Argentine President Javier Milei's chainsaw threatens to cut politicians' salaries
Argentine President Javier Milei has launched a major institutional reform package to eliminate economic populism. The centerpiece is a "fiscal shackles" mechanism that freezes government spending and politicians' salaries if budget deficits persist.
Following the "electric chainsaw" comes the turn of the "fiscal shackles." This past weekend, Argentine President Javier Milei dropped another bombshell with the launch of the largest institutional reform package since he took office. The goal is to erase every trace of the economic populism left by the Kirchner administration, which brought one of the world's richest countries in terms of natural resources to the brink of economic collapse.
The path forward is to turn the budget balance from a policy of the Milei government into a permanent restriction that will apply to every government that follows. The anchor is a very hard-to-digest number — 12,819,532,788,614,400,000% — the cumulative inflation rate in Argentina since the Central Bank was established in 1935. Milei added another figure, 168,580%, the cumulative inflation since the Convertibility Law was abandoned in 2002. Both numbers serve the same argument: the institution itself, not the decision-makers within it, is the problem.
Four Pillars of Reform
The package includes four bills: changing the Central Bank law, imposing a permanent fiscal rule called "fiscal shackles" (Grillete Fiscal), liberalizing the capital market, and reforming the insurance market. These proposals are linked; if you shut down the Central Bank's printing machine and the government's deficit tap, an alternative source of funding (the capital market) is required, as in any modern country.
When diving into the details of the reform at the Central Bank (BCRA), one understands how much the Argentine institutional infrastructure lags behind the West. The goal is to return to a monetary regime with only one target — price stability — instead of the five targets added by Kirchner. State financing by the Central Bank is explicitly prohibited, including the purchase of government bonds in the primary market. Likewise, removing a governor or a member of the monetary committee will require a two-thirds vote in both houses of Congress. This move is intended to prevent the firing of governors who refuse to finance deficits or release foreign currency reserves.
Fiscal Shackles and Accountability
The innovative mechanism that caused a stir is the fiscal shackles model, according to which a deficit lasting several months will give Congress a short period to correct it. If Congress fails to do so, a shutdown mechanism will take effect, inspired by the US administration's shutdown. However, it is a tougher mechanism that includes freezing new expenses, a ban on signing contracts, stopping recruitment, and halting discretionary transfers to the provinces.
And the clause that made headlines: as long as the shutdown continues, the president, his deputy, ministers, their deputies, members of the Senate, members of the House of Representatives, and CEOs of government ministries will not receive a salary.
"Politicians have no incentive to care about the pockets of Argentines, because they never pay for the damages," explained Milei. "Therefore, this initiative will cause those who create the damages to pay for them."
On the other hand, pensions, child allowances, social security, health services, and the prison service were excluded, representing about 70% of government spending.
Timing and Challenges
One cannot ignore the timing: Kristalina Georgieva, Managing Director of the IMF, finished her first visit to the country a day before the package was announced. While there is no public evidence that the Fund demanded the shackles, the connection is clear. Georgieva noted that a strong, independent Central Bank and a permanent framework of fiscal responsibility could help future governments preserve the gains of stabilization.
What is clear is that Milei used the visit to signal that his revolution is only in its infancy. He is trying to cement the result beyond his term. There is a refreshing reversal here: the president who was elected with the promise to close the BCRA and move to dollarization is now writing a constitution for it. However, the plan faces hurdles. The 2012 BCRA law is an ordinary law, and Milei's proposal is also an ordinary law, meaning it could be overturned by a simple majority. Furthermore, the plan lacks clarity on specific deficit definitions and emergency escape clauses. The real test lies in the small print — the vote count in Congress. The big question is, will his shackles survive a populist majority that will seek to remove them?
