Subsidies cover more than half of the electricity cost - IDESA

Report Nº: 94430/12/2021

Subsidies cover more than half of the electricity cost

In the parliamentary procedure that ended in the rejection of the 2022 budget, cross accusations prevailed. It would be much more appropriate to focus on avoiding a deepening of the crisis. A key and urgent issue is to stop the exponential increase in energy subsidies.

The treatment of the 2022 budget is another testimony of the political system’s mediocrity. On one hand, there is a deep socio-economic crisis that demands professionalism, creativity, and efforts unification. On the other hand, the legislative discussions are full of aggressiveness and irony. After a long session of 20 hours, where accusations about who is responsible for the crisis flew inside the Lower House of Congress, the 2022 budget bill presented by the government was finally rejected.

In well-organized countries, the budget is an essential tool. Hence the name “law of laws”. But in a context of such high inflation and uncertainty as the one installed in Argentina, it loses relevance. The degradation of the budget is aggravated by the large number of legal devices that allow the executive to deviate from it and by the strong rejection to result evaluations of public interventions programmed in the budget.

It would have been more conducive to agree on avoiding the crisis deepening. Here, the issue is energy utilities. With information published by the Congressional Budget Office, the following exercise can be done:

  • In 2021 energy subsidies cover 56% of the cost of electricity.
  • If the bill remains frozen and inflation remains at 50% per year, in 2022 subsidies will account for 70% of the cost of electricity.
  • In 2023, subsidies will account for 80% of the cost of electricity.  

These data are estimates, but they are useful to show that the strategy of freezing electricity utilities with high inflation is extremely harmful. In this path, subsidies are tending to cover almost the entire cost of electricity. This pushes for more money printing and to the Central Bank to issue more Leliqs and repos to absorb the excess of money. If the government aspires to be reelected and the opposition to govern in 2023, both should agree in stopping the utility freeze. This is the only way to avoid reaching a fiscally, socially, and politically unsustainable situation in 2023.

There are many actions to put public finances in order and moderate monetary printing. But none is as urgent as rethinking the utility subsidies. The rejected 2022 budget bill recognized this by contemplating a reduction in electricity subsidies as the main factor for reducing the fiscal deficit. The bill proposed a reduction of the primary deficit from 4% of GDP in 2021 to 3.3% of GDP in 2022. Practically all of this reduction was explained by the cut in electricity subsidies, which went from 1.6% of GDP in 2021 to 1.0% of GDP in the 2022 budget. This statement clears up any doubts that there is no possibility of stopping the monetary expansion without a utility tariffs scheme revision.

Adjusting utility tariffs to moderate subsidies is a very complex challenge. The lag in the utility prices is enormous. A carefully designed and executed strategy is needed to mitigate conflicts. This includes teaching the public opinion about the damage caused by not paying the costs of utilities, as well as having a social tariff mechanism that moderates the impact on low-income families. The latter requires overcoming huge deficits in public management quality. A social tariff scheme requires ordering the databases on ownership of electricity meters, real estate valuations, and updated values of assets and families income.

The bungling in the treatment of the 2022 budget bill is not a manifestation of some “rift” between the government and the opposition, as many might believe. On the contrary, passionately discussing past faults without self-criticism and without the courage and suitability to address present problems enjoys a great consensus in a large part of the political spectrum.


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