Argentina Braces for Painful Economic Measures Under Its New President

(Photo by LUIS ROBAYO/AFP via Getty Images)

A vendor sells newspapers showing the inauguration of Argentine President Javier Milei on the covers in Buenos Aires, Argentina, on Dec. 11, 2023.

While the new Argentine government's spending cuts and tax hikes will help Buenos Aires reduce its fiscal deficit and eventually reduce inflation, these benefits will come at the price of heightened social unrest amid worsening living conditions in the short to medium term. On Dec. 12, Argentina's new Economy Minister Luis Caputo unveiled a 10-point plan that combines spending cuts and tax hikes to severely reduce the country's fiscal deficit and lower inflation. The main measures include a devaluation of the Argentine peso by more than 50%, an increase in taxes for imports and exports, a reduction of the number of federal ministries and secretaries by half, a reduction of the fiscal transfers from the federal state to the provincial governments, the cancellation of public infrastructure works that were scheduled to begin in 2024, and an unspecified reduction in subsidies for electricity, natural gas and public transportation. Caputo also announced that the monthly payments under a welfare program for low-income Argentines will be frozen at 2023 levels while the payments under a universal child allowance will be doubled and spending on a food program will increase by 50%. According to Caputo, these measures will contribute to the government's efforts to take Argentina's fiscal deficit to zero (from around 3%) by the end of 2024, which will reduce inflation to more manageable levels in the medium to long term. This is the first package of economic measures by libertarian President Javier Milei, who was inaugurated on Dec. 10 and promised to put the fight against inflation at the core of his government's policies.

Argentina's inflation exceeded 140% year on year in October and is expected to continue increasing in the coming months. According to the Argentine government, monthly inflation will probably be above 20%-30% in the early months of 2024. During his electoral campaign, Milei said it would take his government some 18 months to align inflation with international standards.
Shortly after Caputo's announcements, the International Monetary Fund issued a statement welcoming the measures. According to the institution, "these bold initial actions aim to significantly improve public finances in a manner that protects the most vulnerable in society and strengthen the foreign exchange regime. Their decisive implementation will help stabilize the economy and set the basis for more sustainable and private-sector led growth." The Argentine government, in the meantime, confirmed its intention to comply with its debt payments to the institution.
On Dec. 13, Argentina's Central Bank announced additional measures, including a monthly devaluation of 2% and keeping the interest rate unchanged at 133%.

In the short to medium term, these measures will likely exacerbate inflation, reduce Argentines' purchasing power and maintain a high risk of social unrest. The lifting of subsidies for electricity, natural gas and public transportation (which the government said will happen over several months) means that millions of Argentines will experience a significant reduction in their purchasing power as the prices of these services increase. Additionally, increased taxes on imports will raise the prices of products that are imported or whose manufacturing requires imported intermediate goods, also contributing to inflation. While the peso's devaluation is meant to protect the Central Bank's dollar reserves and boost exports, the increased taxes on exports will somewhat mitigate the latter impact. The government's decision to increase spending on some welfare programs is meant to reduce the risk of protests by low-income Argentines, but this could still generate at least two problems. To begin with, Argentina's accelerating inflation will force the government to announce new hikes in these programs in the future, which risks extending the vicious inflation-welfare cycle that Milei promised to end. In addition, the expansion of these programs is very unpopular among middle-class Argentines who do not benefit from them and who voted for Milei hoping that they would end. As a result, the risk of social unrest will remain high in the short to medium term, as low-income Argentines are likely to protest to preserve their welfare programs while middle-class Argentines will be particularly affected by the initial package of measures.

Several organizations representing low-income families will protest the new Argentine government in Buenos Aires on Dec. 20. Other organizations also expressed their intention to protest but did not make any concrete announcements. Finally, some groups refrained from announcing protests but expressed concern about what they consider to be small increases in welfare payments in the context of high inflation.

In the coming days, the Argentine government will announce structural reforms to improve the business climate and enhance domestic competition, but Buenos Aires will probably have to compromise on many of them because of insufficient support in Congress. Caputo's Dec. 12 announcements are all measures that the Argentine government can take without parliamentary approval. However, other issues on Milei's reform agenda, such as the privatization of state-owned companies, a tax reform to simplify the system, and a labor reform to make it easier for companies to lay off workers, all need parliamentary approval. Milei's Liberty Advances party and its conservative allies do not have a majority in either of the two chambers of Argentina's Congress, so they will have to water down some of these plans to compromise with the opposition. Additionally, Milei will likely have to scrap some of his most radical reform proposals, such as eliminating the Argentine Central Bank and dollarizing the economy, as they are unlikely to pass under the current composition of Congress. As Milei struggles to gain support in Congress, he will likely use fiscal transfers as carrots and sticks to sway senators and deputies representing Argentina's provincial governments to his side. Caputo likely kept his promise that Buenos Aires will "reduce" fiscal transfers to provincial governments vague for this purpose.

Several unions, including the General Confederation of Labor, criticized Caputo's announcements and said they were currently assessing strategies to express their opposition. While workers in some sectors could go on strike in the coming weeks, the probability of general strikes will be much higher when the government presents its plans for labor reforms.