How Javier Milei plans to reduce spending by 14% of GDP

Javier Miley He usually says that he plans to do sharp cuts in public spending as part of an ambitious austerity program to balance the budget in a country famous for its chronic deficits.

Milei’s fiscal belt tightening would focus on cut spending on subsidies for utility billssuch as gas, electricity and water, as well as in transfers from the federal government to poor provinces according to a person with direct knowledge of the campaign’s economic strategy.

While Wall Street investors would applaud Argentina’s moves to balance the government’s books, many observers doubt that the 52-year-old economist can achieve such dramatic results in such little time. Previous austerity campaigns, such as that of 2019, only led the economy to further recessionas subsidy cuts fueled inflation, reducing consumers’ purchasing power as unemployment rose.

And a cornerstone of Milei’s budget proposal — reducing overall outlays for family social subsidies nationwide and focusing on low-income households that really need them — has proven technically problematic. President Alberto Fernández’s government has long promised to eliminate spending on subsidies for the rich, but never succeeded.

Milei has discussed cutting spending equivalent to 15% of gross domestic product, but so far the figure is close to 14% as estimates continue to evolve, according to the person, who asked not to be identified, discussing Milei’s economic strategy. Either way, It would be one of Argentina’s most ambitious austerity programs.

Milei’s ideas on how to cut spending if he wins the presidential election on October 22 (and takes office on December 10) are as follows:

  • The 5% of GDP of the transfers of the federal government to the provinces.
  • He 2% of GDP will be eliminated privatizing public works.
  • He 5% of GDP will be adjusted in a review of the subsidy program directing support to households most in need, rather than businesses.
  • The 1% of GDP eliminating privilege retirement packages awarded to high-ranking government officials.
  • It will reduce the 1% of GDP selling or closing unprofitable state-owned companies.

Milei has already compiled a list of companies its management is likely to consider selling or closing. In its “top five” are Aerolíneas Argentinas, the state television channel Public TVthe state news agency Telam, the National Radio and the state energy company Enarsa.

The sale of the state oil company YPF would not occur immediately: Milei’s team would first conduct a thorough financial analysis to be in a position to sell it well above its current book value. This can take more than a yearthe person said.

Fundamentally, the Central Bank will stop issuing pesos from “day 1” of a Milei administration. If the official weight has not been adjusted by then, the government will devalue it to a level close to its current market level –the level of the parallel dollar– and will impose a fixed exchange rate.

Additionally, Milei’s team plans to send legislation to Congress to legalize free floating of the currency and voluntarily propose the dollarization.

By Editor

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