Milei Slashes Argentina’s Debt Burden

The main goal of fiscal policy should be to shrink the burden of government spending, not to balance the budget or lower debt.

However, those two goals are not in conflict if policy makers pursue good policy. The evidence is overwhelming that spending restraint is a very effective way to limit red ink.

A good example is what has happened in Argentina. Thanks to big spending cuts, Javier Milei has implemented the largest peacetime fiscal consolidation in world history.

Lo and behold, look at how government debt has dramatically declined since he took office.

The above chart is based on the IMF’s big database. And if you peruse the numbers for Argentina, you’ll see that nominal debt has not actually decreased.

Instead, Milei has made progress for these two reasons.

1. Nominal debt is no longer growing rapidly.
2. Nominal GDP is growing rapidly.

The combination of these two factors means that debt as a share of GDP (debt/GDP) is quickly declining. Much as debt in the United States declined after World War II, albeit as a much slower rate than what we’re seeing in Argentina.

The key thing to understand is that debt is no longer growing rapidly in Argentina because Milei imposed record spending restraint.

By the way, the same thing is actually happening today in Greece, though at a much more modest pace. All of which confirms what I wrote back in 2015.

And we have very powerful evidence from the 1800s showing that large debt burdens can be solved with spending restraint.

Sadly, it appears that American policy makers are incapable of learning.

P.S. Tax increases are not a successful strategy to reduce the burden of red ink.

P.P.S. Politicians can (and do) use inflation as a strategy to reduce debt burdens, but that only works in the short run and should be viewed as a form of financial repression.