5/26/2024 - Politics and Society

A cultural model without a fiscal rule: the relationship between fiscal deficit and financial education

By Alejo Lasala

A cultural model without a fiscal rule: the relationship between fiscal deficit and financial education

The politicians do not emerge from a bubble. In the Argentina of the 21st century, a good part of them come from the middle class and rise up once they reach public office: for instance, Néstor Kirchner, born to a postal worker father with limited means in the southern part of the country, did not earn significant income until he became the governor of the province of Santa Cruz. Similarly, Cristina Fernández, born in a precarious house with no sewer system on 4th and 32nd street in Tolosa, was even evicted during her childhood. And the current president, Javier Milei, does not stand out for a luxurious lifestyle or a wealthy financial statement, being a business economist and television panelist, combined with a history of dependent employment. In his book, he even describes various situations where he earned low or no income, despite having a degree in economics.

Politicians come from our society, today and throughout our history. And as a society, back in 1880-1900, liberal ideas prevailed over collective ones, influencing the free market, secular education, the promotion of immigration, and a liberal economy.

From the 1930s onward, liberal ideas gradually faded away in favor of a statism concerned with infiltrating and growing at the expense of individual freedoms. Economically, and perhaps encouraged by politicians, a populist corporatism began to take shape, whose characteristics can be summarized in the "macroeconomic populism" of Edwards and Dornbusch: fiscal expansionism through increased spending, minimizing the problem of inflation and disregarding the need to incur external debt. The consequences are the depletion of the Central Bank's coffers and deficit financing: the result of a cultural model without fiscal rules.

This cultural model is based on a central and redistributive state, which, through high tax rates and regulations, hinders the growth of the private sector and generates a dependency of citizens on the government. Over time, we have not only delegated our education and health to the State but also demand access to services and transportation at inexplicably low costs. As a result of inflation, the market does not function adequately, forcing us to depend on state subsidies for vacations, government-financed easy payment installments, housing access, and other needs, which become the responsibility of the current president.

Socially, we move further away from understanding that one cannot spend more than what comes in. According to a CAF and BCRA survey in 2018, Argentina is one of the worst-ranked countries in financial education globally. In that same survey, 70% admitted having trouble covering their expenses, using debt as a means of payment, and only 29% said they had saved, showing one of the lowest rates worldwide. The countries leading the survey are France, Finland, Canada, and Norway.

According to the Financial Capabilities Survey by the Latin American Development Bank, a measurement under the "Index of Attitudes and Behaviors," which shows individuals' inclination towards attitudes favorable to their financial well-being, such as their preferences towards spending or saving, whether they set long-term financial goals, whether they consider their payment capacity when making purchases, among other aspects, gives the lowest score in the region for Argentina among the countries analyzed (Chile, Colombia, Ecuador, Peru, and Bolivia): 6.2 points, with 1 being the lowest level, and 10 the highest.

Argentinians lack financial education, as empirical evidence shows. We do not know how to apply the fiscal rule due to ignorance and sometimes willfully, nor do we intend to adopt saving attitudes, and thus we do not prevent indebtedness. This can lead us to consider that resources are infinite and that payment capacity is not a primary concern when making decisions.

In politics, this has translated into 112 years of fiscal deficit out of 122 analyzed. For 112 years, the State spent more than it collected and financed itself through mechanisms that destroyed and undermined institutions from within, including public buildings, education, health, and credibility in politics itself: inflationary issuance to have unsupported pesos, the destruction of reserves, also inflationary, and public debt accumulation. Argentinians have paid part of our bus fares, electricity, gas, health, education, and many other expenses with funds from other countries or lending institutions.

It is no coincidence that we are currently in the top 25 (out of 211 countries analyzed) most indebted countries in the world. It is no coincidence that we currently have the highest inflation rate in the world. It is no coincidence that much of society, in this context, demands subsidies and low tariffs at the State's expense, free shows, state-funded tourism plans, etc. We do not understand the cause of our crisis: financial education.

One can disbelief in the intrinsic presence of the state (called libertarians), who abhor state activity in any context as it is inherently distortive, but in Argentina, the problem may not be the state's presence itself, but its harmful, destructive nature, lacking common sense and fiscal rule, and its populist, politico-partisan use as a machine that grants at the cost of debt and impoverishment through inflation: which is the tax that most directly affects the lower classes.

Milton Friedman speaks of four ways to spend money: 1) my own money on myself: I maximize the benefit and minimize the cost; 2) my own money on others, where the cost tends to be minimized, and I do not maximize the benefit; 3) other people's money on myself: I maximize the benefit and the cost does not matter; and 4) other people's money on others: I do not care about the cost or the benefit: this last one is the role of the State.

Now, in Argentina, we do not even know how to spend our own money on ourselves. We cannot be surprised by our inefficiency in spending other people's money on others. We cannot be surprised by the historical inefficiency of the State's role.

The future depends on becoming aware of this situation and taking self-control measures while educating people, in public and private institutions, in financial education. Self-control measures should address monetary issuance, fiscal deficit, and external debt. Additionally, reducing the size of the State is fundamental for balance, and therefore, to avoid needing debt as a financing mechanism.

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Alejo Lasala

I am a Political Science student at UCA and a quality analyst in the Government of the City of Buenos Aires.

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