MercoPress. South Atlantic News Agency

Uruguay faces persistent fiscal deficit: Levels match end of previous administration

The Ministry of Economy, led by Azucena Arbeleche (right), has explained that the unexpected drop in inflation, which ended 2023 at 5.1%, impacted fiscal revenues, particularly VAT collection

The fiscal deficit in Uruguay has reached levels comparable to those at the end of the previous leftist Frente Amplio's administration, posing a significant challenge to the current government a few months before the next elections. The latest data, adjusted for extraordinary factors such as the pandemic, indicates that the consolidated fiscal deficit stands at 4.4% of GDP, mirroring the 2019 figures.

Fiscal Deficit Trends and Government Efforts

The reduction of the fiscal deficit was a central promise in Luis Lacalle Pou's 2019  electoral campaign and a priority for the current administration. However, the fiscal result, excluding temporary effects like the pandemic, indicates an ongoing struggle to improve the country's financial health. The Ministry of Economy and Finance had previously described the situation in 2019 as concerning, with “red lights” signaling fiscal distress.

The fiscal deficit has experienced three distinct phases during the current administration. The first phase, marked by the COVID-19 pandemic in 2020, saw the deficit peak at 5.8% of GDP due to increased health-related expenditures. When these expenses are excluded, the deficit remained close to 4.5% of GDP.

The second phase, spanning 2021 and the first nine months of 2022, involved a significant fiscal adjustment, reducing the deficit to its lowest point of 1.9% of GDP in September 2022. This adjustment primarily involved cuts to salaries, pensions, transfers, and investments, prompting concerns about the sustainability of these measures once economic recovery was underway.

The third phase, beginning in late 2022, has been characterized by increased spending. From September 2022 to May 2024, there was a fiscal deterioration equivalent to 2.5% of GDP. This increase in spending included higher salaries and pensions, as well as a substantial rise in discretionary spending such as investments.

Current Fiscal Situation

As of May 2024, the overall fiscal deficit was 4.4% of GDP, slightly exceeding the levels recorded at the end of the previous administration in December 2019. The Ministry of Economy and Finance attributes this deterioration to an “inflationary surprise,” where a faster-than-expected decline in inflation led to lower fiscal revenues and less effective expenditure reductions.

The Ministry of Economy, led by Azucena Arbeleche, has explained that the unexpected drop in inflation, which ended 2023 at 5.1%, impacted fiscal revenues, particularly VAT collection. On the expenditure side, lower inflation resulted in less reduction in real terms for certain expenditures like salaries and pensions, which grew significantly in nominal terms in 2023. However, this explanation does not fully account for the sharp increase in investment and non-personnel expenses.

The Fiscal Advisory Council (FAC) has issued warnings regarding the structural fiscal result, one of the three pillars of the fiscal rule. The FAC's report highlights a deviation in the projected structural fiscal result, indicating that the fiscal position is not aligned with a sustainable debt trajectory. The report noted that “the structural fiscal position in 2024 would be far from a situation of slack and consistency with a structural primary result that guarantees a sustainable debt trajectory in the medium term.”