Chile’s tax, Brazil’s inflation and Argentina’s path forward

argentina milei
Inauguration of Javier Milei as the new president of Argentina

The newly appointed Argentine Economy Minister, Luis Caputo, has unveiled an ambitious recovery plan designed to tackle hyperinflation.

This comprehensive strategy involves implementing sharp currency devaluation and spending cuts, with the aim of halting the erosion of public finances and addressing the severe economic challenges facing the nation.

Inflation and taxation are crucial aspects that profoundly impact a country's economic landscape. Inflation, the persistent increase in the general price level of goods and services over time, erodes purchasing power, disrupts economic planning, and challenges fiscal policies. Taxes, on the other hand, play a pivotal role in revenue generation for governments, funding public services, and shaping economic behaviours.

To navigate these complex economic factors, countries often look to successful policies and experiences of others. Chile's utilisation of the Unidad Fiscal and Unidad Tributaria (UF and UTM) and Brazil's Plano Real offer valuable lessons in managing taxation, inflation, and achieving economic stability.

Chile's implementation of UF and UTM stands as an exemplary model for tax stabilisation. The UF provided a standardised unit for tax calculations, fostering uniformity and accuracy in fiscal assessments. Moreover, the UTM, designed for inflation adjustments in tax-related values, ensured that fiscal parameters remained in line with changing economic conditions.

This approach allowed Chile to mitigate the impact of inflation on tax calculations, maintaining the real value of tax-related figures and enhancing fiscal stability. Countries like Argentina grappling with inflationary pressures and tax inconsistencies could emulate Chile's strategy to foster a more resilient tax system.

Conversely, Brazil's Plano Real serves as a multifaceted case study, offering insights into both successes and failures in economic stabilisation. The Plano Real effectively combated hyperinflation, instilling confidence in the currency and stabilising prices. However, challenges persisted, and the plan's full objectives took time to materialise. 

Brazil's experience highlights the importance of a comprehensive, long-term approach to economic stabilisation. The successes of the Plano Real underscore the significance of measures to control inflation and restore economic stability, but the process was not without setbacks!

Although the IMF foresees Argentina reducing its 2023 current account deficit from an initial US$6.5 billion to around US$1.5 billion and expects a current $6 billion boost in reserves, challenges persist. Nevertheless, and setting aside the IMF’s expectations and objectives, Argentina could derive valuable insights from both Chile’s tax policies and Brazil’s Plano Real to address these ongoing challenges.

The experiences of these nations emphasise the importance of standardised units for tax calculations, mechanisms to counter inflation's impact on fiscal parameters, and comprehensive strategies for economic stabilisation. By leveraging successful policies and understanding the pitfalls, nations can tailor approaches to managing inflation, taxation, and achieving long-term economic stability. They can adapt these strategies to suit their unique economic circumstances and policy objectives.

Mohamed Filali is the founder and managing director of Jurisfiscal, 

Article pubished in BBN Times