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Argentina’s Fiscal Crisis Reaches Tipping Point: Gas, Water Subsidies Cease to Flow

By: Belén Marty - @belenmarty - Apr 10, 2014, 8:11 am

EspañolAs reported by the Official Gazette on Monday in Resolution 226, there will be a new price schedule for Argentineans following the removal of the 20 percent subsidy on natural gas and potable water. To encourage frugality, each household’s new rates will ​​depend on whether they have reduced their consumption relative to the same two-month billing period of last year.

Cristina Kirchner, president of Argentina, announced via her Facebook page that the reduction in government subsidies for these services is due to a “duty of fairness.” She also explained that her late husband and former president of Argentina started the subsidy policy because “it was necessary to encourage consumption.” She argues that things have changed now that employment has improved and the public are earning higher salaries.

The new gas prices, which go into effect from this month, will vary based on location and use. Rates will differ for those who are able to reduce their consumption of natural gas by between 5 to 20 percent, or more than 20 percent, relative to the same billing period during 2013. Considerations will also be made for those who live in areas where the climate plays a factor.

As a result, those who reduce their natural gas consumption by more than 20 percent will not be as affected by the removal of the subsidy. These consumers may face higher prices due to general price increases, but they will bear no additional cost as a result of the loss of the subsidy.

According to the official announcement, “it has become appropriate to consider a plan that achieves a rational consumption of natural gas, incentivizing conservation in order to encourage a responsible and efficient use of resources. As such, there will be benefits for those residential and business consumers that reduce their demand.”

Is It a Tax Hike?

Economy Minister Axel Kicillof and Planning Minister Julio de Vido have both repeatedly said this measure is not to be considered a tax increase (see the video, in Spanish).

Kicillof said, “There is no tax hike, only a reduction in differential subsidies. For those who consume less, it will be reduced by 20 percent. For those who consume more, by 80 percent.” He explained that the measure is not a way to “get cash” from anyone.

However, the reality is that consumers who pay one of the lowest gas rates, such as AR$20 every two months — approximately 27 percent of all consumers — will see an increase of $8 in April, $6 in June, and another $6 in August. As such, consumers will see a 100 percent rate increase, and beginning in August will be paying 40 Argentinean pesos (about US$4).

In fact, a consumer in the northern province of Tucumán, if there is no reduction in use, could end up paying 765 percent more than last year. This contrasts with statements by officials who have declared only a 284 percent increase.

With regard to the price for water, as administered by state-operated AySA, the increase in rates will vary between 170 and 460 percent.

According to financial analyst Iván Cachanosky of the Liberty and Progress Foundation in Buenos Aires, now is the worst possible time for such an adjustment.

“They could have done this before when inflation was not affecting the public as much.… They did not do it then, I believe, because of how it looks politically. Now they have to do it because spending got out of hand and the tax burden has hit its limit, printing money has reached its limit [and there is the risk of runaway inflation],” commented the Argentinean.

For Cachanosky, the question of whether or not this is a tax hike is entirely rhetorical.

Where Will the Money Go?

According to the ministers, “the additional revenue generated will be used entirely to cover the costs of transportation and distribution, as well as reallocated to further the Asignación Universal [Universal Allocation] and Hijo y Progresar [Child and Progress] initiatives.”

However, there is widespread skepticism about the potential consequences involved with the removal of the subsidy. Cachanosky notes, “it may be that the money is in fact already spent, and if the subsidy were left intact, someone would have to pay the overage [the average taxpayer]. By removing the subsidy, the government saves about $10 billion a year [US$1 billion].”

According to the Economist, Argentina is on a path toward “normality,” with monetary adjustments like an official devaluation and a touted “redirection” of 20 percent of water and natural gas subsidies toward social programs. However, according to the article, this rollback of subsidies will have a negative effect on inflation, which has already increased as a result of the devaluation issued in January.

For Iván Carrino, another analyst for the Freedom and Progress Foundation, this appears not to be the case. He believes that “eliminating subsidies in no way affects the monetary market and that is where we need to look for the cause of the inflation.”

Carrino continues by saying that, “If, on other hand, the reduction in subsidies implies a reduction in public spending, then this means the government will depend less on the Central Bank to print money and finance the deficit. If this were the case, then the elimination of the subsidy would be, in reality, a crucial tool in reducing inflation!”

“We Need Legal Certainty”

Christophe De Margerie, president of Total, the largest gas producer in the country, told the Argentinean newspaper Clarin that it is necessary for the government to give them access to dollars so they can continue investing in the southern province of Tierra del Fuego. He has also called on the Argentinean government to grant greater legal security and prices to continue working in Vaca Muerte, an oil and gas field located in southwestern Argentina.

The company, headquartered in Paris, had announced plans last year to invest US$1 billion in Argentina to develop other areas in the province. However, the company president and former head of its subsidiary in Argentina also said, “We need access to the foreign exchange market to invest in major projects in Tierra de Fuego, and allow the production of new sources of gas to meet Argentina’s domestic demand.”

Translated by Guillermo Jimenez.

Belén Marty Belén Marty

Belén Marty is the Libertarian Latina, a journalist based in Buenos Aires, Argentina. She has lived in Guatemala, Jordan, the United Arab Emirates, and the United States and is a former candidate for local office with Argentina's Libertarian Party. Follow @BelenMarty.