They estimate that subsidies will reach 4 points of GDP this year

Foto Aldo Abram
Aldo Abram

ÁMBITO FINANCIERO – Subsidy spending promises to become a new headache in the future when the quarantine scheme has to be exited and the coronavirus is in the past. According to private projections, they could represent half of the fiscal deficit by the end of the year, which is estimated to be at least 8 points of GDP.

This was pointed out to Ámbito by the economists Aldo Abram of the Fundación Libertad y Progreso, Jorge Colina, director of the Institute for Business Development of Argentina (IDESA) and the economist of the Center for the Implementation of Public Policies for Growth with Equity (CIPPEC) José Gasparín.

A recent report from the Argentine Institute of Fiscal Analysis (IARAF) estimates that during the first half of this year the Government already had to disburse 2 points of GDP to support public service rates, basically energy, and transportation. The report details that between January and June $ 293,632 million were available, equivalent to 9.7% of total primary spending and 2 points of GDP. It is detailed that “the extension of the freeze, which expired on June 20, will maintain the amount of electricity and gas bills until December 17, 2020” and it is noted that “for the freezes prior to 2015, there was an inflation stable between 20% and 25% annually; while today with a speed of rise in prices of at least 40%, the rates are delayed at twice the speed and the State will have to disburse expenses for economic subsidies much faster to sustain its policy ”.

In this regard, Abram estimated that on average the public is paying about “30% of the value of the rates”, while in the period prior to 2015, as he said, “they were paying 18%.” All that way is the one that would have to recover the tariffs to be balanced. The problem that arises is that in the midst of the inflationary context “very large increases have to be determined and almost everything is carried away by inflation.” The economist understands that in a framework of generalized increase in prices “rates have to rise above” the value set by the CPI, something that in this context does not seem viable. In fact, the economist from Libertad y Progreso does not believe that when the Minister of Economy, Martín Guzmán, begins to negotiate a program with the International Monetary Fund (IMF) they will demand an immediate correction. “The point is that if they want to face the entire plan of works that they are announcing, they will not be able to finance it with what they are supposed to stop paying interest on the debt, because that was not being paid, it was being refinanced”, said Abram, who stated that inexorably the Government should save on the subsidies side in order to finance the new spending.

In contrast, Colina was less optimistic. “It is almost that we have a 95% chance that the Fund will demand a reduction in subsidies,” said the director of IDESA. The economist maintains that “if the cost of subsidies is projected for the entire year, they will be like 4 points of GDP, that is, half of the deficit of 8 points.” Colina believes that the credit agency is going to ask Guzmán to launch a stabilization plan that inevitably includes avoiding the delay in utility rates. For the professional, the current situation leads to an economic debate similar to the one that existed 5 years ago, which is whether the correction can be made through a shock or in a gradual process. “The first thing you see now is that the rate freeze affects investment. This is the case of Edesur, the quality of the service suffers ”, said the IDESA economist.

For his part, Gasparín warned that “in the first six months the economic subsidies showed strong dynamism, which occurs in a very particular context such as the pandemic.” However, he clarified that “a good part of the components have their own inertia”. “The economic subsidies were mainly destined to energy, but those destined for industry also showed an important dynamic from the measures taken by the Government to cushion the effect of the health crisis.”