How fiscal irresponsibility has shattered the economy of Argentina and other countries

Brazil doesn’t have to look far to learn how fiscal irresponsibility can tear a country’s economy apart. Inflation in Argentina is close to 100% and Peronism, with its lack of interest in reducing the fiscal deficit, is one of the main factors that led to this chaotic scenario.

“What really destroyed Argentina was Peronism, a political organizational system where there is a very large force of union movements,” highlighted economist and doctor in international relations Igor Lucena. “The political union organization in the country considers corporatism as the superior good: the fiscal costs don’t matter,” he described.

Absorbing government expenses that cannot be disassociated is part of the country’s political-economic organization which, according to the specialist, is very difficult to combat without a radical economic plan, such as the Real Plan in Brazil.

“Peronism transformed Argentina, which was one of the richest countries in Latin America, into one of the poorest,” stressed Lucena.

Within this system, the country today led by the Peronist Alberto Fernández prints money uncontrollably, spends more than it collects and still borrows in dollars – therefore, it needs to return it in dollars. This becomes almost a vicious circle, in which currency devaluations make debts unpayable.

Across the Ocean, another recent event involved former prime minister Liz Truss, the fifth in the UK since 2016. The ‘dance of the chairs’, in which she stayed for just 45 days, was also related to tax issues.

Truss’s initial proposal was to create a large tax cut, which would benefit even the richest, within a mini-budget, with a streamlined State, very different from Argentina’s. However, to cover the hole in the government’s accounts, the idea was to borrow billions. The fear of an increase in public debt worried investors and made the pound fall to the lowest value in history against the dollar.

After investors showed pessimism in relation to Truss’s economic plans, the British government announced changes, but they were not enough to keep the newly arrived prime minister in power. She resigned, and the swift movement of the UK leadership may have prevented further economic tragedies.

Greece, for example, despite eagerly recovering part of its international economic credibility, is still experiencing the consequences of fiscal irresponsibility from more than ten years ago.

According to a recent survey by the Marc Institute, the biggest concern of the Greek population is the rising cost of living (for 84.5% of Greeks). This problem is way ahead of tensions with Turkey (44%), for example.

In the face of galloping inflation, which reached 12.1% – one of the highest in the European Union, according to Eurostat -, it was especially in the field of energy that the increases were the most spectacular: gas prices quadrupled in a year (+ 332%) and electricity rose 30%. As winter approaches, many Greeks fear they won’t be able to keep warm.

When the economic crisis broke out in 2010, rates rose and the country could no longer finance itself on international markets. In 2015, after the radical left government of Alexis Tsipras came to power and the confrontation with Brussels to reduce the austerity measures, rates reached close to 11%.

It took time for Athens to regain confidence. The political change in July 2019 also had a positive impact on investors, who found the conservative government of Kyriakos Mitsotakis to be less unpredictable, promoting lower taxes on property, businesses and social contributions. But there is still a long way to go to account for the losses of so many years.

Given these examples, monetary policy in Brazil is efficient and even had three months of deflation this year.

For Lucena, the country’s biggest risk today is fiscal immaturity. “We cannot spend more than we earn,” he warned.

The economist pointed out that what holds Brazil back is exchange rate and monetary maturity, but there is a risk of following paths like those of the countries mentioned in the report if there is total lack of control over fiscal spending.

“That is why it is so important that this transitional PEC that is being announced has a limit close to R$70 or R$80 billion and is only for this year. And that, next year, we will have a change from the spending ceiling to long-term debt control”, summarized Lucena.

With information from Gazeta do Povo/Mariana Braga