The shortest month of the year does not necessarily have the lowest inflation and this February looks like being no exception with the 3.6 percent posted by INDEC statistics bureau on Thursday (although, if it does turn out to be the lowest figure of 2021, then both the government and the country are in deep trouble). This latest monthly figure takes annual inflation over the 40 percent mark, vastly exceeding the official forecast of 29 percent enshrined in the 2021 Budget – normally this hypothesis is a random number never taken seriously but Economy Minister Martín Guzmán has made it a benchmark around which he entrenches his entire economic policy.
Given that this benchmark has painted the government into a corner, there are only two possible outcomes – that inflation continues to outrun the forecast or that the Frente de Todos administration pushes enough of the many buttons at its disposal to make the 29 percent stick – and neither outcome is desirable. Annual inflation topping 40 percent (and heading closer to 50 percent at this rate) would obviously drive a coach and horses through any incomes policy, Socio-Economic Council or no Socio-Economic Council. But the price of success in ending the year at 29 percent (or 31 percent as more recently floated by Guzmán) may well carry a heavier and more irreversible cost.
The latter conclusion stems from the favoured solution leading to a bigger problem. If inflation is overtaking the official forecasts, it is in turn being outstripped by the revenue figures, at least on the basis of the January data registering 53.3 percent growth from the first month of 2020 and the first fiscal surplus in 15 months – exactly the direction in which the government intends to head. Unlike some of his more primitive comrades who place their faith in price controls (which have never worked since the Code of Hammurabi in Babylon four millennia ago), Guzmán sees the roots of inflation as macro-economic, taking reduction of the fiscal deficit seriously. So seriously that, left to his own devices, he might well stand to cut the deficit by margins comparable to the preceding Mauricio Macri administration despite all the ravages of the coronavirus pandemic. But quite apart from his policies having to co-exist with an election year (with, for example, extreme pressure to swell the subsidies for public utility billing to hold them at their hugely popular levels by limiting increases to a quarter of inflation), there is a major difference with the Macri administration – the latter’s reduction of the deficit came alongside tax cuts and debt service whereas Guzmán proposes to achieve the same results with opposite methods.
It is precisely here that the solution leads to a potentially bigger problem – improved fiscal solvency meets the dream of every orthodox economist but puffing up an already excessive tax burden would make the cure worse than the disease. Moreover, electoral factors lead to this revenue build-up being combined with an income tax relief package of 40 billion pesos for salaries under 150,000 pesos, thus piling up the pressure elsewhere. Not only is there the new wealth tax but the electricity and gas subsidies will be withheld from business companies, thus steeply increasing their costs. “Soak the rich” policies might correspond to social justice and even find favour in an outside world aware of the extreme inequalities of Latin American incomes. Yet these policies of sponging up any surplus in these pandemic times into Treasury coffers at the expense of investment while also crowding the private sector out of credit markets with government bonds at steep interest rates could prove as noxious for economic health as the crassest populism.
Looking at the fine print of the February inflation data, the worst news is actually the best – the biggest culprit was “restaurants and hotels” (up 5.4 percent), which is not only predictable in a summer holiday month but offers that battered sector some sorely needed relief. Yet the far more strategic item of “food and beverages” (up 3.8 percent) and a core inflation of 4.1 percent both topped the monthly average, pointing to further trouble ahead.
Only 10 months into the year, it is still far too early to say how the inflation projection of 29 percent or any forecast will turn out. An election year is always a political year but if a week is a long time in politics, as the late British prime minister Harold Wilson said half a century ago, it can be a long time in economics too.