Half a year of ‘shock’: the changes that Javier Milei made

In half a year of administration, the libertarian Javier Milei has managed to balance the public accounts of Argentinabut by dint of an unprecedented and fierce adjustment that has been a hard blow to the real economy, while doubts persist about the sustainability of its ‘shock’ plan in a country where poverty is growing and high inflation persists.

Milei, an ‘anarcho-capitalist’ economist who dreams of a world without a State, assumed the Argentine Presidency on December 10 and, without anesthesia, set about the task of recovering the fiscal surplus through what he himself called a ‘chainsaw’ – applying drastic net spending cuts – and ‘blender’ – slightly increasing some budget items, but below inflation, resulting in cuts in real terms.

Its initial objective was to recover fiscal balance by the end of this year. He achieved it in a few weeks, an “unprecedented” adjustment in the world, as the president boasts of saying.

“Unlike others, who with adjustments of half a point of GDP ended up flying through the air, we made an adjustment of 7 points of GDP and we are standing here and we are going to continue fighting,” Milei stated days ago in an economic forum .

From a primary deficit of 2.9% of GDP and a negative financial result of 6.1% of GDP in 2023, Argentina managed to accumulate a primary surplus of 0.66% of GDP and a financial surplus of 0.18% in the first quarter of this year.

”From the macroeconomic point of view of shock measures, the fiscal balance is very good. But the question is sustainability over time, if this can last,” Leonardo Piazza, director of the consulting firm LP Consulting, told EFE.

In the first four months, expenses on social benefits (retirements and family benefits) fell 24% year-on-year in real terms; operating expenses (state salaries, universities) fell 22%; transportation and energy subsidies collapsed 29% and 34%, respectively; Transfers to the provinces plummeted by 76% and capital expenditures (public works) by 85%.

The new Administration has also worked to reduce the monetary surpluses and the heavy liabilities of the Central Bank, cut monetary issuance to finance the Treasury, alleviate the burden of debt maturities and rebuild monetary reserves.

These are the steps that Milei believes it is necessary to continue taking to one day fulfill – he no longer risks when – with his campaign promise of lifting exchange restrictions and, then, imposing a new currency competition regime.

But the adjustment has its ‘B side’ in the real economy: activity has accumulated a drop of 5.3% in the first quarter, with sectors in resounding collapse, such as construction, hit by the stoppage of public works, and the industry, affected by the collapse in demand.

Particularly in the first four months, consumption plummeted due to the loss of purchasing power of household income, diluted by inflation that in December and January skyrocketed due to the devaluation and the release of repressed prices and then slowed down, but at levels that are still very high (289.4% year-on-year and 8.8% monthly in April). With income losing the race against inflation, the result is dramatic in social terms: poverty rose to 55.5% and indigence, to 17.5%.

Added to this is the loss of jobs, both in the public and private sectors.

The decline in economic activity could have hit its bottom in March-April, but experts are suspicious that there will be a vigorous or even lukewarm recovery in the immediate future. “Consumption, helped by credit, is already beginning to show signs of a little of reactivation, which is good news. But without a ‘base law’ (economic reforms promoted by Milei) or a fiscal pact and without good communication with the governors, Argentina is not going to grow in investments and exports. Then we will have leveled growth,” Piazza observed.