Uruguay faces persistent fiscal deficit: Levels match end of previous administration

South Atlantic News By MercoPress

Thursday, July 11th, 2024 - 9:40 PM Coordinated Universal Time

Uruguay is facing a tough challenge as the fiscal deficit has climbed to levels similar to those seen during the last leftist administration. This poses a big hurdle for the current government as they prepare for the upcoming elections. Recent data, which accounts for special circumstances like the pandemic, shows that the consolidated fiscal deficit is at 4.4% of GDP, matching the numbers from 2019.

Trending Fiscal Deficits and Actions by the Government

Luis Lacalle Pou made it a main focus during his 2019 campaign to decrease the fiscal deficit, and it continues to be an important goal for the current government. Despite efforts to improve the country's financial situation, excluding temporary factors like the pandemic, there are ongoing challenges. In 2019, the Ministry of Economy and Finance expressed worry about the country's fiscal health, with warning signs showing financial difficulties.

The government's spending gap went through three different stages since the current administration took office. The first stage, which was caused by the COVID-19 pandemic in 2020, saw the deficit reach its highest point at 5.8% of the country's GDP because of the rising costs related to healthcare. If we don't count these expenses, the deficit stayed around 4.5% of the GDP.

During the second part of the project, from 2021 to September 2022, there were big changes in how money was managed. The deficit went down to 1.9% of the country's total income by September 2022. This shift mostly included reducing pay, retirement funds, money transfers, and spending on projects. People worried about whether these changes could continue once the economy started to improve.

Starting in late 2022, the third stage saw a rise in expenses. Between September 2022 and May 2024, there was a fiscal decline of 2.5% of GDP. This upsurge in spending encompassed increased wages and retirement benefits, along with a significant boost in discretionary spending on things like investments.

In May 2024, the total fiscal deficit was 4.4% of the country's GDP, slightly higher than what was seen at the end of the previous government in December 2019. The Ministry of Economy and Finance is blaming this decline on an unexpected increase in inflation, which caused a decrease in government revenue and less effective spending cuts.

The Ministry of Economy, headed by Azucena Arbeleche, has stated that the surprising decrease in inflation, which finished 2023 at 5.1%, affected government income, especially the collection of VAT. On the spending side, the lower inflation led to smaller cuts in certain expenses like salaries and pensions, which saw a significant rise in nominal terms in 2023. However, this reasoning does not completely explain the significant increase in investment and non-personnel expenditures.

The Fiscal Advisory Council (FAC) has raised concerns about the structural fiscal outcome, which is one of the key components of the fiscal rule. According to the FAC's report, there is a discrepancy in the expected structural fiscal outcome, suggesting that the government's financial position is not on track for a sustainable debt path. The report pointed out that "the structural fiscal situation in 2024 would not be in line with the necessary structural primary outcome to ensure a sustainable debt path in the coming years."