Argentina’s powerful left has vowed to fight austerity measures set out by the new maverick libertarian President Javier Milei after his government pledged to halt new public works, halve government ministries and slash subsidies in an attempt to balance the budget next year.
Union leaders called urgent meetings as Milei announced more details of his “shock therapy” plans, while Axel Kicillof, the governor of Buenos Aires province from the left-leaning populist Peronist movement, promised: “We are going to fight boldly . . . we will have to be much more creative and much more militant.”
Milei’s new government will reduce transfers to provincial governments, increase import taxes to 17.5 per cent and restore personal income taxes cut by the outgoing government, according to announcements on Tuesday and Wednesday, as it pushes to quickly eradicate the estimated budget deficit of 5.2 per cent of GDP.
Union founder and campaigner Juan Grabois described economy minister Luis Caputo as a “psychopath on the verge of massacring his defenceless victims”. He said on X: “Do they seriously think people aren’t going to protest? . . . People won’t allow themselves to be led to slaughter.”
Milei’s government argues the reforms are badly needed in the face of persistent deficits. The country also faces inflation expected to top 200 per cent this year, empty government coffers and a looming recession.
Presidential spokesman Manuel Adorni told a press conference on Wednesday: “This government has not been left a patient with toothache. We have found a patient in intensive care on the verge of dying.”
Milei’s plans won a cautious endorsement from financial markets as his government revealed t its plans for the crisis-hit economy, beginning on Tuesday with a currency devaluation of more than 50 per cent.
Argentine sovereign bonds rose by the most for two years after Caputo announced a list of economic measures, with the benchmark 2035 bond adding 1.3 cents to 34.9 cents on the dollar on Wednesday, according to Bloomberg.
In a pre-recorded television message on Tuesday evening, Caputo dwelled at length on the dire state of the economy but was short on detail. The message was delayed several times, with local media reporting that it was being re-recorded.
“There is no more money,” Caputo said several times during his address.
After campaigning on a pledge to take a “chainsaw” to the state, close down the central bank and swap the peso for the US dollar, Milei quickly pivoted to economic orthodoxy once he had won the election.
Economists described the initial measures that followed his Sunday inauguration as a relatively conventional set of spending cuts and tax rises to balance the budget.
The IMF, to whom Argentina owes $43bn, was quick to welcome the “bold” measures but some economists expressed disappointment that Caputo had not gone further.
Carlos Melconian, a former president of the state-run Banco Nación, said his plans were milder than expected: “So far, he has just swapped the chainsaw for the blender.”
A breakdown provided by the government on Wednesday estimated that revenue-raising measures would yield 2.2 percentage points of GDP, while spending cuts would deliver 2.9 percentage points, moving the overall budget next year close to a balance.
“The fiscal adjustment is aggressive, though risks surrounding execution remain in a difficult political situation,” said analysts at Citi. “Keeping capital controls for longer may also be helpful to manage the short term.”
Argentina has artificially fixed the peso’s exchange rate since 2019 and created a complex web of controls and taxes on imports and exports. The Milei administration aims to phase these out and to unify the exchange rate, but says it needs to move gradually.
Tuesday’s announcement devalued the peso to 800 to the dollar at the official rate, 54 per cent less than the previous week, but still some way off the levels at which the US currency trades on the flourishing black market. On Wednesday, the black market dollar jumped again to 1,100.
The central bank said that it would implement a crawling peg regime from now on, devaluing the peso’s official rate by just 2 per cent a month, in an attempt to anchor inflation, which is expected to rise sharply after the devaluation.
Milei has already warned that the coming months will be worse for Argentines before the situation improves. Analysts at JPMorgan predict a recession next year, with GDP falling by 3 per cent, and add that “risks are skewed to the downside”.
With more than 40 per cent of the population in poverty, the government announced it would try to offset the impact of the spending cuts on the poorest by increasing the value of food cards by 50 per cent and doubling child benefit payments. Payments from the biggest welfare programmes will be frozen at 2023 levels.
Milei’s government faces big challenges in winning legislative support. His La Libertad Avanza political movement, founded only two years ago, is far short of a majority in congress, even after forming an alliance with former president Mauricio Macri’s conservative PRO party.
Milei’s spokesman promised on Wednesday that the central bank would stop printing money to fund the deficit. But economists said there were still questions about whether it could successfully deal with a pile of more than $20bn of short-term debt issued to local banks, and how Argentina would find $4bn it needs to pay the IMF and bondholders by the end of January.
Additional reporting by Ciara Nugent
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