Even with Brazil’s decisive run-off tomorrow, the New England economist Dr Hale’s roving eye never strays far from Argentina. He writes:
“My country was founded on the principle of ‘No taxation without representation’ (a keystone of the cause for which my famous ancestor Nathan Hale died) and I’m starting to have my doubts as to how fully it applies to Argentina. Sure, there is formal compliance in the shape of the budget obtaining stormy passage in the Lower House this week to sanction the various revenues, even including the so-called ‘retentions’ – long omitted as export duties, not taxes (although there seems to be plenty of discretion with the percentages). But what I see is a whole bunch of new taxes sprouting from this government precisely because it lacks representation. The road to zero deficit seems heavily weighted in favour of more revenue rather than less spending and the obvious cause is the need to square the Peronist governors in order to secure majorities in Congress. And talking of zero deficit, I saw something by an emerging market guru about three zeroes (zero budget deficit, zero expansion of the money supply and zero exchange rate intervention) – looking at the September export-import figures, could there be a fourth zero on the way with the trade deficit?”
“There is much in what you say and the protests from the sectors carrying the tax burden have been long and loud – not least from a drought-stricken agriculture with export levies no longer limited to a shrinking percentage on soy (which the original budget draft proposed raising to 33 percent). Conventional wisdom has it that Argentina is among the most overtaxed countries on the planet, especially when measured against the quality of public services – a tax burden magnified by the size of the underground economy. And indeed if we take the peak figure for public spending as a percentage of the gross domestic product (42 percent in 2015 and only minimally reduced under the Mauricio Macri presidency) and divide it by the estimated two-thirds of the economy operating formally, this would mathematically yield a tax percentage of around 63 percent (always assuming a balanced budget and zero inflation, which do not apply to Argentina).
“Yet at the same time Argentina has long been a casebook study for the syndrome of poor companies and rich businessmen with an excess of indirect taxation and a dearth of direct. The heavily criticised personal assets tax is a step toward reversing this trend but the massive return of the export levies is a step back to taxing production instead of income – taxation needs to be reformed, not increased.
“Regarding the lopsided balance between tax increases and spending cuts, I’m unsure whether or not the negotiations with the provincial governors could have been handled with more skill. On the one hand, there is the feeling that more could have been done to call their bluff since the budget is absolutely essential to their survival – there can be no federal revenue-sharing without revenue. But that survival could also be short-lived with the general elections now exactly a year away from today – these governors are running a big political risk in facilitating what is widely considered an austerity budget imposed by the International Monetary Fund (IMF). In any case it is unlikely that we have seen the last of the negotiations and amendments regarding the 2019 budget.
“Last month’s trade surplus was certainly welcome news after 20 months in the red – the result of recession and devaluation rather than the protectionism espoused by your Donald Trump. The first trade surplus with Brazil in four years announced a fortnight ago (even if a minimal US$6 million) had already pointed strongly in that direction. September’s surplus of US$314 million is not the product of any export boom, despite devaluation, since these actually fell (by -4.8 percent) to just above US$5 billion but imports plunged even more sharply (by -21.2 percent). The biggest falls were cars (-51.4 percent, pointing to a consumer slump) and capital goods (-40.1 percent, indicating that investment is discouraged by prolonged recession). The brightest spot is the 122-percent surge in fuel exports, suggesting that Vaca Muerta shale is starting to come on stream at last with the end in sight for the energy deficit.
“As for the three zeroes, all have yet to materialise and to speak of zero exchange rate intervention is already inaccurate, strictly speaking, because there is the famous band between 34 and 44 pesos (due to rise next month). Indeed the two monetary zeroes cancel each other out because if the pesos really do dry up, people in these hard times will have no choice but to shed some of that legendary dollar hoard second only to Russia (estimated at around US$60 billion with some US$21 billion lying around in loose cash). This in turn would be sure to drive the exchange rate below the lower range of the band, thus allowing the Central Bank to buy as many dollars as it likes (as opposed to the limit of selling US$150 million daily beyond the upper range) and expanding money supply – this would end both zeroes at a stroke. These forced sales of locals should also combine with a speculative inflow from abroad lured by those 70 percent interest rates but there should be no lack of other sources to pump up the dollar – a better (even bumper) crop, that Vaca Muerta shale and foreign tourist bargain shopping (with far less lost to Miami and Chile). Could all this lead back to the peso appreciation which was a prime cause of this year’s crisis?
“The money markets are thus returning to stability but this is far from being a win-win situation except for those with a one-track mind regarding the dollar. The purchasing-power of wages is expected to suffer a double-digit loss this year (and pensions even more), which will obviously leave the population at large disgruntled. But more affluent sectors are far from happy – 84 percent of the executives at last week’s IDEA symposium in Mar del Plata felt that the economic situation has worsened this year (with widespread whispers about dropping Macri as candidate in favour of popular Buenos Aires province Governor María Eugenia Vidal). Not even the presumed beneficiaries of devaluation such as farming and the regional economies sound bullish with cost inflation, astronomic interest rates and tax hikes rapidly overtaking their windfalls. All credit to Macri for biting the bullet like no president in decades but there is an election in exactly one year from today.”