Expectations improved after the post-electoral announcements
After winning the mid-term election, President Macri outlined his future policies in a short and clear speech on October 30, 2017. He announced that his government will pursue policies aimed at reducing poverty, opening the Argentine economy to the world, fighting inflation and reinvigorating growth.
He proposed the immediate discussion in Congress of tax and expenditure reforms, a negotiation with governors to agree on joint efforts for fiscal consolidation, and the removal of distortions that have been preventing competitiveness and retarding productive investment. He also announced negotiations with employers and labor unions on labor rules and regulations.
In addition, he made a forceful appeal to all political forces to address and correct the pitfalls of political institutions in order to reassure independence of the judiciary and the effectiveness of legislative activity in Congress. President Macri also requested a coordination of efforts between the executive branches of the national and the provincial governments to reduce government expenditure, eliminate fiscal deficits and improve the supply of public goods, particularly in education, health care and security.
The day after his speech, the ministers presented draft legislation on taxes, labor reform and social security regulations that will be discussed in Congress over the coming months. The proposal regarding federal tax reform includes a gradual reduction of corporate income tax rates, employers’ contributions to social security taxes and the financial transactions tax. At the same time, it includes taxation of financial rents and a realignment of excise taxes on luxury goods and goods that generate negative externalities. For the time being it doesn’t pay to speculate on the probable effects of the tax reform because it may suffer significant changes in the course of the discussion in Congress. But our preliminary assessment is that the proposed changes intend to address the right problems created by the current tax system, although at a very slow pace. Therefore, no great impact should be expected over the next two years.
The discussion of salaries and adjustment of pensions will be key to help the Central Bank reduce and anchor inflation expectations. So far, salaries and pensions have been adjusted using indices that reflect past inflation. The intention of the government is to adjust them in line with future inflation. This will probably be the most difficult negotiation for the government, both with labor unions and the opposition in Congress. At the same time, it is the topic that Macri’s government will push more forcefully because it is crucial to achieving the inflation targets and transforming the current recovery into sustainable growth.
Our first impression, as well as that of the markets, has been positive and reinforces the optimism reflected in our previous quarterly forecast, which predicts 3.6% GDP growth and 16% inflation in 2018, and 4.5% GDP growth and 13% inflation in 2019. On the inflation front, the official targets are more ambitious. In our view, given the projected fiscal deficits, the official inflation targets are non-attainable, as in 2017. A larger reduction in inflation would require a much stronger fiscal consolidation effort.
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