Midterm elections set limit on Milei’s search for spending cuts

"No hay plata" ("There's no money") has become one of the most iconic phrases of Javier Milei's government to date. The President takes pride in having carried out an unprecedented public spending cut.

However, the markets believe that Milei won't be able to repeat this year's level of cuts in 2025, as the midterm elections will clearly set a limit on capabilities.

“People stopped eating glass a while ago. Some still claim not to understand it, but it’s not because they struggle to comprehend it — it’s because it doesn’t suit them,” fired off one minister, one of the most vocal at a recent year-end gathering in Olivos.

Milei believes he is shaping a new era, marked by a "cultural battle" and a turn in favour of libertarian ideas. He has promised to deepen austerity measures in this electoral year, but with finer precision.

Working on this is the "colossus," as Milei calls him. Federico Sturzenegger, Argentina’s Deregulation & State Transformation minister, is counting down the days to achieve the goal. According to the Asociación Argentina de Presupuesto y Administración Financiera Pública (ASAP), the leading non-governmental body in the field, during the first eight months of 2024, the government reduced public spending by 30.1 percent year-on-year, adjusted for inflation: in other words, by nearly a third.

If 2024 was the year of indiscriminate adjustment, including some 35,000 layoffs throughout the public administration, this year the government will need precision to eliminate more than 3,200 regulations that are in its sights. The scalpel is in Sturzenegger's hands.

Milei’s “chainsaw” is targeting secretariats, sub-secretariats, directorates, national funds, trusteeships and numerous state agencies. Public companies like Aerolíneas Argentinas, which Milei aims to privatise after restructuring, are also in his sights.

The President breaks down his vision into three sections: “Reflexión empírica,” “Corolario,” and “De cara al futuro” (roughly: "Empirical Reflection," "Corollary," and "Looking Ahead"). Milei insists on attacking what he calls the political and financial "caste," whom he accuses of being responsible for the long-running economic crisis.

In "Reflexión empírica," Milei highlights what he considers his most significant achievements in 2024, such as a fiscal adjustment of “15 percent of GDP.” 

Ten points of that adjustment were attributed to attempts to clean up the Central Bank's balance sheet, which still generated significant obligations for the Treasury, resulting in a net cut of around five percent of the Gross Product.

The striking aspect of the Milei-Sturzenegger duo's objectives is their belief that they can apply a similar adjustment this year, also equivalent to nearly five points of GDP. Most experts see that as unlikely, considering the demand for resources will grow as the October legislative elections approach.

“If with this adjustment we reduced the country risk from 1,900 to 600 points, the intended cuts will align us with first-world nations in terms of credit risk, especially since we’re expected to grow by six percent this year,” reasoned an Economy Ministry source.

 

Political advantage?

According to the President, the adjustment has mostly fallen on the political and financial "caste." But specialists mostly agree — and this is also reflected in polls — that the middle class and pensioners have been the most heavily impacted by spending cuts aimed at achieving fiscal balance.

Milei has a political advantage. A broad social sector seems convinced that this time the effort will be worth it, openly criticising Cristina Fernández de Kirchner, who argues that this government is imposing a “sacrifice” on the population that will be futile.

For instance, pensions and their worth suffered significant losses in the first half of the year, while the cost of services like gas, water, electricity, private healthcare and transport budgets quadrupled in some cases. According to ASAP Vice-President Guido Rangugni, "the main contribution to the spending reduction came from pensions, which represent the state’s largest expense."

"The President implemented an unprecedented drastic reduction in National Public Administration (APN) spending, aimed at eliminating the fiscal deficit and its monetary financing through the Central Bank," noted the ASAP.

Milei emphasises that he achieved a fiscal adjustment of 15 percent of GDP, asserting that around 95 percent of that cut fell on the political and financial caste.

He also focuses on another controversial topic when it comes to the opposition. According to Milei, in the second half of the year, when inflation calmed, poverty dropped by nearly 20 percentage points, down from the record 56 percent in the first half of 2024. Now, it stands at around 36 points, according to the his government.

In Milei's view, the next phase will be “second-generation reforms,” which include further trimming of a "bloated" state. He believes maintaining fiscal balance is the key to putting Argentina back on the path of growth. Sustaining that positive trend for at least 30 years will reduce poverty and create jobs, he adds.

 

Chainsaw cuts

To this end, Sturzenegger is working on identifying new areas within the state where the chainsaw can begin cutting. These measures will be accompanied by the elimination of regulations that the La Libertad Avanza administration believe hinder the economy.

Both the President and his sister, Presidential Chief-of-Staff Karina Milei, who is responsible for the political structure of libertarian party, believe that their “cultural battle” is crucial for Argentina’s future.

“We need to carry the ideas of freedom to every corner of the country. We will get this country out of the misery we have been plunged into. We work in service of a noble, true, and common cause, which is far greater than any of us. [It’s] A cause worth dedicating our lives to,” said Karina Milei in a recent public speech.

Cabinet Chief Guillermo Francos has highlighted the need to continue with austerity as a formula for achieving economic growth in the short term.

However, the outlook remains somewhat uncertain, with the opposition continuing to question the government's economic data and policies, although Milei remains confident that a victory in the legislative elections will give him the political muscle to deepen reforms and attempt “third-generation” ones.

The government is on track to close out the fiscal year with a result that many thought unlikely. The fiscal chainsaw cuts may have reached five percent of GDP, the highest level in history, and are reflected in the positive tone dominant throughout the markets. The financial fiscal surplus is estimated to be around two percent of GDP, a record high since 2007.

Given that in December 2023, the accumulated deficit was 4.43 percent of GDP, the government has managed to reverse last year’s red figures, adding at least half a point of fiscal surplus to be even more convincing for the markets.

To achieve this goal, the government applied the "chainsaw" to pensions, capital spending, and discretionary transfers to the provinces. In the case of pensioners, there was a 30- percent spending cut across the year.

Furthermore, investments in almost all infrastructure projects ceased, which, if not corrected, will lead to increased deterioration of roads, ports, and energy. Discretionary fund transfers to provinces were cut by 70 percent.

Economist Enrique Szewach recently praised the elimination of inefficient agencies and the Milei government’s fight against corruption but warned of the difficulties in extending these policies out to the provinces, which are responsible for managing a substantial part of public spending.

"The bulk of Argentine public spending that reaches people is provided by the provinces," he said, referring to budgets for education, health, and justice.

He warned that "just by touring Argentine provinces, one can see destroyed roads, collapsed infrastructure, and deficient services" – a result of “years of underinvestment and poor management.”

"The chainsaw bringing more efficiency to national administration is not extending to the provinces," Szewach warned.

This year, the Executive rolled over the same budget as the previous year, increasing certain allocations discretionary through the use of emergency decrees (DNU).

An analysis of spending so far shows how deep Milei's "big adjustment" has been.

Milei's premise is that if the National State has no deficit (meaning no more expenses than income, as is usually the case), it won’t have to print money to cover that shortfall, a practice he considers the main cause for Argentina having one of the highest inflation rates in the world.

To cut spending and maintain a fiscal surplus (i.e. more income than expenditure), the government has allocated budget increases below the inflation rate this year.

According to ASAP's analysis, the budget increased by less than 134 percent, while the year's average inflation is estimated to be between 215 percent and 224 percent.

 

State scapel

Part of the spending cut decisions Sturzenegger proposes to Milei are linked to "operations" his teams conduct unexpectedly across various establishments.

They have encountered surprising things: his team arrives unannounced at various public offices and ask about assigned tasks. In numerous cases, they found people who were unaware of their functions.

Among the areas under scrutiny are several national funds dedicated to various activities. One is the National Arts Fund, which used to fall under the Human Capital Ministry but has now moved to the Presidential Secretariat. 

If it were up to Sturzenegger, that fund would cease to exist. For now, the intention is to reduce it to the bare minimum. The same applies to several other funds.

Sturzenegger also targets the prison oversight agency, which reports to Congress and employs 500 people who monitor abuses in institutions. This agency will likely be reduced to minimum staffing levels and possibly transferred to the Security Ministry, led by the increasingly empowered Patricia Bullrich.

Based on recent observations, Minister Sturzenegger plans to advance with his scalpel. Officials from his department have launched a comprehensive scan of every entity within the National Public Administration. This includes centralised, decentralised, and autonomous agencies.

Public companies are not yet in the crosshairs, as most depend on the Economy Ministry. However, this sector has been reduced by over 12,000 positions. According to the government’s organisational map, this has already led to the elimination of nearly 200 entities.

Before taking drastic measures, the purpose and usefulness of the entity are evaluated, as well as the number of employees and the budget it consumed in 2024.

“The goal is to eliminate most of the ‘kiosks’ left behind by 20 years of Kirchnerism. We know society supports us in this crusade,” they explain near Sturzenegger.

There is strong pressure on area heads to explain the activity of the organisation, what employees do, and their skills. 

This complements the directives across the State administration for eligible individuals to start early retirement processes. So far, nearly 36,000 positions have been terminated, 12,000 of which were across public companies. Additionally, around 600 employees were dismissed after failing a new suitability test.

New restrictions for adding staff to the national public administration have also been announced. One requirement for hiring a new employee is that three people must be let go first before another can be hired — the "three-for-one" rule.

Although the entire public administration is under the scrutiny of Sturzenegger’s Ministry, some areas may undergo short-term modifications, based on the understanding that the National State should withdraw from areas and actions that can be adequately managed by provinces or municipalities.

Public works were the first to be affected by this definition. This year, housing plans, transportation, and various trusts are expected to face the same fate.