PRICE OF GAS HAS DOUBLED INFLATION |


Informe Nº: 02/05/2018

PRICE OF GAS HAS DOUBLED INFLATION

The adjustments of electricity, gas, water and public transport prices are causing a lot of anger among the population. Growing unrest induced legislative initiatives to stop and / or revise the increase. The proposals have little technical support and much opportunism, but the fury among the population remains majority and emphatic.

The main argument is the negative impact of “tarifazos” (abrupt increase in the utility prices) on low-income families and small businesses. This is explicit and visible. But using public funds to keep prices below the costs that the service production demands leads to, on the one hand, the shortage and low quality of services and, on the other, to higher inflation as subsidies have to be paid by printing money. The hidden social costs of not updating prices are less production and employment, services deterioration, damage to the environment and a more regressive income distribution, since inflation is exacerbated and public funds channeled to medium and high income sectors of society allowing them to pay artificially low utility prices.

To understand the challenge facing correcting utility prices, it is necessary to measure its magnitude. Taking as reference the adjustments in the residential gas price in the City of Buenos Aires (CABA), with billing data of the company Metrogas, it can be observed that:

  • In 2016, the cubic meter of gas rose 49%, while inflation was 41%.
  • In 2017, the cubic meter of gas rose 88%, while inflation was 25%.
  • To April 2018 gas has already risen 41% when the targeted inflation is 15%.

These data show that since the price correction began, the price of residential gas is consistently rising well above inflation. In the accumulated since 2016 to date, the price of residential gas rose twice that of inflation. This occurred even when the Supreme Court, by means of a ruling, ordered gradualism in the correction process of utility prices. It is clear by now that the decision of the Supreme Court temporarily differed the problem, but did not provide solutions neither avoid enervating the population.

It is advisable that the price covers all the costs of producing the public services. This allows financing investments that will maintain the quality of the service and induce the population to its rational use. For families with lower incomes it is necessary to manage a social tariff scheme. For the rest of the families it is pertinent to establish a flat rate, a mechanism by which times of high needs for consumption (winter for gas, summer for electricity) are financed by periods of low needs.

Another key point to be taken into account is that, taking advantage of the misalignment of utility prices, the national, provincial and municipal states arranged a tangle of taxes and fees upon tariffs. As part of the regularization, this process should be reversed. A practical way to do this is to establish that the next price increases are exempt from all taxes and fees. It is an analogous mechanism used in salary collective bargaining with non-taxed components in order to lighten the burden of social charges on salary increases. In the same logic, this tool can lighten the weight of taxes on utility price increases. It is not an optimal solution but it helps to improve the situation, narrowing the gap between the effort made by families and companies to pay for public services and what suppliers receive. In other words, with the same effort of the consumers, a greater recomposition of the income of the producers of public services would be achieved.

Postponing utility price increases not only does not solve the issue but also exacerbates economic and social costs. Instead of proposing opportunistic and demagogic delays, it is necessary to look for innovative solutions. One of them is to establish that from now on all rates increases are exempt from any type of taxation.

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