ENERGY SUBSIDY SAVINGS DESTINED TO MORE PUBLIC SPENDING - IDESA


Informe Nº: 14/01/2018

ENERGY SUBSIDY SAVINGS DESTINED TO MORE PUBLIC SPENDING

INDEC’s Consumer Price Index informed that inflation was 24.8% for 2017. The inflation projections made by private economic analysts surveyed by the Central Bank, before the final number was known, were around 22%. The difference is explained by the adjustments in energy tariffs. In fact, taking only what is known as the “core inflation” (which is inflation excluding seasonal products and regulated prices) the index was 21.1%.

Inflation is the generalized increase of all prices in the economy. In this sense, strong adjustments in the relative prices of some goods –such as energy tariffs– are not strictly inflation if they happen only once. Hence, what is relevant is not so much the deviation that tariffs adjustment causes in the inflation index, but the fact that inflation still remains high, even without considering the tariffs adjustment.

To understand why “core inflation” is still very high, it is pertinent to analyze the evolution of some key components of public spending. The information published by the Ministry of Finance, updated to November 2017, shows that

  • Energy subsidies were reduced by AR$66 billion pesos (U$S 3,5 billion) compared to the same period of 2016.
  • The rest of the economic subsidies went up by $ 30 billion (U$S 1,6 billion).
  • The national programs on education, health, housing, sanitation and social development implemented in provinces increased another $ 33 billion (U$S 1,7 billion).

These data shows that what the national State saved by reducing energy subsidies was used to increase spending on other items. Particularly important is the increase in transport subsidies and in national programs that overlap with provincial and municipal functions and responsibilities. If the expansion of the expenses of the ANSES are added, it can be seen that the persistence of inflation is not only explained by tariff updates related to subsidy reduction, but also by the persistence of the high fiscal deficit.

Ordering the public accounts depends on an institutional arrangement respecting the federal organization. The bulk of the non-energy subsidies mostly go to transport, which have as their main purpose to subsidize the City of Buenos Aires and Buenos Aires’s suburbs. The same type of deviation lies in the overlapping national programs with functions of the provinces and municipalities. This shows that savings can be obtained as soon as the federal government abandons the historical practice of wanting to carry out provincial and municipal functions.

In a similar way, it is urgent to address a comprehensive pension reform and ordering the actions carried out by the ANSES. 38% of the national primary expenditure is on retirement funds and its growth in 2017 represented 62% of the total expenditure growth. This pension dynamic is the main public finance destabilizing factor. The revision of the pensions adjustment formula attacked one of the problems, but it remains pending reviewing many other inconsistencies. For example, the duplication of coverage generated by the pension rule and the proliferation of special and differential pension regimes that gives unjustifiably early retirements and/or higher pensions to certain groups of people.

Some argue that a speedier State reorganisation would harm the lower income population. Nothing is further from reality. Slow gradualism in the state reform is what has very regressive impacts on the distribution of income. To November 2017, the fiscal deficit grew by $ 88 billion compared to 2016, explained entirely by the increase of debt payment interests. Aspiring to control inflation via more public debt –to contain the monetary expansion– is regressive because it does not reduce inflation and assigns a growing mass of public funds to paying more debt interests that, in general, benefit high-income people.

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