Background on Javier Milei and His Impact
Javier Milei, an Argentine economist and politician, has recently taken on the role of overseeing fiscal management in Argentina. His government faces a significant challenge: meeting the International Monetary Fund’s (IMF) demand for a higher primary fiscal surplus. This commitment implies either increasing government revenues or further reducing expenditures, with the promise of eliminating taxes “to the extent that the surplus allows.”
Understanding the New Fiscal Targets
Argentina’s Economy Minister, Luis Caputo, announced that the government aims for a primary fiscal surplus of 1.6% of GDP this year, slightly higher than the IMF’s target of 1.3%. In 2024, under Milei’s predecessor, the primary surplus reached 1.8% of GDP, while the overall surplus was 0.3%. These figures reflect exceptional revenues generated by the post-December 2023 devaluation’s PAIS tax and substantial spending cuts.
Implications for Government Income and Spending
To achieve the new target, Milei’s government must either boost revenues or deepen spending cuts. In 2024, the government already implemented the largest spending reduction in two decades, with a 26.4% real interannual cut across budget items.
According to the IMF report and analysis by the Instituto Argentino de Análisis Fiscal (IARAF), tax revenues are projected to fall by 0.5 percentage points of GDP in 2025, partly due to the high base set by the PAIS tax increase following the devaluation.
On the spending side, SBS projects a 0.3 percentage points of GDP increase, driven by higher pension spending (due to formula changes) and offset by lower energy subsidies. In real terms, total spending is expected to grow by 3%.
Challenges Ahead
Despite the government’s commitment, several challenges lie ahead, according to SBS:
- Income Challenges: The loss of the PAIS tax will necessitate reinforcing other revenue sources. Lower export duties might put pressure on revenues, although higher energy exports could partly offset this. However, global volatility due to U.S. tariffs has led to lower commodity prices.
- Debt Management: A larger surplus could facilitate interest payments without relying on the market, but it may not be sufficient for capital repayments.
Experts’ Perspectives on the Government’s Decision
Economists, including Emiliano Libman from Fundar, agree that the government’s decision aims to demonstrate a stronger fiscal commitment. A larger surplus could potentially ease debt servicing without tapping the market for capital repayments.
