On December 12th Argentina’s new economy minister, Luis Caputo, announced emergency measures to undo the macroeconomic imbalances inherited from the previous government’s use of heterodox fiscal, monetary and trade policies, which led to triple‑digit inflation and an economic recession. The bulk of the measures concern expenditure cuts and tax rises, with the goal of reaching fiscal balance in 2024. Mr Caputo also announced a maxi‑devaluation of the peso, which will lead to significant price pressures in the coming months but will also enable Argentina to rebuild its foreign‑exchange reserves. The main challenge in the short term will be to ensure governability and contain social unrest, given that the poverty rate will increase sharply in the coming months as inflation soars.

Mr Caputo’s announcement makes it clear that the government has moderated its radical free-market economic policy agenda: there was no mention of dollarisation or of the closure of the central bank—both measures that the newly inaugurated president, Javier Milei, had espoused on the campaign trail. Instead, the measures are pragmatic and orthodox, with front‑loaded fiscal consolidation serving as the main policy anchor. Arguing that the fiscal deficit was the root cause of Argentina’s triple‑digit inflation (160.9% in November), Mr Caputo announced the following ten economic measures:

• a reduction in the number of ministries to nine (from 18) and secretariats to 54 (from 106);

• no new tenders for public works projects and suspensions of projects with tenders where development has not yet begun;

• a reduction in energy and public transport subsidies;

• a significant reduction in discretionary fiscal transfers to the provinces;

• a decline in real terms in spending on certain social programmes, but twice the spending on those that support children;

• no renewals of contracts for public employees who were hired within the last twelve months;

• a year-long freeze on public spending on adverts;

• a devaluation of the peso to reach Ps800:US$1;

• a temporary increase in import taxes and the expansion of export taxes to non‑agricultural sectors; and

• the lifting of all import‑licensing controls.

Fiscal consolidation will be a shared burden

The package is nothing short of shock therapy. The government estimates that, taken together, the measures will reduce the fiscal deficit by more than 5% of GDP in 2024, which would bring the fiscal accounts into balance and deliver a primary fiscal surplus. This would represent a dramatic turnaround from this year’s performance; we estimate the fiscal deficit at 4.3% of GDP, with a primary fiscal deficit of 2.8% of GDP. It would also far surpass the primary fiscal deficit target of 0.9% of GDP for 2024, as laid out in Argentina’s current programme with the IMF. Following Mr Caputo’s announcement, the Fund’s managing director, Kristalina Georgieva, published a social media post expressing the institution’s support for Mr Caputo’s measures, sending a strong signal that the relationship between the Fund and the Milei administration will be a co‑operative one.

More than half of Mr Caputo’s proposed fiscal consolidation is based on expenditure cuts; these measures will generate savings equivalent to 2.9% of GDP, with revenue measures accounting for the remaining 2.2%. The announcement of tax rises, especially import and export taxes, and the proposed reversal of recently passed income tax cuts (which Mr Milei supported) were unexpected, going against Mr Milei’s election promises, although the expenditure cuts were largely in line with what the government had proposed on the campaign trail.

Governability will be on the precipice

The Milei administration will leverage voters’ goodwill to push these reforms through an opposition‑dominated Congress. Some of the newly announced measures (such as the reduction in subsidies) do not require congressional approval, but others (especially those that deal with taxes) will need to overcome that hurdle. Indeed, passing unpopular reforms may prove difficult for the governing party, the far-right La Libertad Avanza, as it has few legislators in either the Chamber of Deputies (the lower house) or the Senate (the upper house).

A particular challenge for the Milei administration will be to obtain the support of legislators who are accountable to provincial governors; they are often more pragmatic and act as swing voters. The proposal to suspend all public works projects that are not already under construction will have a serious impact on provincial economies, especially amid a severe economic recession. Moreover, the plan to all but end discretionary transfers to the provinces will make it even more difficult to get governors on side; as a result, we think that Mr Milei will be forced to backtrack on these two proposals to secure governors’ support for other reforms.

Social unrest will also be a major problem for the government, as the steep peso devaluation and subsidy cuts will cause the real value of salaries, pensions and social benefits to decline sharply as inflation surges, especially in the first quarter of 2024. Although we expect the government to follow through with its subsidy cuts, it is likely to increase social transfers more than it currently expects, as rising poverty rates and the risk of politically destabilising social unrest and even looting could well put governability at risk.

The ambitious path towards fiscal consolidation laid out by Mr Caputo will give the government some room to negotiate with the opposition in Congress, although we expect that legislators will be unwilling to agree to important parts of the proposed reforms, preventing the government from achieving fiscal balance in 2024. Even so, the spending cuts and revenue measures are all larger in scale than we had anticipated, and we will therefore revise our projections to show a narrower primary fiscal deficit and a smaller overall fiscal deficit than our current forecasts of 0.7% of GDP and 2.5% of GDP respectively.

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