Report Nº: 95114/02/2022
The fiscal deficit is highly sensitive to economic subsidies. For this reason, it is difficult to comply with the path agreed with the IMF without revising them. This requires not only the establishment of a new tariff regime but also an orderly reorganization of how state services are organized.
There are two types of subsidies financed by the national government. Social subsidies seek to alleviate poverty. These include the Universal Child Allowance (AUH) paid by ANSES and the assistance programs of the Ministry of Social Development, including the Food Card and the “Potenciar Trabajo” program, among others. On the other side are the economic subsidies whose main purpose is to reduce the cost of utilities (electricity, gas, public transportation) and to support public and some private companies.
While social subsidies are not on the agenda of the negotiations with the IMF, economic subsidies are at the center of the discussion. Seventy percent of economic subsidies correspond to electricity and gas tariffs and another 20% to subsidizing public transportation. Therefore, the reduction of economic subsidies implies an increase in electricity, gas, and public transportation bills. This is the main reason why the government avoids talking about the issue, but the IMF insists on talking about it.
In this context, it is worth asking how relevant is the IMF’s insistence on economic subsidies. For this purpose, it is useful to analyze the Ministry of Economy’s data on budget execution. According to this source, it is observed that:
These data show that there is a high correlation between the fiscal deficit and economic subsidies. Although the fiscal imbalance is explained by a multiplicity of factors linked to the disorder of the State, economic subsidies have the fastest impact. Given that the deficit reduction path agreed with the IMF is quite short (ending monetary issuance by 2024 and eliminating the primary deficit by 2025), it seems impossible to achieve it without reductions of the economic subsidies. To this end, utility tariffs must be revised, but also the disorder under which electricity and transportation utilities operate must be corrected.
In the case of electricity, generation and transportation are the federal state’s responsibility, while distribution to the end-users is the provinces’ responsibility. Under the same logic, urban transportation is a provincial and local government’s responsibility. However, in the particular case of the AMBA (Metropolitan Area of Buenos Aires), electricity distribution and urban transportation are still under the federal state’s responsibility. This is because these functions were not transferred to the Autonomous City of Buenos Aires (CABA) when it was created in 1996. For this reason, the federal state ends up financing, with federal funds, subsidies to public services that should be financed by the CABA and the Province of Buenos Aires in the “Conurbano” (CABA’s outskirt). A key advance is to transfer these competencies to these two jurisdictions and let them decide whether to maintain the subsidies and, if so, to finance them with their own resources.
Regarding the utilities, the general principle is to set tariffs at a level sufficient to cover the costs of producing them. In order to take into account the situation of low-income families, a social tariff scheme must be applied, i.e., the State pays part of the tariff (as long as consumption is reasonable). In the case of urban transportation, it can be subsidized universally to discourage the use of automobiles, which are ecologically more harmful, but it should be done per ticket sold and not in a discretionary manner to the companies, as it is currently. This is the way to have sustainable public services (without outages), without waste, and with social equity.
It is logical for the IMF to pay attention to economic subsidies because of their importance in the fiscal deficit and money emissions. But it is a mistake to focus on meeting a fiscal goal without advancing in a comprehensive State’s reorganization. The starting point is for the federal state to stop administering and subsidizing services in the AMBA, eliminating thus the current irritating privileges in respect to the rest of the country.