the reasons behind the fight

2024-02-25 02:13:10

“I’m going to leave you without money, I’m going to melt you all down.” That phrase she would have pronounced President Javier Milei hours following the Executive withdrew the “bases” law from Congress given the beating that the project was receiving in the votes in particular. That phrase, originally said at a cabinet meeting, was reportedly leaked by the Minister of Infrastructure, Guillermo Ferraro. As soon as the version circulated that he had been the author, he was removed from office.

True or not, that’s what’s happening. President Javier Milei achieved a financial surplus in the month of January by force of a blender and a chainsaw almost in equal parts: income rose 257% year-on-year and total expenses, 149%, 105 points less than inflation. He liquefied salaries, pensions and reduced non-automatic transfers to provinces by 95%.

The governor of Chubut, Ignacio Torres, denounced that the Nation illegally withheld $13.5 billion from him, the equivalent of a third of his share. He threatened that, if they do not hand over their resources, Chubut will then retain its oil and gas. In the last quarter of 2023, 21% of Argentine oil production corresponded to Chubut. Number one is Neuquén, with 51%.

All the governors immediately joined the demand: those from Patagonia, those from the north, those from Together for Change, Axel Kicillof and also the one from Córdoba, Martín Llaryora.

Milei redoubled the bet and took the discussion to its maximum tension. She went from criticizing their sponsorship of recitals to calling them “fiscal degenerates” who defend their “obscene privileges.” He reiterated that the national government will not contribute to the “waste of the provinces that refuse to reduce unnecessary expenses, eliminate expendable political positions and govern with the austerity that the inherited economic crisis requires.”

With the verbal pyrotechnics and trench shouts out of the way, what is the point of conflict? Is it so, the governors don’t want to adjust?

Let’s see. Milei campaigned with the promise of fighting inflation and to do that, she maintains, she must stop issuing pesos to finance the Treasury and, to do that, she must balance the accounts. That is, adjust. It was only Milei who advocated for this: no governor spiritually adhered to that idea because, deep down, the owner of the machine is the Nation and the macro, deep down, is the responsibility of the Nation.

The President has said several times that the zero deficit is non-negotiable. Let’s agree: all previous presidents have said it at some point. But it seems that, whatever the cost, he will do it. He is unaware of previous signed commitments and even ignores what is stipulated in the Budget (even if it is the liquidated one, for 2023), such as the Compensation Fund or the pension transfers to the provinces. Pure chainsaw. That seems to have happened in Chubut: Sergio Massa passed on the debts to Mariano Arcioni from the Infrastructure Fund, which correspond to being deducted from the co-participation, and now the Nation withheld everything owed.

How much each

To reach the financial surplus that it aims for by 2024, it needs, according to calculations by economist Marcelo Capello, from the Ieral de Fundación Mediterránea, to lower the national deficit by 5.9 points of GDP (2.9% of GDP due to the primary deficit and 3% for debt interest).

“Such a goal is much more ambitious than the one initially agreed upon with the IMF for 2024, which was a deficit of 0.9% of GDP and primary balance only in 2025,” says Capello.

This had to be achieved in two ways: half by lowering expenses and the other half by increasing taxes. The plan was to increase withholdings, restore the Income Tax, eventually aggravate the Country tax. But the fiscal chapter was shipwrecked and remained pure scissors.

But then the national effort is not enough. There is no way to reach that goal if the provinces do not contribute to fiscal savings.

How much? A fair answer might be linked to another question: how much “fault” do the provinces have in the Nation’s consolidated deficit? Do they have any responsibility for the fact that the national State is bankrupt?

Yes. Not in equal parts. According to Capello: 75% Nation, 25% provinces. “Between the years 2000 and 2023, consolidated public spending between the Nation and provinces rose 10 points of GDP, and 75% of the national government and 25% of the provincial governments were responsible for this. That being the case, the adjustment in spending now required should also respond in similar proportions,” he says.

The problem is that the provinces have no incentives to organize their accounts. “Inflation causes political costs to the national government, not to the provinces. What’s more, sometimes it has even been good for them, because they increased Gross Income and it went unnoticed because it is hidden in the prices,” says the economist.

The situation worsened for the governors for three reasons. One, the 2023 elections left them tighter than in 2022, when the group recorded a fiscal surplus.

Two, in the last quarter of last year, lost resources due to the elimination of the Income Tax. That, combined with increased spending, was lethal.

Three, the climate of the time changed: citizens demand that politics also make its own adjustment and little of that is seen. Families are tired of lowering their consumption, the real salary has fallen since 2016 and is almost as low as in the 2001 crisis and the collective request is that this has to, at least, be shared. “Caste”, as Milei simplified it. The libertarian understood it and made a point of it… the governors were trapped in traditional logic.

Since there is no incentive for the provinces to adjust nor anyone willing to be “the hero of the adjustment,” the Nation does it on its own.

The path chosen is the reduction of non-automatic transfers. “In January 2024, it sent $64,711 million, the lowest real value for the month of January of the entire period 1993-2024 and 81% lower than the average for the period,” says Nadin Argañaraz, from Iaraf.

There are some discretionary ones, such as the ATN – which are openly hand-me-down – and others that have specific laws that establish them, such as the financing of the Córdoba Retirement Fund, which until 2023 was liquidated (it sent only 20% of the estimated ) and this year it directly went to zero. The Transportation Compensation Fund for the interior was contemplated in the extended 2023 Budget and was deregistered, as was the Teacher Incentive Fund.

The final round of the dispute will surely take place in Court, although the governors believe that Justice is doing Milei a favor: allowing him to pedal funds until the contest is defined in the canons of politics.

Libertarians are convinced that in two months the plan will show results (when inflation drops and salaries recover, they say) and that it will be the same governors who will return to implore the reforms that were previously aborted.

The governors (at least, the majority) are not sure of the imminent recovery and believe that in two months everything will have worsened. They want to remain standing on the path of those who “saw it.” The consensus among the 24 is that we must raise our voices because what follows is the delay in the co-participation of the Pais tax and then, perhaps, even the co-participation itself.

This being the case, what is the adjustment that Milei is demanding from the provinces? “I think they should go down proportionally to what they had an impact on the problem, that 75-25, and the numbers show that they are being asked for a little more than 25%,” says Capello.

The economist calculates that, by 2024, the contribution to reducing the fiscal deficit requires around 10% of their income as long as they recover profits and the fuel tax is updated, of which 20% is shared by the provinces. “And if those higher incomes were not there, they would have to double the effort,” he warns.

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