Elon Musk Praises Argentina's 31% Spending Cuts Under Milei – But What About The Recession?

Javier Milei promised to take a "chainsaw" to Argentina's bloated government and he's delivered. One year into his presidency, the country has seen sweeping changes: 31% spending cuts, a devalued peso and inflation dropping to its lowest point in three years. Elon Musk is impressed. "Impressive progress," he said last month. But not everyone's convinced the approach is all good news.

Since taking office in December 2023, Milei has fired thousands of public employees, shut down ministries and hiked utility tariffs. These moves have helped Argentina hit a fiscal surplus of 1.1% of GDP for the first time in 12 years, a "remarkable achievement," according to Ignacio Labaqui of Medley Global Advisors, as reported by Business Insider.

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Inflation? Way down – from 25.5% last year to 2.7% in October 2024. That's a win. But at what cost?

The country's GDP contracted 3.4% in the first half of 2024 and is expected to shrink by 4% for the full year. Unemployment rose from 6.2% in mid-2023 to 7.6% in Q2 2024. The poverty rate hit 52.9% earlier this year, the highest in three decades.

BI reported that Facundo Nejamkis, director of Opina Argentina, calls it a "major" recession. Maria Victoria Murillo of Columbia University agrees, noting that the recession is "very painful." However, she acknowledged to BI that inflation was so bad that many Argentines were willing to endure it.

Musk isn't the only admirer. Vivek Ramaswamy, cohead of Donald Trump's Department of Government Efficiency (DOGE), said the U.S. needs "Milei-style cuts on steroids." As Trump's team plans federal spending cuts, Argentina's dramatic reforms may serve as a road map – or a cautionary tale.

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Despite the grim short-term impact, there's hope for a turnaround. BBVA Research projects a sharp economic rebound in 2025, with GDP growth hitting 6%, driven by investments, exports and consumption. Meanwhile, inflation is expected to drop from 211% in 2023 to 120% in 2024.

Milei's ability to maintain his public image amid these tough reforms has surprised many. Juan Cruz Díaz of Cefeidas Group noted to BI that his moves, like eliminating subsidies for essential services, are typically political poison. Yet, Milei seems to be navigating it well.

As Musk and Ramaswamy eye Argentina's experiment, the stakes are high. Can aggressive spending cuts fix a struggling economy without leaving its people behind? That's the billion-dollar question.

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