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Political
uncertainty undermines market confidence and brings back Cavallo.
On 16 March, Finance Minister Lopez Murphey introduced ambitious fiscal
adjustment measures, which proposed some US$ 1.96 billion in cuts for this
year and an additional US$ 2.48 billion in 2002. Murphey’s plan
sought to implement 95% of the adjustments via presidential decree.
The heavy burden that was to be borne by universities and strong cuts in
social spending prompted widespread protests and the immediate resignation
of four ministers from De la Rúa’s governing coalition partner Frepaso.
The lack of political backing for the new Economy Minister’s fiscal plan
prompted the resignation of Murphey after just two weeks in office and
brought back former Economy Minister (1991-1996) Domingo Cavallo to the
forefront of national politics.
Virtually
upon assuming office, Cavallo announced an economic plan to jump-start the
economy, the so-called Competitiveness Law, and began building the
political consensus needed to pass the bill in both chambers – a
challenging task given the patchy relationship that Cavallo has with
leadership in De la Rúa’s own party, the Peronist bloc and left-leaning
Frepaso.
Nevertheless, continued market volatility and the risks that
further delay posed to economic stability, prompted both chambers to pass
Cavallo’s plan.
The plan, which seeks to re-establish Argentine competitiveness by
cutting firm’s operating costs rather than touching the current
Convertibility Law, grants far-reaching authority to the government for a
one-year term to implement the economic measures necessary to rekindle
growth and reign in the fiscal deficit.
Even though so far the actual plan remains broad in outline, some
details have emerged, including:
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Trade
related measures.
The plan will enable the government to raise import tariffs on consumer
goods by some 35% and eliminate existing tariffs on capital good imports,
in an effort to simulate devaluation.
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New
tax instruments.
The government plans to levy a financial transactions tax of between
0.25%-0.6%, which is expected to bolster fiscal balances by raising US$ 3
billion this year. The government is authorized to remove or modify
existing exemptions on capital gains and sales taxes.
-
Tax
cutbacks.
Government measures would eliminate the current 12-centavo gasoline tax,
which would cost US$ 1.5 billion but is expected to serve as a boost for
the government’s competitiveness drive. Furthermore, domestic
producers of capital goods would be exempt from paying sales taxes on
production inputs.
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Elimination
of provincial taxes.
The government hopes to negotiate the elimination of provincial stamp and
income taxes, which represents a US$ 900 million cost.
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Tax
collection privatisation.
The new plan would immediately privatise tax collection, giving firms that
win the government contracts between 2%-3% of the taxes collected.
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Restructuring
of the national administration.
The government hopes to eliminate or merge existing ministries and
secretariats, which is expected to generate the lion’s share of the
savings for this year.
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Labour
reform.
The government seeks to eliminate or modify existing special statutory
frameworks underlying public sector employment and decentralise collective
bargaining in order to create 2.4 million new jobs in the next four years.
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