Argentina's Austerity Enters Sensitive Zone: Non-Indexed Spending Must Fall 6% Real to Meet IMF

Argentina's government sees signs of economic recovery, believing that April marked the lowest point and anticipating better months ahead. This optimistic outlook underpins President Javier Milei's negotiations with various sectors, as he remains steadfast in his commitment to fiscal surplus targets agreed upon with the International Monetary Fund (IMF).

However, achieving the IMF's goal of a 1.4% of GDP fiscal surplus presents a significant challenge. An analysis by Iaraf indicates that non-indexed primary spending, which constitutes 45% of the total budget, needs to fall by an additional 6% in real terms. With tax revenues falling short of projections, the government may need to deepen cuts to salaries, public works, subsidies, and social programs.

While pensions and child allowances have largely recovered their value compared to 2023, the focus of the fiscal adjustment appears to be shifting towards non-indexed expenditures. This includes public sector wages, infrastructure projects, transfers to provinces, social assistance, and general state operations. The Iaraf report highlights a growing tension between the surplus target and revenue collection, which has been declining for ten consecutive months.

The government's revenue projections are highly optimistic, forecasting a 6.7% real increase in tax collection for 2026. In contrast, the first four months of the year saw a 6.7% real year-on-year decrease in national revenue. For the official target to be met, revenue would need to surge by 13.2% in real terms over the remaining eight months, a scenario considered "impossible to fulfill" by Iaraf.

Iaraf's more conservative projection estimates a 2.3% real year-on-year decline in tax revenue for the year. This accounts for a projected loss in social security contributions due to the implementation of the Labor Assistance Fund in the second half of the year. In this scenario, the fiscal room for maneuver shrinks considerably, placing the burden of adjustment squarely on non-indexed primary spending.