Argentina Draws Plan to Slash Fiscal Deficit, Slow Inflation

  • Last year's deficit was widest in 30 years, Prat-Gay says
  • Government will take gradual approach to reducing shortfall

Argentina intends to reduce its fiscal deficit to 1 percent of gross domestic product and bring down annual inflation to about 5 percent by the time newly-elected President Mauricio Macri finishes his term in 2019.

The government will take a gradual but firm approach to tackling the budget shortfall, aiming at reducing it by 1 percentage point this year from 5.8 percent of GDP in 2015, the widest in 30 years, Finance Minister Alfonso Prat-Gay said at a news conference Wednesday. That gap increases to 7.1 percent of GDP when tax rebates are included, he said. 

The government also pledged to slow inflation in 2016 to a range of 20 percent to 25 percent, from about 27 percent last year.

Andres Borenstein, an analyst at BTG Pactual, said Macri was moving carefully with efforts to cut spending as he’s likely to face opposition from sectors of the society and a Congress he doesn’t control.

“It’s positive that they’ve set targets and plan to reduce the deficit,” he said by phone from Buenos Aires. “It seems that they’re being more ambitious with inflation than with the deficit which seems reasonable to me because you can’t be ambitious in everything.”

Former Buenos Aires Mayor Macri won the election pledging to quickly unravel President Cristina Fernandez de Kirchner’s economic policies, which combined currency, price and trade controls with as a loose monetary stance. The government will try to close the deficit by cutting energy subsidies by 1.5 percent and reducing spending by 0.8 percent this year, Prat-Gay said.

“We inherited a complicated situation from a fiscal and an inflation point of view,” Prat-Gay said. “The previous government posted a record tax revenue last year and still had a deficit.”

Argentina will end the practice of funding the deficit through central bank transfers to the treasury, which amounted to 78 billion pesos ($5.8 billion) last year, Prat-Gay said. While the government lowered tariffs on soy exports by 5 percentage points to 30 percent, it still expects revenues to grow in local currency as the peso devalued nearly 30 percent against the dollar after Macri allowed it to float freely.

Inflation has already shown signs of slowing after spiking late in November before Macri took office, Prat-Gay said. The government expects price increases to slow to about 1 percent a month by the second half of the year, he said.

The government will find a way to make up for an additional 100 billion pesos ($7.4 billion) in lost revenue related to decisions that benefit workers and vulnerable families, Prat-Gay said. Those included raising the threshold and brackets at which workers begin paying taxes and cutting value added tax on essential goods.

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