The primary fiscal deficit in 2017 was lower than the official target.
Revenues growth outpaced that of primary expenditures for the first time since 2004. Primary expenditures grew 21.8%, while revenues increased by 22.6% (28.1%, excluding the penalties collected in 2016 and 2017 linked to the tax amnesty program). The increases in pensions (40.9%), social benefits (30.9%) and wages (24.9%) were partially offset by a 22.5% reduction in subsidies (mostly related to energy consumption). In real terms, primary expenditures fell 2.4%, and total revenues dropped 1.8% (an increase of 2.6%, excluding the above mentioned extraordinary revenues).
The interest bill increased relative to 2016, due to growing debt and less reliance on central bank financing. Net interest payments increased to 2.2% of GDP in 2017 from 1.6% in the previous year. As a consequence, the nominal federal government deficit expanded to 6.1%, up 0.2% from the deficit registered in 2016.
The government ratified its commitment to further reduce the primary deficit in the years ahead. The treasury minister, Nicolás Dujovne, reaffirmed that the next steps are to reduce the primary deficit to 3.2% of GDP this year and to 2.2% in 2019. As there will be no revenues related to the tax amnesty in 2018, we estimate a needed fiscal effort of 1.1% of GDP to reach this year’s target. . In our view, the 2018 target can be achieved through recent changes in the way pensions are adjusted, continued efforts in slashing subsidies and higher tax collection due to the expected economic recovery. For 2019, we estimate a primary deficit of 2.4% of GDP, slightly above the official target (2.2% of GDP).
Net public debt remains manageable, in spite of large fiscal deficits. We estimate that gross debt will likely reach 67.6% of GDP in 2019 from an estimated 61.3% in 2017 and 64.8% in 2018. Excluding central bank and social security holdings of treasury bonds, net debt will likely reach 38.4% of GDP from an estimated 32.4% in 2017 and 35.7% in 2018, a still low level.
Juan Carlos Barboza