Milei bans deficit, restricts Central Bank in structural reform

Milei bans deficit and restricts Central Bank: the key reform

Yesterday, Javier Milei presented what his government considers one of the most important structural reform packages in the last 91 years. The plan has two pillars: reforming the Banco Central so its sole objective is preserving currency value, without assisting administrations through money issuance, and a "fiscal straitjacket" that prevents approving deficit budgets. If a deficit appears, a mechanism similar to the US "shutdown" is activated: the president is subject to an exceptional regime while the imbalance lasts.

This is not a cosmetic change. It is the legal prohibition of monetary financing of the State, the tool Argentina has used for decades to cover its deficit. Central Bank profits can only be used to repay existing public debt. The immediate question is whether this works without external anchoring, and the debate has focused on whether inflation is, as Milei argues, exclusively a monetary phenomenon.

Is inflation just a monetary phenomenon? The dispute dividing economists

Milei's thesis is clear: fight inflation by stopping printing. But an analytical current notes that empirical evidence is not so conclusive. The study by De Grauwe and Polan, published in the Scandinavian Journal of Economics in 2005, analyzed 160 countries over thirty years: the relationship between money supply growth and inflation is very strong in the long term, but weakens in countries with low and stable inflation. In other words, monetarism works as a diagnosis for hyperinflation, but does not explain all price increases.

Here lies the nuance: supply shortages, such as a fertilizer shock due to the closure of the Strait of Hormuz, also raise prices. For monetarists, this is not inflation in the strict sense: it is a change in relative prices because money still holds the same value, but there are fewer goods to buy. For Keynesians, it is an increase in the price level affecting the cost of living, period. The discussion is not academic: it depends on whether the fiscal straitjacket is sufficient or if Argentina will also need supply-side policies.

The Peruvian mirror and the investment grade goal

Reform advocates point out that Argentina needs to invent nothing: the model is Peru, a country with a Central Bank that does not finance deficits and has the most stable currency in South America, despite endemic political chaos. The Argentine government itself aims to reach investment grade status by 2031, climbing six to seven rungs from its current speculative category. Each year of macroeconomic orthodoxy brings this goal closer, but the path is demanding.

Recent data offers some relief: annual inflation stood at 33.5% in June 2026, with a monthly variation of 1.9%, whereas when Milei arrived, daily inflation hovered around 1.5%. The reduction is real, but the price level remains high, and critics underline that 75% of pesos in circulation have been issued during his term, with a money supply increase of 280% since he took power. The "inertia" argument has a time limit.

Underlying skepticism: people over system

The most serious drawback is not economic, but institutional. Some argue that the human factor is decisive: copying the Swiss or Peruvian system in Argentina guarantees nothing if citizens and the political class do not change. Singapore was one of the most corrupt countries, and its revolution reversed the order; the question is whether Argentina can do the same. Skeptics recall that laws can be repealed when Kirchnerism returns, and that the Central Bank has been colonized before. The difference is that now the restriction would be legal, not voluntary.

Milei's plan is a strong bet: tying the State's hands so it cannot spend what it does not have again. Argentine history teaches that institutions are worth as much as people want them to be worth. The reform is on the table. The next chapter depends on whether, this time, the macroeconomic framework survives the first government that does not share it.