MercoPress. South Atlantic News Agency

Warning that Uruguay is running out of “fiscal margin”

In spite of the good performance of the Uruguayan economy academics and former ministers have warned that given the expansion of public spending and subsidies to alleviate energy prices, the government is running out of “fiscal margin” in the event of a contingency.

The Uruguayan government has repeatedly argued that it has the necessary support to confront such a situation and keep a balanced budget. But former Economy ministers and university academics question such optimism stating that the government has virtually "exhausted the fiscal cushion" and will not be able to prevent prices from escalating in the coming months. Economist Gabriel Oddone, and belonging to the economic consulting firm CINVE from where most members of the current Uruguayan Economy team come from, said that the "heterodox" measures (subsidies) can help "gain time" hoping for food and energy prices to moderate. Oddone estimated that the government already has spent the entire fiscal cushion" it had programmed for this year, estimated in 340 million US dollars equivalent to 1.5% of GDP, basically fuel subsidies for transport and electric energy generation. "This has helped prune 1.5 percentage points from the Consumer Prices Index and without them CPI would be closer to 8.7 or 9% instead of 7.2%", said Oddone. As to next year, the "fiscal cushion" was estimated in 2% of GDP, approximately 462 million US dollars, but this will be insufficient to address the 319 US dollars outlays expansion contemplated in the budget plus financing the existing subsidies. "If we face another energy crisis next year or more permanent subsidies are needed, there's no fiscal margin", added Oddone. He also recalled that on electoral years (2009) Uruguay "systematically violates basic principles of economics and fiscal policy becomes pro-cyclical". He finished saying that CINVE estimates that the "explosive" increase in food and energy prices will force inflation in Uruguay to reach a floor of 8.1% in 2008 and 7.3% next year, far ahead of the 3% and 7% targets announced by the Uruguayan Central Bank. Former Economy minister Ignacio De Posadas said that the fiscal management of the government "was good" until it announced an additional expenditure of 319 million US dollars for next year. He anticipated that all of Minister Astori's efforts "to manipulate prices will be useless in containing inflation because of demand pressure". De Posadas added that the current mechanism of salaries round for the private sector "was bad last year and will again impact on inflation this year". Luis Mosca, another former minister said that there has been a change in the international scenario with increases in interest rates and appreciation of the US dollar, which means commodities prices will begin to decline although not to their previous prices. "This should convince government to have a good fiscal cushion for contingencies, which unfortunately it is not implementing", added Mosca. Oddone finally said that the current salaries round, above productivity, will have a 0.8 and 0.9 percentage point impact on inflation this year and in 2009.