MercoPress. South Atlantic News Agency

“Fiscal orthodoxy”, once Cristina K becomes president

Faced with the growing turbulence of global financial markets and Senator Cristina Fernandez October 28 presidential bid Argentine President Nestor Kirchner has instructed his advisors to promote domestic consumption and ensure economic expansion, but as of next November “fiscal revenue must be higher than expenditure” according to reliable political sources in Buenos Aires.

The new international scenario will mean for Argentina a credit contraction and higher financial costs which could have an impact in the country's four years running expansion at an annual rate above 8%. To avoid this President Kirchner told his closest economic advisors he will only tolerate an excess of public spending over fiscal revenue until the end of the month of October when hopefully his wife will be elected president with no need of a run-off. Under Cristina Kirchner Argentina apparently will return to "fiscal orthodoxy" and a genuine budget primary surplus above 3.5% of GDP, which has been Argentina's trump card and foreign investors' reference index. So far this year Argentina's public spending increased 42% while fiscal revenue 30%, meaning that the primary surplus has dropped to less than 2.5% of GDP, but according to Argentine sources as of November, following President Kirchner's instructions, expenditure and revenue must begin to balance. International investment banks are increasingly signaling uncertainties about Argentina's fiscal solidity and forecast a collapse in the current rates of growth. Banks are concerned that with fiscal deterioration, making effective Argentine sovereign bonds could weaken considerably. Another worrisome issue for the Kirchner administration is inflation which seems to have overshot all official targets and attempts to manipulate the indexes, --currently under judicial investigation--, and is estimated by private sector analysts to end 2007 closer to 20% than below the two digits repeatedly announced objective. The fact is demand has out stripped supply and with insufficient investment the provision of energy and quality of public utilities, with rates frozen since the 2002 crisis, has significantly deteriorated in spite of the Kirchner administration's insistence that there's no "energy crisis" but rather an extraordinary recovery of the economy. Economist and former president of the Argentina's Mortgage Bank Pablo Rojo argues Argentina for the last seven to eight years has been investing far below its needs, thus contributing to inflation. The Kirchner administration has failed in its investment policy both in public infrastructure as in conditions for private investment, "this is the government's main policy weakness when analyzing the prices issue", says Rojo. "The inflationary issue is worrisome with rates far higher than those released by Indec (the Census and Statistics Office) and will probably end above 15% in 2007", said Rojo adding that "Argentina is facing shortages in all sectors and the energy complications are only worsening the overall picture". Inflation fears were emphasized this week when President Kirchner announced that tax revenue in July had jumped 37.7% compared to a year ago, the steepest since December 2005. However VAT, with a hike of 48.7% over last June, was the star tax in the increase. Officials argued it was evidence of greater consumption, more credit and higher customs revenue plus improved revenue collection. But all economists and tax collectors also know it's the most sensitive of levies to inflation. During 2007 the increase in VAT revenue had been fluctuating between 21 and 34% so the almost 50% hike was a surprise. "This is evidence of an undoubtedly high inflation. The economy is growing at 8% but consumption at 8.5% in constant prices so there's no way it can be attributed to an improvement in revenue collection", said Guillermina Guglielmetti from Data Risk consultants. "It's a good revenue index which means consumption is strong and the economy is growing, but government spending is increasing at an annual rate of 50% and there's no possible revenue that can stand it", said Daniel Artana from the Latinamerican Economic Research Foundation, FIEL.