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Argentina’s Macri Outlines Tax Relief After Rebuff in Primaries

Posted on Aug. 16, 2019

After being sharply rebuked in primary elections, Argentine President Mauricio Macri announced a series of tax and other measures to provide relief to voters upset that his liberal reforms have failed to improve the economy. 

Discontent with Macri’s policies led many political pundits to predict that he would come in a relatively close second in the open presidential primary elections August 11. The president instead finished almost 16 percentage points behind Alberto Fernández of the populist Peronist Party. Fernández’s running mate is Cristina Fernández de Kirchner (no relation), who preceded Macri as president. Fernández de Kirchner, in turn, had succeeded her late husband, Néstor Kirchner, who was president from 2003 until 2007. The populist and protectionist policies implemented during the Kirchner presidencies have been blamed by many for putting Argentina into a macroeconomic hole that has proved difficult for Macri to escape. 

Currency and financial markets were hit hard by the extent of Macri’s defeat, and by the likelihood that he’ll be swept out of office in the general election. The Buenos Aires Stock Exchange’s Merval index plummeted by over 34 percent August 14. The currency, which had closed at 45 pesos to the dollar before the election, collapsed to 60 pesos by the close of trading August 14. 

The possibility of a currency devaluation spooks many Argentines because of the country’s experience with hyperinflation. The peso strengthened somewhat August 15 after Macri talked with Fernández, who reportedly said he would cooperate to reduce some of the uncertainty. Earlier in the day, Fernández said in a radio interview that an exchange rate of 60 pesos to the dollar was “reasonable.” 

Macri went on television August 14 to take responsibility for his party’s poor showing. The president also announced a series of personal income tax cuts for low- and medium-income families, higher welfare spending, and a 90-day freeze on gasoline prices, which he said would help “17 million workers and their families.” The package of measures is expected to cost around ARS 40 billion (approximately $697 million.) 

Among the measures, a family with two children with gross monthly wages of ARS 80,000 will receive a refund of ARS 12,000 for taxes paid earlier in the year. The threshold for paying income tax will also be increased, and social security contributions will be reduced for September and October, Macri said. Small- and medium-size businesses will have 10 years to pay off their tax liabilities.

On August 15 Macri announced that the government will suspend the 21 percent VAT on basic foods — including bread, milk, sugar, and rice — until the end of the year. After the market reaction August 12, “I made an exceptional decision that had never been taken in the history of our country before,” Macri said in a message on Instagram. “We will eliminate the VAT of the main foods consumed by Argentine families.” 

Juan Valerdi , a professor of economics at the National University of La Plata, said the tax measures are targeted at workers and small enterprises with back-tax debts. “They will definitely not affect business, especially in [what is] close to a hyperinflationary context,” he said. 

'No One Thinks Macri Has Any Chance'

If no one receives a majority in the general election October 27, the leading candidate can still avoid a runoff by capturing at least 45 percent of the votes or securing at least 40 percent of the votes while maintaining a margin of 10 percentage points or more over the second-place candidate. Macri’s term expires December 10. 

“No one thinks Macri has any chance in October,” Valerdi said. “Journalists, people in the street, and politicians are not discussing Macri’s chance of winning in October, but whether he will continue being president.” Because of economic turmoil, neither of the two non-Peronist presidents elected since the end of Argentina’s military dictatorship in 1983 have finished out their terms.

Martin Krause, a professor of economics at the University of Buenos Aires, said the measures won’t have a positive impact on Macri’s reelection chances. “They’re too little, too late,” Krause said in an email. “He is facing a run on the currency. Only trust can help recover money demand, and he is not going to be able to engineer a ‘confidence shock.’” 

Krause was referring to widespread expectations around the time of Macri’s election in late 2015 that his new administration would provide a positive “confidence shock” to the business community and investors after years of perceived economic mismanagement by the Peronists

Krause said that if Fernández and Kirchner prevail in the national elections, he expects higher taxes on exports and financial investments, “particularly from Macri’s fiscal [amnesty] in 2016.” Argentine residents declared $116.8 billion in previously undisclosed assets and paid $9.6 billion in taxes and fees as part of an amnesty program that concluded in March 2017. 

Valerdi was pessimistic about the prospect of tax reforms under a new administration. “When the economy is running good, they don't touch the tax system because they ‘don't need to,’ and they prefer to not try new taxes or [do away with] old (bad) ones,” he said in an email. “When the economy is bad and in an emergency, they usually apply any change that will give them easy and sure money as quickly as possible. That's not a planned tax reform, but emergency taxes . . . usually stay forever. Our tax structure is full of that and is defined by them.” 

Valerdi said that shortly before Macri announced his relief measures, there were rumors that the government would finance the package by increasing taxes on agriculture exports. “The [agriculture sector] blocked that measure and there is no explanation about the sources for financing either the new expenditures or the lower tax collections,” he said. 

In 2008 the Argentine Senate rejected a measure that would have ratified a decree sharply increasing grain export taxes imposed by Cristina Kirchner. After the Senate deadlocked on the measure, Vice President Julio Cobos unexpectedly broke the tie by voting against the measure. 

“Now the market conditions are totally different, so it makes no sense to impose such a system,” Valerdi said. “Of course, that doesn’t mean that the next government will not raise the retention percentage rate after several decreases [put through] by Macri.” 

Shortly after his inauguration, Macri abolished steep export taxes on wheat and corn and reduced the tax on soybean exports from 35 percent to 30 percent. In October 2016 he said retention taxes on exports of soybean products would be cut by 0.5 percentage points a month. In August 2018 the government suspended the previously scheduled tax reductions on exports of soybean meal and soy oil products, Argentina’s most important sources of foreign exchange. The following month, Macri announced sharp increases in taxes on exports of goods and services in an attempt to restore investor confidence and reverse a precipitous fall in the peso’s value. 

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