Slashing Public Spending is Argentina’s Most Needed Reform

Slashing Public Spending is Argentina's Most Needed Reform
In Argentina, tax pressure and public spending are at record levels when compared to the rest of the continent. (La Nación)

EspañolArgentina approved its latest income tax reform after a long battle between the government and the opposition. Mauricio Macri’s administration was able to reach the agreement and get to the end of 2016 in peace.

The mere fact that negotiations were carried out through dialogue is already good news. It means that the pillars of the Republic are starting to work again after 12 years of attacks to the most essential foundations of the rule of law.

The reform increases non-taxable minimums aiming to alleviate the tax burden on workers, which is good. However, Argentina is far from facing its real problem: excessive public spending. The media has focused on debating what is the optimal point of tax collection.

In Argentina, both tax pressure and public spending in proportion to the GDP are at record levels when compared to the rest of the region. Given that the country has accumulated years of fiscal deficit and stagnation, a reduction of both variables is necessary to achieve a sustained growth. Otherwise, the nation will continue to grow and fall, showing a trend of stagnation as we have seen so far.

Why is it necessary to lower the tax burden? Because a country, in order to grow steadily, needs private investments, which generate jobs. And high tax burdens frighten these investments.

Macri’s administration already has the proof in front of its eyes with the case of the agricultural sector. This year, the government eliminated many taxes from this industry, and for now, it is the only one that has improved and will bear fruit in 2017. That is not a coincidence.

The goverment can generate investments if it applies this prescription to other industries. But of course, this becomes difficult if public spending is not reduced.

Public expenditure is the genesis of all economic ills. As a result of this high expenditure, Argentina has an alarming fiscal deficit.

The problem is that a sustained fiscal deficit begins to negatively affect other economic variables: it drives away investments, negatively impacts employment, increases debt to finance the deficit, promotes the flight of capital, promotes monetary issuance with its consequent inflation and the list goes on.

As if this weren’t enough, Argentina not only has the highest public spending in the region, but its public services are very poor quality. Insecurity is one of the problems that worries most people. Education is not giving any good results, and the level of attrition has rocketed. Many public hospitals are in terrible conditions, and traveling on public transport can be a total adventure.

Argentina’s fundamental problem is public spending, and we should not avoid discussing it. If we do not start reducing it now, the impact of a reform on income will be attenuated.

Countries in the region that overcame the fiscal deficit did so by lowering both the tax burden, and public spending. Of course, it is also necessary to continue on the path of reducing tax pressure. The mere fact that there is a check tax demonstrates the excess we are living in.

But following the way of dialogue is right. There is also a need for a more reasonable opposition which does not raise taxes that have already been removed, as in the case for the taxes to mining.

Discussions about reinstating these taxes only violates the rules of the game, something that does not give a good signal to private investments. The opposition must hold dialogues and negotiate, but without attacking the clear rules of the game.

Otherwise, they are only making potential investors have doubts, and politics should not drive away investments that can provide jobs for Argentina.

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