Argentina’s past, present, and future is a remarkable case study in the virtues of Austrian economics, restoring hope to a once prosperous nation.
December 23, 2024
By: Bobby Casey, Managing Director GWP
The headlines read, “Milei Announces a Historic 90% Reduction in Taxes,” and I nearly spit my coffee out. From a country that was mired in hyperinflation and corruption, to see a headline like that was unbelievable.
The election of Javier Milei, even symbolically, was an incredible thing. And while purists will always find something wrong with everyone, practical people who will always favor less government, less regulation, and less taxes are of course cheering on this direction.
Alas, the headlines were a little deceptive. It’s not to say that Milei wouldn’t slash taxes by 90%, but that isn’t quite what’s on the menu. Still, Milei just celebrated one full year in office, and there is much to celebrate.
In the spirit of Charles Dickens and the Winter Season, let’s take a look at Argentina’s Past, Present, and Future.
The Ghost of Argentinian Past
Within the last 100 years, Argentina had a time of incredible prosperity. It’s sad how those years got memory-holed. Similar to how the years of Afghani and Iranian women were walking around in western attire, walking unaccompanied by men, and taking pictures in front of their universities. Or like how the US once had a very affordable and simple private healthcare system that didn’t involve insurance.
The memory hole holds a lot of treasures to be sure, and that vault is kept sealed tight by power hungry people like Juan Domingo Peron. Mr. “Third Way” fascist murdered all of Argentina’s good fortune with spending, welfare, and inflation, ushering in a sort of economic death spiral this country would not escape for 77 years thereafter.
In 2001, Argentina defaulted on its debt of USD$95 Billion, and in 2014, Bloomberg reported about then President Cristina Fernandez de Kirchner:
“Since her re-election in 2011 when capital flight almost doubled to $21.5 billion, Fernandez has put into effect more than 30 measures to keep money from leaving the country. Her policies have included blocking most purchases of foreign currencies, taxing vacations abroad and online purchases, banning units of foreign companies from remitting dividends, and restricting imports.”
Those measures failed to keep money in Argentina, and her plan to pay off their sovereign debt with reserves also flopped.
Mauricio Macri tried his hand at gently moving away from all the spending and printing. The outrage at his austerity policies combined with a series of uncontrollable and unfortunate events had the “slow removal of the band-aid” approach blow up in his face, and de Kirchner found herself back at the helm.
In 2020, in the wake of a massive drought, uncertain trade climate, and unaffordable interest rates, Argentina was in hot water:
Argentina is suffering with double-digit unemployment, inflation above 50%, and more than a third of citizens living below the poverty line. Additionally, the government is running low on foreign reserves and must renegotiate its debts with private creditors and the International Monetary Fund, which gave the previous government a record $56 billion bailout. Investors see a very high chance of a sovereign default.
And in response to this, the new administration leaned heavily into higher taxation.
That’s the past of Argentina’s past, present, and future, and the chains are loud and heavy. It is what Javier Milei inherited, and the mess he set out to clean up.
The Ghost of Argentinian Present
“AFUERA!” was the chant we heard around the world, when Javier Milei took office last December… and “AFUERA!” we got.
The “chainsaw” he symbolically touted, and figuratively took to the government agencies was an immediate promise delivered in the first year: his administration cut 34,280 redundant jobs.
“In particular, the national administration (one of the few sectors whose jobs had grown over the last decade in Argentina) experienced a drop by over 20,000 jobs, which saved US$3.82 billion,” estimated the Ministry, which is headed by Federico Sturzenegger, the architect of many of Milei’s key reforms.
Milei’s job chainsaw… tore through contracts issued under the Framework Law, with a decrease by US$2.06 billion. As for the permanent and temporary method, dismissals helped the government “save” US$1.13 billion, whereas in service agreements they added a further US$630 million, said the Ministry.
The original omnibus bill set forth didn’t quite pass, but he did get some concessions:
Although the law heralds a significant shift away from the budget-busting economic model of the country’s left-leaning Peronist movement, it has been significantly watered down from Milei’s original proposal, which boasted over 600 articles.
For instance, Milei entered office planning to privatize more than three dozen state companies, including big names like the flagship carrier Aerolíneas Argentinas, the national bank and state oil company. In the end, he managed to get approval for the sale of just six lower-profile public firms like the Buenos Aires sanitation provider.
But his wins are nothing to scoff at!
- Inflation is down: While there is still a long road to haul, he’s throttled it by virtue of simply cutting a lot of the inflationary policies of yester-administrations. He inherited 211% inflation, and he’s still in the 200% range, it’s tapering off and that’s a good sign for the coming year.
- Budget surpluses: Since January, the new government has been able to achieve a budget surplus every month (for the first time since 2008), although a slight deficit was recorded again in July, which the government explained with seasonally higher expenditure.
- Investments in raw materials and energy: One of the wins in Milei’s omnibus package was the investment promotion package RIGI (“Régimen de Incentivos para Grandes Inversiones”, “Incentive System for Large Investments”). It offers 30-year tax concessions and foreign trade facilitation for larger investments (over USD 200 million) in energy, raw materials, infrastructure, and technology.
Since the law came into force in July, the first foreign companies have already announced investments, following the growing interest of foreign companies in Argentina since Milei took office. The country risk for Argentina on the international markets has also decreased significantly compared to the previous Peronist government, although it is still above the initial level of Mauricio Macri’s presidency (2015-2019). - Reprieve in the rental markets: The Milei administration relaxed the tenancy laws that stymied rental supply. Prior to that deregulation, the laws required lease terms be at least three years, inflation adjustments were only allowed one time annually, and contracts must be in Argentinian Pesos. Understandably, landlords saw this as a losing proposition and withheld their properties. These regulations made vacancy more profitable and preferable. The lifting of these regulations didn’t bring the prices down on rent, but did increase the supply.
Milei also eliminated a lot of subsidies, especially in the energy department. So the cost of renting in Argentina is still high, but all Milei did was clear out the smoke and mirrors masking the economic reality of real estate. The costs will need to come down through deflation and more supply, which is the hope.
While there’s a lot of work ahead, Argentina is much better situated than it’s been in a long time. The present of Argentina’s past, present, and future is poised to deliver an antidote to the decades long curse.
The Ghost of Argentinian Future
This brings us to the 90% tax cut headline. Sadly, at this time, Argentina is not cutting 90% of the tax burden on individuals and businesses. It is, however, cutting the number of taxes by that much. Imagine having so many different federal taxes, that you could eliminate 90% of them, and still not cut 90% of the tax burden on the country. The sheer redundancy and frivolity!
Deregulation & State Transformation Minister Federico Sturzenegger clarified on Radio Mitre:
“To lower the tax burden by 90 percent, we would have to slash spending by 90 percent. We have cut 30 percent, which is historic but he was talking about our having a very complex revenue structure with a whole bunch of petty taxes which bring in very little so now is the time to begin simplifying it and concentrating on the most important taxes.”
Even so, this would be a win, if for no other reason than to serve as a simplification of the tax code.
A big thing coming down the pike in 2025 is the end of what is called “cepo”. Translated to English, it means “clamp”. Wikipedia defines cepo as:
“Cepo” in Argentina refers to the country’s strict currency controls, essentially meaning “exchange clamp” in Spanish, where the government limits how much foreign currency individuals and businesses can purchase, often implemented to stabilize the Argentinian peso by restricting access to dollars; it’s a colloquial term for the official capital controls imposed by the central bank.
Milei announced that in 2025 the cepo will be lifted:
“With us, it will end next year, and forever,” Milei promised. The current cepo has been in place since 2019 and states that Argentines can legally buy up to US$200 per month at the bank. In recent years, there have been even more restrictions on who could purchase foreign currency, excluding those who receive government welfare or energy subsidies, among others.
He of course will continue his fight against the central bank, and for further austerity measures.
It took 77 years to get to where Argentina is today. It cannot be fixed in 7 months. But the course can be corrected, and gains can be measured in a presidential term. Watching Argentina is like watching an episode of “My 600 Pound Life”. A very unhealthy obese person contends with the untennable nature of their condition, but fights every measure to fix it every step of the way.
Milei is carrying the torch for Argentina’s bright future. And much like Dicken’s Christmas Story, the future can be better. Argentina’s past, present, and future can be a wonderful case study in Austrian economics for the world to observe.
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