MercoPress. South Atlantic News Agency

Uruguay’s budget deficit soars to 2.8% of GDP; Minister pleads for ‘austerity’

Economy minister Lorenzo budget deficit has created “a vulnerable situation”

Uruguay’s budget fiscal deficit soared to 1.35 billion dollars or 2.8% of GDP last year, the highest since 2003, propped by energy costs, extraordinary one time payments and support for the recently implemented national health scheme, according to a release from the Ministry of Economy.

This is in sharp contrast with 2011 when the Uruguayan treasury managed a budget primary surplus (before debt payments) of 2% of GDP, which in 2012 turned into a deficit of 0.2% of GDP, something which did not happen since 2001 when the Uruguayan economy nosedived as a consequence of the spill over from the melting of neighbouring Argentine economy and their massive sovereign default.

The administration of President Jose Mujica argues that the unexpected red in government accounts can be attributed to the power over-cost because of an exceptional drought (Uruguay has to appeal to fossil fuel to provide for the lack of hydropower); payments of busted banks credits dating from the 2001/02 crisis and last but not least the closing down of the country’s flag air carrier, PLUNA.

However even if the extraordinary payments of last year are not included the budget fiscal deficit would have reached 1.9% of GDP, which is considered too high given the sustained growth of the Uruguayan economy during the last nine years.

The 2.8% of GDP shortfall is far worse than all the scenarios anticipated by the Uruguayan government that in the course of 2012 on two occasions modified its deficit estimates which started at 1.1% of GDP (on budget presentation), and then were modified to 1.7% of GDP and later 2.2%. The 2012 result is also quite higher than the 0.9% of GDP in 2011.

According to the release, revenue from the non financial sector was equivalent to 28.7% of GDP in 2012, which was 0.1 percentage point less than in 2011. This was particularly severe because of the poor performance of the government owned companies (monopolies) which meant that the primary result fell from 1.1% of GDP to 0.8%. “This was in a context of drought which influenced hydropower generation in the first eight months of last year and the cost of supplying energy finally was 1% of GDP higher than that financed by the utility rates”.

On the other side, 2012 expenditure of the non financial public sector increased 1.9% of GDP over 2011 reaching 29% of GDP. The national health scheme both for the labour force and pensioners demanded an additional 0.5% of GDP while one time payments to several international banks (Chemical Overseas Holdings, Credit Suisse and Dresdner Latinamerica) creditors of the defaulted local Banco Comercial represented 0.3% of GDP. Finally closing the national air carrier PLUNA demanded 0.1% of GDP. On the bright side sovereign debt payments were down 0.3% of GDP to 2.6%.

Earlier this week at the first cabinet meeting following the January holidays, Economy minister Fernando Lorenzo pleaded for ‘austerity’ from the rest of his peers and warned about the “vulnerable situation”.

In mid January the head of the Macroeconomics Desk from the ministry, Andres Masoller warned that the fiscal situation was “most delicate” and anticipated that the floors for the different income tax categories would remain unchanged even when private sector and pensioners’ income increased an average of 12.42% during 2012 in an overall 8% inflation scenario.