When “Deficit zero” is not “Deficit zero”:
Spotting fiscal illusions

There’s been an ongoing debate in Argentina about the federal budget results under the Milei administration. I want to be very clear: the numbers show significant improvement, and Milei’s administration has been successful in putting the “deficit issue” on center stage. Yet, there are also good reasons why some Argentine economists point to potential problems and misleading fiscal reporting, notwithstanding the significant improvements.

Right now, the Argentine government issues instruments called LECAPs and BONCAPEs. When a LECAP matures, the government doesn’t pay you back. Instead, it rolls your principal plus accrued interest into a new LECAP. The debt grows automatically, compounding at rates that exceed those of a stagnant economy. This bond interest is not a coupon to be paid; it is capital (principal) to be paid.

None of this capitalized interest appears in the budget calculations. The monthly “deficit zero” figures exclude the very real, very substantial accumulation of obligations that will eventually come due. It’s the fiscal equivalent of paying your credit card bill by taking out a new credit card, and then celebrating that you haven’t spent more than you earned this month. In the process, you accumulate debt at a higher rate than the growth of the economy.

There is something economists understand but often get lost in political cheerleading: proper fiscal evaluation requires calculating the structural fiscal balance in present value terms, not on a month-to-month cash basis. Present value accounting discounts future obligations back to their equivalent cost today, showing the true burden on the taxpayers. Ignoring capitalized interest that compounds at 4.5% monthly while the economy grows near zero is not a measure of fiscal responsibility; it’s a measure of fiscal accounting creativity. We might be observing cyclical, not structural, surplus.

In fact, the IMF’s own assessment of Argentina’s fiscal position explicitly notes that the reported figures are “calculated based on the authorities’ reported cash interest payments, which exclude capitalized interest payments” (p. 8, fn. 5). The report further states that “including all capitalized interest payments to the private sector above the line would imply a cash overall deficit of about 1.2 percent of GDP“ (emphasis added). This represents a notable improvement from the 4% deficit Milei inherited.

To be fair. This is not just a Milei-Caputo accounting practice. Similar “tricks” can be found in other places (two examples below).

1. The present value Bbporting annual budget deficits (flow measures) while ignoring or downplaying the present value of future obligations (stock measures). This lets governments claim fiscal discipline based on this year’s numbers while simultaneously promising benefits or incurring obligations that dwarf those annual figures. This is the credit card analogy. Showing a positive cash flow by not paying my bills does not imply a structured, balanced budget.

2. Moving the goalposts: What counts as “The Budget”

Not all government spending appears in official budget deficits. Some obligations are “off-balance-sheet,” technically separate from the official accounts, but no less real for the taxpayers who will eventually fund them.

This category includes unfunded pension liabilities, loan guarantees, implicit bailout commitments, and, in Argentina’s case, debt capitalization schemes that don’t register as current expenditure. By defining “the budget” narrowly, governments can hit deficit targets while actual obligations grow unchecked.

3. The timing trick: When do obligations count?

Governments can manipulate when they recognize expenses versus when they actually incur obligations. Cash accounting records transactions when money changes hands. Accrual accounting records them when the obligation is incurred, regardless of when cash flows.

The choice between these methods isn’t neutral. A government can promise generous pensions to employees, creating real future liabilities, but record zero expense in the current budget if it uses cash accounting. The debt grows invisibly until bills come due decades later.

4. The derivative disguise: Financial engineering for regulatory compliance

The most sophisticated fiscal illusions use complex financial instruments to achieve technical compliance with fiscal rules while violating their spirit entirely. Cross-currency swaps, securitizations, and other derivatives can transform the accounting treatment of obligations without changing their economic substance.

These aren’t illegal. Often, they’re explicitly permitted by the relevant accounting standards. But they allow governments to meet deficit targets on paper while their true fiscal position deteriorates.

Now let’s see how these patterns appear in practice.

The United States: Social security’s $62.8 trillion question

Every year, the Social Security Administration publishes a report containing the infinite horizon unfunded obligation of the Old-Age, Survivors, and Disability Insurance. The latest report estimates a total of $62.8 trillion in present value terms.

Social Security is a pay-as-you-go system. Current workers’ payroll taxes fund current retirees’ benefits. The system has promised a specific formula for calculating future benefits, but it hasn’t set aside the funds to pay them. As demographics shift, the gap between promised benefits and projected tax revenue grows.

The $62.8 trillion figure represents the present value of this gap extending infinitely into the future. Using the government’s own discount rates and demographic projections, you would need to set aside $62.8 trillion today, invest it in Treasury bonds at projected rates, and use the principal and interest to cover the shortfall between payroll taxes and promised benefits forever.

To put this in perspective: closing this gap would require immediately raising the payroll tax from 12.4% to 17.0%, or cutting all current and future benefits by 26.5%. These aren’t fringe concerns raised by alarmists. These are the official numbers from the Social Security Administration’s own actuaries, published annually in the 2024 Trustees Report (Section VI.F).

Critics are correct to point this out. Unfunded liabilities represent a massive burden on future generations that is not reflected in official deficit statistics. By making unfunded promises, the government moves obligations off the official books while claiming to track government finances honestly.

Libertarians who point this out are performing a valuable service by insisting we look at the full picture, not just the convenient annual snapshot.

Europe: How Greece “legally” hid $1 billion in debt

In 2001, Greece wanted to join the Eurozone. There was just one problem: the Maastricht Treaty required member countries to maintain budget deficits below 3% of GDP and total debt below 60% of GDP. Greece wasn’t quite there.

Enter Goldman Sachs and cross-currency swaps: “Cross-currency swap transactions with Goldman Sachs reportedly were designed to lead to up-front cash payments from Goldman Sachs to Greece along with favorable early-year results, in exchange for a large ‘balloon’ longer-term cash flow in the reverse direction.”

When the swaps eventually unwound, the hidden debt reappeared. Greece’s fiscal crisis in 2009-2010 revealed the full extent of obligations that had been kept off the books. The “legally compliant” accounting had masked a deteriorating fiscal reality, allowing Greece to avoid hard choices until they became catastrophic choices.

Back to Argentina: Dissecting the “Deficit zero” illusion

Argentina’s use of LECAPs and BONCAPEs combines multiple elements of fiscal illusion into one elegant package.

Start with the present value blindspot. When Argentina issues a LECAP that capitalizes interest, the present value of that obligation is growing dramatically. In an economy with near-zero real growth, debt compounding at over 69% annually (assuming 4.5% monthly compounded) represents a potentially exploding burden if the primary surplus is not large enough. But the monthly deficit calculations ignore this entirely.

Add the timing trick. Because the interest is capitalized rather than paid in cash, it doesn’t appear as an expenditure in the current period. Under cash accounting, there’s no outflow. The government can claim it’s not spending more than it collects, even as its actual obligations surge.

Include some goalpost-moving. Whether these capitalized interest obligations should be counted in deficit measures is a question of how you define “the deficit.” The Milei government uses definitions that exclude them. Technically compliant with their stated metric, substantively misleading about the fiscal reality.

The result: “deficit zero” announcements that ignore the accumulating obligations, much like Greece’s compliance with Maastricht criteria ignored the derivatives-hidden debt, and much like US annual deficits ignore the growing Social Security unfunded liability.

Accounting principles don’t change based on whether we like the politician. Present value matters, or it doesn’t. Off-balance-sheet obligations matter, or they don’t. The timing of when you recognize expenses versus obligations matters, or it doesn’t. If the off-report debt capitalization grows faster than the economy, that is a yellow warning to be aware of.

This material is a result of a collaboration between Professor Nicolas Cachanosky and the European Center for Austrian Economics Foundation (ECAEF), focused on publishing a series of articles on economic and fiscal topics. It emphasizes our commitment to independent thought, academic freedom, and critical inquiry. The original was published here: https://economicorder.substack.com/p/when-deficit-zero-is-not-deficit