The traumatic surge into monthly double-digit inflation, as confirmed by the 12.4 percent figure posted for August by INDEC statistics bureau last Wednesday, naturally springs to the top of the news but it is also important to look beyond that grim number to some further questions – not only a correct diagnosis of the disease but also to ask whether some of the proposed cures might not be worse, most immediately the irresponsible electioneering moves of Economy Minister Sergio Massa in the past few days. An obscene abuse of his dual role as presidential candidate and minister to subordinate economic stewardship entirely to furthering his electoral chances with spasmodic tax cuts only enhancing the lack of confidence lying at the heart of Argentina’s volatility.
Those tax cuts require more than one reading. At first sight Massa would seem to be virtually eliminating income tax (a luxury which only four oil-rich Middle Eastern states can afford in the world) while slashing IVA value-added tax in a frenzy of populist electioneering (panic or merely cynicism?). On one of the innumerable occasions when Vice-President Cristina Fernández de Kirchner rubbished the monetarist notion that printing money leads to inflation, Hernán Lacunza (the last economy minister of the Mauricio Macri administration) responded that if money could indeed be printed without causing inflation, why bother collecting taxes which are extremely unpopular – Massa would seem to be taking him at his word.
Yet Massa’s tax emancipation can also be viewed as more apparent than real, smoke and mirrors. While claiming to benefit millions of Argentines, the higher income tax floor only favours hundreds of thousands already privileged (even the old floor of 700,870 pesos represents a wage to which only a minority can aspire, never mind the 1.77 million now imposed) – little to do with social justice. In the immediate wake of INDEC’s 12.4 percent August inflation figure, Massa did announce some relief for the IVA value-added tax of 21 percent paid by everybody but even if the mechanism can be made to work, how far will 18,800 pesos go in a month of supermarket shopping?
While there is more than one reading of Massa’s tax cuts, all lead to more inflation. Taken at face value, obliterating revenue while jacking up state spending by the trillion can only augur an inflation which would beggar August’s 12.4 percent. But reducing Argentina’s tax-paying universe to some 90,000 people out of a population of 46 million may not be as drastic as it sounds – personal income tax accounts for almost 10 percent of state revenues and yet professional economists have calculated the fiscal cost of the new tax floor at 0.3 percent of gross domestic product. Massa would argue that this cost is covered – while obviously not admitting to the “inflation tax” which is augmenting nominal state revenues at accelerating speed, he has pointed to the cuts being compensated by the extension of the PAIS tax to almost all imports decreed eight weeks ago.
Which now leads us to the diagnosis of the disease. The official story for August’s 12.4 percent inflation is that it is a one-off blip (or not lasting beyond this month) stemming from the post-electoral devaluation imposed by an inhuman International Monetary Fund and that the fixed 350-peso exchange rate in force until the elections will ward off any further price surges. Yet if Massa is indeed offering tax cuts in this pre-electoral month with one hand while jacking it up with the other via heftier import levies, the latter might well be as strong a factor behind inflation as devaluation and far more permanent.
If one side of political polarisation blames the fiscal deficit for inflation and the other business greed, both are simplistic. Those who think that freezing the money supply will solve the problem forget that there are two “v”s behind inflation (not only the volume of money but also the velocity of its circulation). And while there is growing consensus towards eliminating the fiscal deficit as the root of the evil, it cannot be overlooked that prices are being raised by the private sector, for reasons other than business greed (a worldwide syndrome without causing inflation elsewhere) – the confusion of relative prices, giving themselves the benefit of the doubt when it comes to future inflation and restocking but above all, the confidence also enjoyed by spendthrift public ministries that whatever the price demanded, the money will somehow be produced. All food for thought with inflation surely public enemy number one after August’s 12.4 percent.