Progressive polices need and orderly state - IDESA

Report Nº: 97021/07/2022

Progressive polices need and orderly state

The exponential increase in energy subsidies accelerates fiscal destabilization. The government’s incoherent tariff segmentation mechanism will not solve the problem. This is further evidence that in order to implement progressive public policies, an orderly and professionalized State is needed.

The war in Ukraine and the sanctions against Russia keep the prices of oilseeds, grains, and energy very high. Argentina used to be a net exporter of these three complexes 20 years ago. However, due to its policy of tariff freeze, it became a net importer of energy. As a result, Argentina is not taking advantage of the very favorable international context. The record prices of agricultural products are offset by the insufficient updating of electricity and gas utility rates, which destabilize public accounts.

Energy subsidies to compensate for tariff freezes are a policy of the present century. In the 1990s there were no energy subsidies. Between 2002 and 2004, with the end of convertibility, electricity, and gas rates were frozen under the argument of economic emergency. From 2005 onwards, instead of applying a rational tariff scheme, the policy of maintaining the tariff freeze and subsidizing energy consumption with public funds was implemented.

According to ASAP data, energy subsidies peaked in 2014 at 3.7% of GDP. The previous government made progress in the tariffs’ update and reduced subsidies, but the current one reversed this policy. The evolution of energy subsidies under the current administration is as follows:

  • In 2019, when they assumed office, they represented 1% of GDP.
  • In 2021, they were already 5% of GDP.
  • Based on what happened in the first four months of this year, it is projected that 2022 will close at 4% of GDP in energy subsidies.

These data show that energy subsidies quadrupled in terms of GDP since the government took office. The level is worrying because it exceeds the maximum value of 2014, a year that –not by chance– was one of strong macroeconomic instability, including devaluation and acceleration of inflation, even with exchange rate control. Although experience shows that energy subsidies destabilize public finances, the current government made the same mistake again.

The late reaction was embodied in the recent Decree 332/22 which establishes the so-called tariff segmentation. It stipulates that households whose income exceeds AR$333 thousand per month, or own 3 or more cars or real estate, or have airplanes or boats, or shares in companies that demonstrate ability to pay, will pay full tariffs for electricity and gas. The scheme is highly arbitrary and inequitable since the properties have, for the State, values far removed from reality, reflecting erroneous socioeconomic conditions. In addition, while the State administers the registers of real estate, cars, ships, and airplanes, the decree creates in an overlapping manner the Registry of Access to Energy Subsidies (RASE) where those who aspire not to pay the full tariff must register. Instead of this incoherent mechanism, it would be much more pertinent to use income tax and personal property tax forms to identify families in the highest socioeconomic stratum.

This administrative imperfection will result in inequities, conflicts, bureaucracy, corruption, and, most seriously, an insufficient reduction of subsidized households. Although the information available is very limited, based on the income declared in the INDEC’s EPH, it can be estimated that only approximately 5% of households will be removed from the subsidy. Keeping the remaining 95% heavily subsidized is inconsistent with the severity of the fiscal problem. Furthermore, transportation subsidies must be added since they are causing claims for increases in the AMBA and bus strikes in the interior of the country. This suggests that total economic subsidies will end 2022 at above 5% of GDP.

This is yet another example of the fact that, in order to implement good public policies, especially those with a progressive orientation, a financially and managerially solid State is essential. For this reason, the organization of the State has no ideology. It is needed both for a development program with a “right-wing” orientation, and even more so if a “left-wing” strategy is chosen.


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