Objective, Subjective, and Intersubjective Reality (the Narrative)
The release of the 2025 budget by the President in Congress aims to reinforce the message of a regime change after a week of intense activity, marked by vetoes and near misses with the ratification of the veto on the pension law, the rejection of the decree to increase funding for the intelligence agency, and the approval of the new education financing law, which has already been announced will be vetoed. All of this has occurred while the ongoing struggle between the National Government, Provinces, and Municipalities has been dominated by efforts to curb the growing revenue collection to offset the decline in national resources: due to the reduction in revenue sharing and the halt in discretionary transfers.
The message is clear: zero deficit is non-negotiable, and that makes sense in a country that has broken its currency and credit after years of abusing monetary financing and bankrupting the Central Bank. The debate revolves around how the costs are distributed, the political feasibility, and the macroeconomic backdrop of the adjustment. The new fiscal rule states that any increase in revenues beyond what is projected will not be allocated to additional spending; similarly, if revenues fall short of projections, there will be a reduction in expenses that are not automatically adjusted for past inflation, which accounts for approximately 40% of total spending.
The fiscal rule looks challenging given the optimistic macroeconomic outlook and the revenue projections included in the document. It’s important to remember that the National Budget includes a projection of revenues and an authorization of expenditures, and that over the past 20 years, revenues have consistently been underestimated, followed by budget expansions financed either through higher revenues or through Central Bank funding and/or other sources.
This time, the revenue projections include two opposing effects.
On the one hand, there’s a slight decrease in total revenues from 16.7% to 16.5% of GDP, despite the fact that 1.0% of GDP from the “País tAX” will be lost in 2025. The difference is explained by an increase in non-shared Income Tax revenue due to changes passed in the Fiscal Package (0.3%), the Fuel Tax (0.35%), and export duties (0.47%).
On the other hand, the macroeconomic scenario anticipates inflation ending this year at 104% (1.2% monthly between September and December), and reducing to 18% in 2025 (1.4% monthly). On average in 2025, inflation rises by 30%, GDP by 5%, revenues by 32.9%, and primary spending by 34%, while interest payments increase by only 14%. The dollar is projected to close 2024 at $1,020 (with a 2% crawling peg) and 2025 at $1,207 (with a 1.4% crawling peg), and there is no mention or indication of an exit from the currency controls or the Blend.
In terms of GDP, the level of primary spending remains at 15.1% in 2025. The interest payments account is reduced from 1.5% of GDP to 1.3%, and the financial result of the National Public Sector is balanced. A notable detail: the National Public Administration, which includes agencies like ANSeS and PAMI, shows a deficit of 0.3% of GDP.
Now, with the country risk dropping to 1,360 basis points—thanks to the flows from the tax amnesty, some help from ANSeS, and international factors—the dollar credit market remains closed beyond the Repo they are working on. The peso credit market continues to rely on currency controls. Under the current scheme of a 2% monthly crawling peg and Blend, the Central Bank (BCRA) stopped buying dollars in June, net reserves turned negative again by USD 4.8 billion, and the cleanup of the BCRA’s peso debt was done by shifting it to the Treasury. In consolidated terms, peso debt (including Bopreal) has practically returned to the levels of November before the devaluation. In other words, while the flows adjust, the stock of debt continues to weigh heavily.
The transfer of BCRA debt to the Treasury will add 1.5% of GDP to the interest account for 2024 (recorded as debt) and an additional 3% of GDP next year. This scenario assumes the full rollover of maturities and does not account for the crowding in effect towards the private sector that the Minister is now promoting as the ANKER Point. The shift of debt from the BCRA to the Treasury means that what previously required the BCRA to issue pesos when banks dismantled remunerated liabilities due to credit demand now requires an issuance (from the pesos deposited by the Treasury in the BCRA) to cover any potential non-renewal of 100% of the LECAPs maturities. The safety net was prepared before last week’s auction, although it ultimately wasn’t needed.
Let’s remember that expansive fiscal adjustments are those that coordinate a collapse in country risk, and consequently, a drop in the domestic interest rate. In the current program, the drop in domestic interest rates, despite high country risk—which explains the expansion of credit—is based on currency controls. Far from being contractionary, the monetary program has become quite loose and is the driving force behind the economic expansion that the government envisions for 2025.
While local actors trust the Minister, foreign banks factor in the possibility of a full or partial removal of the Blend between October 2024 and the first quarter of 2025 in their dollar outlook. The IMF indicates that Rodrigo Valdés (Director of the Western Hemisphere Department) is stepping down as negotiator, but this does not imply a shift in the negotiations. Without explicit political backing (the government continues to bet on Trump), a new program will require a clear stance on the exchange rate and monetary framework that allows for the gradual removal of capital controls, which implies a recalibration that is absent from both the government’s narrative and the numbers in the Budget Project. For now, the tax amnesty flows provide some relief, and there is unlikely to be significant movement before November 5th, when the U.S. election is decided. With the outcome in hand, the government will need to adjust its narrative (the intersubjective reality, in Harari’s terms) to the objective reality imposed by the budgetary constraint, which indicates that with currency controls, an overvalued exchange rate, and country risk at 1,360 basis points, “there are no dollars” to sustain growth.
