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When Balancing the Budget Hurts the Economy

Summary:
Immediately after taking office, the president of Argentina, Javier Milei, signed a decree and reduced the number of ministries from twenty-two to nine. Although tens of thousands of public employees have been disposed of since then, the celebrated reduction is still symbolic, because it only ordered some ministries to absorb others and did not reduce public employment significantly. Milei has managed to achieve five budget surpluses so far. Public works have ceased to be financed to an important degree. Milei closed some government agencies, cut some subsidies, and almost completely stopped discretionary money transfers to provinces. However, Milei expanded the welfare state—including the multiplied pesos (in real terms) for various welfare programs.Likewise,

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Immediately after taking office, the president of Argentina, Javier Milei, signed a decree and reduced the number of ministries from twenty-two to nine. Although tens of thousands of public employees have been disposed of since then, the celebrated reduction is still symbolic, because it only ordered some ministries to absorb others and did not reduce public employment significantly. Milei has managed to achieve five budget surpluses so far. Public works have ceased to be financed to an important degree. Milei closed some government agencies, cut some subsidies, and almost completely stopped discretionary money transfers to provinces. However, Milei expanded the welfare state—including the multiplied pesos (in real terms) for various welfare programs.

Likewise, right from the start, and against his promises, Milei increased taxes on fuels, imports and foreign currency purchases, and then, in May 2024, extended the scope of a tax to subscriptions of special bonds, and purchases of foreign currency for the remittance of profits and dividends. Furthermore, a tax package to be enacted soon restores a category of income tax. True, Milei reduced a few tariffs and lowered taxes on car dealerships, but his tax hikes are much more significant, do not benefit the economy, and should not be seen as a way to escape the crisis.

Regulations and cartelization

It should be noted that regulations can be as destructive of productive output as taxes are, so a policy of taxation with less regulation renders a higher monetary return than the same with more regulation. For this reason, any State might find it appropriate to move in the direction of a more pure taxed and deregulated economy in order to succeed in the international scene. Indeed, deregulation seems to be the hallmark of Milei’s presidency. His labor reform will also serve to facilitate formalization vis-à-vis the State and get more people entering the legal market, which will help to collect more taxes. Undoubtedly, to decrease the counterproductive effect of regulations relative to that of taxes can help to achieve all the surpluses that Milei wants.

With a decree, Milei deregulated the economy to some extent, removing or modifying hundreds of laws. The removal of various price controls has had some positive results in some markets, but the overall benefits of such measures (as well as the cutback of some subsidies) are still limited in a largely cartelized economy. For instance, this is the case in private healthcare, where, after the removal of price control, companies were compelled to lower their prices according to imposed criteria following only four months of increases in a context of notable inflation. To the contrary, the laissez-faire response to accusations of cartelization should be to continue the process of deregulation instead of imposing barriers against free pricing. Compulsory cartelization of industries means granting monopolistic privileges, so freeing prices in this situation means removing a policy that addresses previous interventions in regulating the industries—which restrict competition, discourage investing, deprive consumers of a better satisfaction of their needs, and distort the free allocation of market resources. The regulation problem can be partially dealt with once the law “Bases” is enacted. The bill includes privatizations, deregulations, labor market fluidity, and consolidation of more power in the executive branch.

Surpluses and budget

Surpluses are very rare in our statist world, they happen when more money is collected in taxes than spent by the government over a period of time. A surplus could be hoarded by the government or liquidated through deflation. If seventy pesos are taken from the milk industry and only forty are spent on paper, taxation is the larger burden, paying not only for the spending but also for the hoarded or destroyed pesos. The milk industry’s loss should be considered when the government imposes burdens in the budgetary process. When expenditures and receipts differ, the fiscal burden on the private sector can be approximately measured as the greater of the two.

However, the government burdens the public twice: it appropriates the resources of the private sector first by inflating the money supply and then by taxing back the new money. If surpluses are used for repaying government debts, as Milei actually intends to do, not only insult is added to injury, because debts are also imposed on taxpayers, but the deflationary effect is impossible. And if they are used for redeeming debts held by banks, the deflationary effect will not take the form of a credit contraction and will not correct maladjustments brought about by the previous inflation—in fact, it will create further dislocations and distortions.

In short, surpluses as well as expenditures should be deducted, because both extract funds from the private sector. Total government expenditures or total government receipts should be deducted from the NNP, whichever is higher. This will show the approximate impact of fiscal affairs on the economy, a more precise estimate would compare total depredations with gross private product (a measure developed by Murray Rothbard which means gross national product minus income originating in government and government enterprises).

The correct response to surpluses should be cutting taxes. But if Milei has not cut taxes in general, returned any money to where it came from, or burned money to reduce the supply, surpluses remain inflationary. To favor the economy, fewer resources should be diverted from the productive sector to the public one. In February 2024, Milei declared that he will cut taxes once they stabilize the economy and there are resources to spare. How many resources does he need? Then, in April 2024, Milei expressed the idea of freezing public spending, so that as the economy starts to rebound and grow, the size of spending in terms of GDP will fall. But why not cut spending further? He also said that the myriad of taxes will move to a simplified system in which there will be about four taxes that are “payable” and “understandable,” and the State will be 25 percent of GDP. But why 25 percent and not less?

As Rothbard indicated, in our age of government deficits, conservatives—and it seems that Milei too—prefer budget balancing to tax reduction and “oppose any tax cut which is not immediately and strictly accompanied by an equivalent or greater cut in government expenditures.” Certainly, cutting taxes may result in an increased deficit that requires more debt. Now, being taxation an illegitimate act of aggression, any opposition to cutting taxes is impermissible and undermines any commitment to private property. Rothbard concluded, then, that the time to oppose expenditures and call for drastic slashes is when the budget is being considered or voted upon.

While balancing the budget can be good if it is through less taxation and less spending, Milei is balancing it with more taxation rather than with more cuts in spending. And as the peso is a forced-currency for transactions that is actually rejected by the market, and its value continues to be artificially increased relatively to the dollar, which is used for savings, Milei’s decelerating inflation and balancing the budget are favoring comparatively more State agents and welfare recipients, and also bondholders and the banking system profiting with his fight against inflation. Hence, his policies are hurting the economy and the savings of Argentinians by revictimizing the productive people. Besides, by keeping price controls on exchange rates, his actions become even more detrimental to the same people.

In view of the forced-revaluation of the peso, and the stagnant productivity, many people—especially the middle class and retirees—have to resort to their savings to cope with the situation—which also discourages investments. Therefore, Milei’s manifest desire to attract foreign investment is in direct collision with the fact that his actions are counterproductive for the very Argentine investments.

Surpluses are part of the money supply, and no money disappears from the money supply unless the monetary unit ceases to exist or fiduciary media used as money disappears in a fractional-reserve system. The proper response is to continue pushing down tax rates, but this is not what Milei has done. His surpluses are funds diverted from the productive sector to plans that do not involve public spending, that is, to other activities of the government such as cleaning up the balance sheets of the central bank and the Treasury—and his fight against inflation is harming the productive people who are forced to finance a fight for an unwanted currency already rejected by the market for many years.

According to Milei, “for the first time in Argentina, the righteous do not pay for the sinners.” But as a Yiddish proverb says, “a half-truth is a whole lie.” Instead of alleviating Argentinians from taxation and an annoying currency, he is making the productive people pick up the lion’s share of the tab.


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