Report Nº: 107501/07/2024
The financial surplus has been achieved thanks to a strong reduction in public spending. But an important role is also played by the growth of tax collection driven by very bad taxes. This alerts on the importance and urgency of tax reform foreseen in the May Pact.
The government announced that May 2024 was the fifth consecutive month a financial surplus was achieved. In order to reach this goal, it went from a deficit of $10 billion at current prices in the first 5 months of 2023, to a surplus of $2 billion between January and May of this year. In other words, an impressive reversal in the public accounts of approximately $12 billion was achieved.
This change in public finances is explained by relative revenue stability (the year-on-year comparison shows a real fall of 3%) and a strong reduction in expenditures (a real fall of 28%). All expenditure items show negative variations compared to last year. By orders of magnitude, the reduction in pensions ($4 trillion, representing 34% of the total decrease in spending), investments ($2 trillion, representing 16% of the total decrease in spending) and transfers to the provinces ($1.8 trillion, representing 15% of the adjustment in spending) stand out.
The unprecedented reduction in spending and the relative stability of revenues lead to not paying enough attention to the behavior of taxes. In this regard, according to data from the Ministry of Economy, between January to May 2023 and the same period of 2024, it is observed that:
These data show that the surplus is not only explained by the strong reduction in public spending but also by the increase in the collection of two very distorting taxes such as export duties and the PAIS tax (a special import duty). Just as the sustainability of the decrease in public spending is a source of controversy, the role played by two taxes with a strong anti-export bias in the fiscal surplus generation should cause similar concerns. Bias divorced from the government’s objective.
A similar phenomenon is occurring at the level of the provinces and their municipalities. In addition to the recession-related drop in tax collection, there has been a drastic cut in non-automatic national transfers. In the first 5 months of the year, the cut reached 86% compared to the previous year. The reaction, quite generalized, was to alleviate the collapse of federal income by increasing the rates of the provincial Sale Tax or, more detrimental to production, by making the payment-in-advance regimes of this tax (withholdings and perceptions) more burdensome. The municipalities, for their part, follow a similar strategy with the Industry and Commerce taxes that operate as a tax analogous to the provincial Sale Tax or by increasing the road tax that raises the price of fuel.
The government’s strong will to achieve a fiscal surplus is a fundamental step forward for Argentina to emerge from its decline. But good results will not be achieved if the quality of the taxes used to generate the surplus is not improved. Therefore, it is strategic and urgent to advance in the transformations of the May Pact. A particularly relevant item in this Pact is the organization of the tax system.
The experience of these first 5 months of the year shows that the fiscal surplus is sustained, in part, with increases in very bad taxes. This makes it clear that the proposal to eliminate bad taxes as spending is reduced is voluntarist. An alternative path is for better taxes to absorb bad taxes. For example, without waiting for new (and desirable) reductions in public spending, it must be established that the national VAT absorbs the provincial Sale Tax and, if possible, the municipal Industry and Commerce taxes. This will make it possible to move faster towards a better tax system.
