Argentina Steps Up Pace Of Economic Overhaul

Benedict Mander in Buenos Aires

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Argentina’s pro-market government aims to get a package of economic reforms approved by Congress by the end of the year, as it moves quickly to capitalise on its victory in midterm elections last month.

With a tax reform sent to Congress on Monday, Nicolás Dujovne, Treasury minister, was confident that a fiscal pact with regional governors aimed at reining in Argentina’s bulging fiscal deficit would be signed by the end of this week. 

“Every day that we lose in not advancing with the reforms, we lose an opportunity to increase employment and reduce poverty,” Mr Dujovne said. The support for President Mauricio Macri’s reforms reflected in the strong election results would ease their passage through Congress, he said, even though the ruling coalition still had a minority. 

“The endorsement of the government’s policies strengthens its ability to negotiate with the opposition, who understand that the reforms are popular. This acts as a break against obstructionism,” he said. 

The tax bill — aimed at cutting corporate taxes as well as simplifying an arcane and onerous tax code — would bring Argentina’s system into line with global practices within the next five years, Mr Dujovne said. 

“We are setting in motion a series of reforms that will make Argentina’s economy viable and sustain higher levels of growth in the long term, after many years of stagnation,” he said. The tax reforms must be gradual, he says, so as not to conflict with the aim of reducing the fiscal deficit. 

41%

Public spending as a proportion of GDP this year, down from 43%

Mr Dujovne said there were three main reasons why public spending had spiralled out of control over the past decade: pensions, subsidies and public sector employment in the provinces, all of which have risen far beyond the state’s capacity to pay. 

Some analysts argue that pensions represent the biggest challenge, since they account for around half of public spending. For now, the government is proposing simply to alter the formula for calculating pensions, taking inflation into account. 

While this change should pass through Congress easily in the coming weeks, Mr Dujovne admitted that “deeper changes will require broader consensus”. A commission including representatives from trade unions is being set up to discuss the issue, although this is unlikely to yield results before the next presidential elections in 2019. 

Faster progress has been made with subsidies, after tariffs multiplied by four or five times last year. But the cost of public services would be fully reflected in tariffs by the end of next year, Mr Dujovne said — with the exception of “social tariffs” for the poorest users. 

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Meanwhile, Mr Dujovne hoped a fiscal responsibility law, also expected to be passed by the end of the year, would provide incentives to keep public sector employment under control by preventing provincial spending from rising faster than inflation. 

He said the fiscal deficit had fallen “much faster than everyone was expecting”, with public spending as a proportion of gross domestic product falling from 43 per cent to 41 per cent this year. The primary fiscal deficit this year would be below its target of 4.2 per cent, compared with 5.6 per cent last year.

Even so, Mr Dujovne said that much remained to be done. “It will be many years until we can declare ourselves to be immune to external shocks,” he said, referring to Argentina’s dependence on external credit to lower the deficit. “But we are in a much better condition than we were just two years ago.”

While many are concerned about a growing current account deficit, Mr Dujovne said he was not. This was an “inevitable” byproduct of Argentina’s reinsertion into the global economy, he said, as imports increase rapidly to re-stock businesses, so improving productivity. 

“Today Argentina is solvent,” Mr Dujovne said, adding that the first year of Mr Macri’s government was dedicated to avoiding a crisis and normalising the economy. “Our solvency is no longer in question, the economy is now growing and poverty is declining.”


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Source : https://www.ft.com/content/33b92b18-c86e-11e7-ab18-7a9fb7d6163e

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