Procyclical Fiscal Policy in Argentina

Industry Overview - Argentina has exhibited exceptionally high fiscal procyclicality and GDP volatility, ranking among the most volatile economies globally, with economic recessions occurring approximately 33% of the time over the past seven decades [9] - The country's fiscal policy has historically been highly procyclical, characterized by persistent fiscal deficits that exacerbate economic fluctuations and hinder stable growth, ranking among the top four nations in terms of public spending and GDP cyclicality correlation over the past 22 years [9] - Public spending in Argentina rose significantly from 25% of GDP in 2005 to 41% of GDP in 2016, primarily driven by recurrent expenditures, outpacing revenue and leading to fiscal imbalances, liquidity constraints, and debt restructuring [9] Fiscal Policy Analysis - Argentina's fiscal procyclicality stems primarily from expenditure policies, particularly those related to pensions and public wages, with both influenced by the "price" effect and the "quantity" effect, especially for the public wage bill [2][13] - The cyclically adjusted primary balance (CAPB) in Argentina has significantly declined, with discretionary policies being more pronounced during economic booms, and the country's heavy reliance on agricultural commodities exacerbates procyclicality [2][17] - Argentina's unconventional taxes, such as export duties and financial transaction taxes, exhibit a negative correlation with the economic cycle, contributing to fiscal procyclicality [16][80] Public Spending Breakdown - Argentina's public wage bill has displayed strong procyclicality, driven by both "price" and "quantity" effects, with the number of public servants and their average wage showing pronounced procyclical behavior at both national and subnational levels [15][46] - Pension spending in Argentina is highly procyclical, influenced by erratic indexation mechanisms and the "price" effect, with the real value of benefits strongly linked to the economic cycle [14][64] - Public investment and consumption in Argentina have exhibited strong procyclical tendencies, with correlations of 0.59 and 0.61, respectively, over the past two decades [41] Tax Policy Analysis - Argentina's traditional tax sources, such as CIT, PIT, and VAT, exhibit a relatively acyclical policy stance, with correlations between changes in tax rates and real GDP being positive but not statistically significant [76] - Unconventional taxes, including export duties and financial transaction taxes, contribute significantly to Argentina's tax revenue, with export duties showing a weak but negative correlation with the economic cycle, indicating procyclical behavior [80] - The tax structure in Argentina deviates from international standards, with unconventional taxes accounting for nearly one-third of total tax revenue, limiting the effectiveness of traditional tax rate cyclicality analysis [72] Structural Fiscal Balance - The structural budget balance (CAPB) in Argentina has deteriorated significantly over the past decades, even prior to the conclusion of the commodities super-cycle, indicating the presence of procyclical discretionary policies [17] - During the commodities super-cycle, cyclical revenues from commodities-related export duties contributed nearly 1.1% of GDP in additional receipts, with a hypothetical stabilization fund potentially generating revenue equivalent to 2% of GDP between 2006 and 2008 [102] - Argentina's fiscal policy has exhibited a procyclical nature, failing to effectively stabilize the economy, with expansionary fiscal policies during economic upswings hindering improvements in savings and raising sustainability concerns [111]