Energy subsidies generate more poverty - IDESA

Report Nº: 91211/05/2021

Energy subsidies generate more poverty

Energy subsidies are causing a fierce internal struggle within the government. With such a weak fiscal situation, as the current one, using public funds to maintain utility rates low and increase welfare with overlapping programs, as announced by the government, means to increase poverty with more inflation.

Economic subsidies encompass a set of public funds transfers to companies. Most of them are intended to avoid increases in energy and transport rates in the AMBA region and to cover public companies’ deficits. They started being relevant in the national budget after the 2002 crisis, when it was decided to freeze electricity, gas, transportation and water rates despite the fact that inflation had returned to Argentina. As of 2016, the Cambiemos government reduced them, tending to compensate the lowest income families with a social tariff. The current government went back to freezing tariffs and increasing subsidies.

In the 2021 budget it is planned to reverse this process. The reason is that economic subsidies are fiscally unsustainable and socially inequitable. In particular, they add inflationary pressure by further monetary emission to benefit high-income people in the metropolitan region. But a part of the government coalition opposes this idea and pushes for a tariff adjustment much lower than the one foreseen in the Budget.

In order to analyze the fiscal sustainability of economic subsidies, it is useful to analyze their historical behavior and their current situation. According to data from the Argentine Budget Association (ASAP), it is observed that:

  • Between 2005 and 2014, subsidies increased from 0.8% to 5.1% of GDP.
  • From 2016 onwards, they started to decrease until they reached 1.6% of GDP in 2019.
  • In 2020 they rose again to 2.9% of GDP and in the first quarter of 2021 they increased by 170% compared to the same period of the previous year. 

These data confirm the enormous fiscal weight that economic subsidies had until 2014. This was reversed, through a very traumatic process during the Cambiemos government. But the current government increased them again last year to almost double. This could be justified as a transitory palliative for the confinement. Now, maintaining this strategy in 2021 implies an exponential increase in subsidies. If the trend of the first quarter continues for the rest of the year, economic subsidies will again exceed 5% of GDP in 2021.

For subsidies to reach 5% of GDP implies more fiscal deficit. Under current conditions, this forces monetary printing to accelerate. The Central Bank is trying to mitigate inflationary impacts by placing Leliqs and Pases in banks to absorb the excess of money. But this mechanism is saturated. Currently, Leliqs and Pases exceed saving deposits people have in the banks and 1 out of every 3 pesos of increase in the stock of Leliqs and Pases is produced by the interest they generate. In other words, there are no instruments left to prevent inflation acceleration from the increase in economic subsidies.

The government also has announced the extension of the Alimentar Card. This is a welfare program overlaped with the Universal Child Allowance and a large number of other welfare programs administered by the three levels of government. Overlapping is an inefficient way to assist the poor because it increases bureaucratic expenses, corruption and clientelism. Keeping increasing economic subsidies and welfare spending with overlapping programs is a very regressive strategy. The poor receive crumbs in exchange for bearing a large part of the cost generated by rising inflation.

The so-called Argentine Federal Council against Hunger has the opportunity to justify its existence by inducing the national government, together with the provinces, to adopt a better strategy. On the one hand, to take the proposal of the Ministry of Economy to apply a social tariff scheme for low-income families and a normal tariff for the middle and upper classes. This would prevent inflation from worsening. On the other hand, redesign the welfare policy so that public resources reach the poor through a single, simple, transparent and accountable mechanism.  


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