Report Nº: 103427/09/2023
Milei proposed to review the co-participation regime. Several governors rejected the idea, including the threat of resignation if the proposal becomes a reality. The evidence shows that, in order to get out of Argentina’s decadence, the ordering of the federal regime must not be postponed.
The presidential candidate Javier Milei raised the question of the need to review the co-participation. Although it was in generic terms and without specifications, it immediately aroused a strong rejection among some governors of the northern provinces. The most extreme manifestation was the threat of resignation by the governor of La Rioja, Ricardo Quintela, if the candidate Javier Milei is elected president.
Economic theory identifies fiscal correspondence as the main factor that contributes to good public administration. That is, the level of government that executes an expenditure must be also responsible for collecting the taxes needed to finance that expenditure. In this way, there is more citizen pressure on the governors to pay attention to the good use of what is collected through taxes. If the fiscal correspondence is diluted, the governors’ incentives to moderate spending and manage public funds well are also diluted.
How much fiscal correspondence is there in Argentina? To answer the question, it is useful to estimate how much national taxes are paid by the inhabitants of each province and how many resources are returned to each province through automatic transfers (co-participation) and discretionary transfers from the Nation to the provinces. According to the García and Vera study, in 2022 it is observed that:
These data show that some provinces receive much more than double the resources their citizens contribute by paying national taxes, which implies a very low level of fiscal correspondence. These provinces receive many resources not coming from the efforts of their inhabitants. The consequence –as predicted by economic theory– is that there are no incentives for good public management practices. These are provinces where excessive public employment and clientelism have historically prevailed.
The poor organization of the federal regime results in a very perverse incentive structure. The Nation extracts resources from the most prosperous provinces, impoverishing them. The extreme case is the Province of Buenos Aires. Part of these resources are transferred from the central level to the most backward provinces to deepen their impoverishment. Paradoxically, being benefited in the distribution of national resources ends up contributing to maintaining their underdevelopment. It is no exaggeration to say that co-participation and discretionary transfers from the Nation constitute one of the main factors that explain and sustain Argentina’s decline.
The construction of fiscal correspondence requires a comprehensive reform of the tax system and the assignment of each level of government’s roles. The way out is by unifying national, provincial, and municipal taxes, eliminating co-participation so that each province can finance itself with the taxes it generates in its territory (thus providing an incentive to provincial development), and contemplating –for the most backward provinces– a Convergence Fund to promote their development. The key point of this Fund is to set emphasis on the generation of infrastructure and human capital, instead of the “blank check” used for clientelist spending as co-participation is. With the same orientation, discretionary transfers from the Nation to the provinces should disappear.
The political viability of this reform constitutes a complex operation, but not impossible. The unanimous consent of all provinces is not essential. A tax and functional coordination agreement signed by most of the provinces is sufficient. The agreement, together with the repeal of the current co-participation law, requires a simple law of the National Congress, the adhesion of the provinces to such law, and a scheme for the special treatment to be applied to the provinces that do not adhere.