Procyclical Fiscal Policy in Argentina: Drivers and Channels of a Long-Lasting Marriage

Francisco García Posleman and Julian Folgar

No 10942, Policy Research Working Paper Series from The World Bank

Abstract: Fiscal policy can play a critical role in mitigating business cycle volatility. However, between 1990 and 2022, Argentina was one of the most procyclical countries globally. This paper scrutinizes Argentina’s fiscal policy conduct throughout the business cycle, pinpointing procyclical budget components and estimating the cyclically adjusted primary balance, incorporating transient and structural factors. The study reveals a significant decline in Argentina’s cyclically adjusted primary balance. It shows that Argentina’s fiscal procyclicality stems primarily from expenditure policies, particularly those related to pensions and public wages, setting Argentina apart from its peers. Furthermore, through an in-depth analysis of Argentina's procyclical pensions and public wage policies, the paper finds that both have been influenced by the “price” effect, while the “quantity” effect has been particularly relevant for the public wage bill in recent decades. Additionally, Argentina’s unconventional taxes exacerbate procyclicality. These contributions hold significant implications for policy makers, offering valuable guidance in designing more effective policy levers to achieve fiscal policy objectives, including macroeconomic stabilization.

Date: 2024-10-03
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