THE FEDERAL ORGANIZATION MUST BE REBUILT

The reduction of discretionary transfers to the provinces is part of the plan of the Minister of Economy to attack the fiscal deficit. The reason given is that these funds were historically used for political clientelism. The reality is more complex.  

In general, discretionary transfers are associated with National Treasury Contributions (ATN). The ATNs are regulated in the co-participation law, which establishes that a portion of the co-participable mass is arbitrarily distributed by the Ministry of the Interior. There are also other transfers of national funds to the provinces. Some are based on regulated obligations, such as compensation to the provinces that maintain the pension funds of their public employees. Others are direct expenditures by the nation in the territory of the provinces, administered at its discretion. This includes national programs of the Ministries of Education, Health, Housing, Social Development, Environment, among others, which overlap with provincial expenditures.     

With data from the Ministry of Economy and limiting the analysis to monetary transfers (i.e., not including direct expenditures made by the nation in provincial territories) for fiscal year 2022, it is observed that:

• The northern provinces obtain 74% of their revenues from co-participation and an additional 9% from discretionary transfers of national funds.
• Those in the center of the country obtain 54% of their revenues from co-participation and an additional 6% from discretionary transfers.
• The southern provinces obtain 45% of their revenues from co-participation and an additional 3% from discretionary transfers.  

These data show that automatic and discretionary transfers have a marked bias in favor of the northern provinces. Although this redistribution of public funds from the rest of the country to the northern provinces has been going on for decades, it has not been able to reverse the lag in the development of the north. On the contrary, it is in the north where the worst social indicators in the country are registered.

The main explanation for this paradox is that the federal co-participation of taxes generates perverse incentives. Co-participation operates as an automatic and unconditional monetary transfer. This induces local politicians to use public funds in clientelistic practices aimed at maintaining themselves in power. The most illustrative example is the excesses of public employment. Faced with this situation, different national agencies devise discretionary transfers to further help the provinces that lag behind. Thus, the discretionary transfers not only do not solve the problems but rather increase them.

The solution is to rebuild the federal organization based on a new tax and functional coordination agreement between the provinces and the national government. A central point of the agreement –which does not require the acceptance of all the provinces but only of the majority– is to replace co-participation with the separation of tax sources. The national government would be financed with taxes on foreign trade, social security, and the totality of income tax. The provinces would be financed with the total VAT –unified with the provincial sale tax and the municipal industry and commerce taxes– generated in their territory. For the northern provinces –nowadays underdeveloped due to co-participation– a Convergence Fund would be foreseen to finance development plans. Under these conditions, it is feasible to eliminate discretionary transfers to the provinces.

Reducing discretionary transfers to the provinces may reduce the fiscal deficit in the short term. But it is not sustainable. The same happens with the rest of the adjustment policies, such as paralyzing public works or increasing distortionary taxes. Only with a comprehensive reorganization of the State, at the three levels of government, will it be possible to overcome the chronic financial and management deficits of the Argentine public sector.