Higher economic growth, subsidy cuts and revenues from the tax amnesty program are key factors.
The primary fiscal deficit narrowed in October relative to the same month of 2016 for the fourth consecutive month. The primary deficit was ARS 32.5 billion, almost a half of the ARS 61.9 billion deficit registered in October 2016. The primary deficit accumulated over 12 months fell to ARS 327 billion in October, approximately 3.4% of GDP, down from ARS 356.3 billion in the previous month (3.7% of GDP).
Expenditures have grown significantly below revenues in October. Primary expenditures rose 6.0% year over year, marking the lowest nominal increase in the last decade, and an important drop in real terms (-13.6%). The decline was due to an important reduction in subsidies (-49.1% yoy) and capital expenditures (-27.7% yoy). These reductions partially offset the increase in pensions (42.2%). On the other hand, total revenues grew by a solid 31.8%, marking a new gain in real terms (7.4%).
The treasury is heading to beat the primary fiscal target for this year (-4.2% of GDP). Higher economic growth, subsidy cuts and the collection of penalties related to the tax amnesty program in early 2017 are key factors. During the first ten months of the year primary expenditures grew 24.2%, below the rate of expansion of revenues (30.8%).
However, to meet the fiscal target for 2018 (3.2% of GDP) is challenging due to the absence of the above-mentioned extraordinary revenues. Excluding the penalties related to the tax amnesty, the primary deficit reached 4.9% of GDP in the last 12 months, although it fell from 5.2% in September. The government will continue slashing subsidies in 2018. The goal is to reduce them from the current 2.5% of GDP to around 1.4% in 2018. We note that the government is also pushing for changes in the way pensions are adjusted, which could further reduce expenditures as a share of GDP. The bill, which has not been sent to Congress yet but discussed with governors of provinces, plans to adjust pensions on a quarterly basis by the CPI inflation registered in the previous quarter. The new formula may represent savings of around 0.6% of GDP. Those savings will lik ely more than compensate the Province of Buenos Aires on a revenue-sharing dispute (which could cost 0.2% of GDP for the federal government).
Juan Carlos Barboza