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Argentina: Provincial Problems

Just as midterm elections loom, Argentina's provinces are now completely subject to the whims of the Kirchners.


The federal government continues to enjoy a comfortable fiscal environment, despite the erosion of public accounts throughout the emerging markets.

However, the Argentine provinces are facing a serious crisis. Federal tax receipts grew 11 percent y/y in January. This was the lowest increase since 2006, but it was still better than shortfalls that beset the regional governments.

Coparticipation receipts increased only 1.3 percent y/y in January, leaving the 23 provinces plus the City of Buenos Aires in very tight conditions. This was part of a trend that began a number of years ago. Federal tax revenues rose 35 percent y/y in 2008, but coparticipation improved only 25 percent. Eight of the twenty-three provinces, along with the City of Buenos Aires, posted operational deficits in 2008. The provinces of Missiones, Catamarca, La Pampa, Tierra del Fuego, Buenos Aires and the City of Buenos Aires posted primary and operational deficits.


Meanwhile, the provinces of Jujuy, Santiago del Estero and Neuquen posted only operational shortfalls. The aggregate provincial operational deficit in 2008 was $3.039 billion-with most of it concentrated in the Province of Buenos Aires and the City of Buenos Aires. The problem is that the federal government's most important sources of revenue, export tariffs and the check debit tax, are not automatically coparticipated with the provinces. This is one of the ways the Kirchners have been to impose their political will on the regional governments, while enjoying a very comfortable fiscal position. Provincial finances have always been a controversial political issue in Argentina, and they are returning to the limelight as the country marches closer to the midterm elections.

Since the founding of Argentina, in 1810, the federal government limited the provinces' ability to collect taxes. Most of the country's revenues were collected at the custom's house, which was located in the City of Buenos Aires-even though most of the production originated in the provinces.

However, the funds were automatically coparticipated (shared) with the regional governments. Consequently, the provinces had no urgency to collect taxes. The federal transfers to the provinces represented the lion share of their operating budgets. The tax scheme may seem unfair, but it allows the entire country to equally enjoy the spoils. Nevertheless, there were problems with the system, especially as the federal government took on foreign debt. It had very little control over a large segment of the country's tax revenues. Therefore, during the debt crisis, the government was authorized special powers to change the coparticipation scheme, giving it sole control over export tariffs and the check debit tax.


As a result, the federal government gained a powerful tool to impose its will over the regional economies.  The various governments tried to attend their fiscal problems by improving their collection efforts, through the imposition of property taxes and automobile registrations. However, most of them lacked the population to create a meaningful tax base. The exceptions were the Province and City of Buenos Aires. However, the downturn in the business cycle in 2008 marginalized their tax collection efforts.  Unfortunately, the outlook for 2009 is even worse.

In addition to the sharp reduction in coparticipation receipts, the effects of the drought, the decline in commodity prices and lower consumer activity are depressing local tax collection efforts. Furthermore, operating costs are soaring. Wages represent 60 percent of provincial budgets. INDEC may claim that Argentina's inflation is rising only 7.2 percent y/y, but the CGT labor union is calling for wage increases of more than 20 percent. Therefore, the provinces are slashing expenditures. Almost all provincial public works programs are on hold. Many governments ordered hiring freezes, and there are rumors that some provinces will soon pay their workers in script. In earlier times, the provinces may have been able to tap into the local capital markets to meet some of their funding needs, but the nationalization of the pension fund system (AFJP) obviated that option. This means that the provinces will now be completely subject to the whims of the Kirchners. This is becoming a much more visible issue, as the country marches closer to the midterm elections.

Daniel Scioli, a close associate of the Kirchners, is the governor of the Province of Buenos Aires; while Mauricio Macri, a staunch opponent to the Kirchners, is the mayor of the City of BsAs. This means that the province will probably find itself with some extraordinary resources to meet their obligations, while the city may forced to implement a more draconian adjustment to stay afloat. However, this may spark a political backlash, as the electorate realizes the dirty games that the Kirchners are playing with the fiscal arrangements that were established almost 200 years ago.

Walter Molano is head of research at BCP Securities. 


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