You might look at the astronomical growth in federal government debt and say, ?Surely, our government leaders have to scale back spending at some point. They must realize we can?t afford to maintain spending at levels that far outpace our ability to pay.?
That?s a nice wish. But a new Business Week article tells the sad tale of Argentina, which defaulted on its foreign debt as recently as 2001. Despite the recent memory of a currency collapse, the South American country?s leaders have failed to learn their lessons.
Kirchner has lavished billions of dollars on subsidies for food, fuel, and electricity, sending state expenditures up by some 30% annually since she took office two years ago. The problem is, tax revenues have been rising just 12% annually, so a comfortable fiscal surplus has become a deficit equivalent to 2.5% of gross domestic product over the past two years. To make up the shortfall, Kirchner tried in 2008 to raise export taxes sharply on soybeans and other grains. That led to a four-month standoff with farmers before she backed off. Later that year she nationalized some $30 billion in private pension funds, adding the resources to the Treasury and forcing millions of Argentines to join the government’s pay-as-you-go social security system.
Such moves contributed to the defeat of Kirchner’s Peronist party in last year’s mid-term elections. With a presidential vote looming in 2011, Kirchner is eager to shore up support. “What we really have here is a politically weakened government that’s desperate to get funds to keep spending,” says Daniel Kerner, an analyst with political risk consultancy Eurasia Group.
