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New Argentine Leader Seeks Higher Taxes to Boost Crisis Spending

New Argentine Leader Seeks Higher Taxes to Boost Crisis Spending

17/12 - 17:52 - President Alberto Fernandez sends emergency bill to Congress. Government plans to renegotiate debt, raise levies to farmers.

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Argentina’s new government is proposing higher export levies and a tax on the purchase of foreign currency as part of a plan to boost social spending and fix its debt problem.

President Alberto Fernandez on Tuesday sent a so-called emergency bill to Congress, where his coalition will face its first test. He seeks to obtain sweeping powers to renegotiate debt, raise salaries and taxes, while controlling prices of politically-sensitive items such as utilities and medication. In addition, the bill would raise export tariffs on the key farming sector.

Also among the measures proposed are higher taxes on the wealthy as well as a surcharge on purchases made in foreign currency. It follows recent government decrees for temporarily doubling severance pay and lowering medication prices.

“This bill is the first step to resolving Argentina’s economic crisis,” Economy Minister Martin Guzman told reporters in Buenos Aires. “We have to discourage savings in a currency that we don’t make, which is dollars.”

The bill is Fernandez’s first attempt to strike a balance between his voters’ demands for higher social spending and the country’s dire financial situation. Guzman, 37, has said the government can’t freely print money to cover costs, nor can it continue the previous government’s austerity cuts, which he argues have worsened the recession.

The minister added Tuesday that, in order to put public debt on a sustainable path, the government first needs to “determine a sequence of primary fiscal and trade results that are consistent with a recovering economy.”

Argentina is suffering with double-digit unemployment, inflation above 50%, and more than a third of citizens living below the poverty line. Additionally, the government is running low on foreign reserves and must renegotiate its debts with private creditors and the International Monetary Fund, which gave the previous government a record $56 billion bailout. Investors see a very high chance of a sovereign default.

Argentina’s century bond led gains, climbing 2.9 cents to 44.5 cents on the dollar. Bonds maturing in 2036 also jumped more than 2 cents to 42.8 cents on the dollar. Separately, the statistics agency reported Tuesday that Argentina’s economy grew on 0.9% on a quarterly basis between July and September, technically ending a 18-month recession.

The large number of measures announced still don’t amount to a comprehensive economic plan. Fernandez’s government has yet to detail its monetary policy, inflation and growth forecasts, as well as fiscal targets for next year. Yet the bill shouldn’t face much resistance in Congress, where the government’s coalition has a working majority.

“The emergency bill will likely be approved quickly,” Daniel Kerner, managing director at Eurasia Group, wrote in a note published before the bill’s formal announcement. “The government has two main goals with respect to the economy: boost growth quickly through domestic consumption and minimize dollar outflows.”

Other experts pointed out that some measures are ill-timed or could have unintended consequences.

A tax on debit and credit card purchases abroad is “a bad idea” because it will have little impact on Argentines’ travel plans during the holiday season, driving demand for dollars on the black market instead, said Juan Manuel Pazos, chief economist at Argentine firm TPCG.

“We’re about three weeks away from summer vacations, and at this point most agents have already their plane tickets booked,” he said. A widening gap between the official and the black-market exchange rates would only add to the sense that the official rate is overvalued, he added.

Matias Carugati, an economist who has worked as a consultant for Congress’ budget and tax committees, said increasing severance pay for workers “is going to end up discouraging hiring at the margin.”

Export tariffs, on the other hand, might be increased further again if the fiscal situation doesn’t improve, said Adrian Yarde Buller, chief economist at Argentine brokerage SBS. “A second phase could come later,” he said.

Balancing Act

Here are the main proposals sent to Congress:

  • Debt negotiation
    • Authorize the executive government to carry out measures necessary to ensure the sustainability of public debt
    • Authorize the government to issue as much as $4.6 billion of 10-year, dollar-denominated notes to the central bank in exchange for hard currency, which will be used to service dollar debt payments
  • Salaries
    • Boost salaries, attending to the most vulnerable sectors and creating mechanisms to facilitate salary agreements
  • Energy
    • Utility prices will remain unchanged for 180 days
    • Maintain electricity and natural gas subsidies under federal jurisdiction and authorize the executive government to start the renegotiation process
    • Authorize the executive branch to “administratively intervene” in national energy regulators
  • Export Tariffs
    • Soybean export taxes may rise to 33% from 30%
    • Wheat and corn export taxes may rise to 15% from 12%
  • U.S. Dollar Purchases
    • Argentina to apply 30% tax on dollar purchases during five fiscal periods
      • Government to use 70% of those proceeds for social security
    • Tax will also apply to foreign transactions
  • Taxes on the wealthy
    • Tax of 0.75% on assets between $3 million and $6.5 million
    • Tax of 1% on assets valued between $6.5 million to $18 million
    • Tax of 1.25% on assets $18 million and higher

    — With assistance by Scott Squires

     

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