members are pleased with the efficiency and transparency that we’re carrying out our duty. We’re seen as an honest broker. Working in these international organisations fits very well with what we’ve been doing locally to improve our institutions. For example, the economic statistics agency, Indec, is now believed by all parties, whereas before its numbers were shrouded in doubt. Likewise, we have restored the power and independence to the gas and electricity regulators.

We are very close to becoming OECD candidates, which is an important step for the country. It will mean that we have to take formal steps with regards to international quality and standards of governance. It will entrench the changes this government makes because once we are OECD members we can’t renege on the commitments that we have made.