Argentina cuts subsidies to profitable industries

AP News

11/2/2011 6:05:42 PM - AP News

Argentina will no longer subsidize utility costs for profitable industries, the government announced Wednesday in a long-expected move that the planning minister said would initially save $140 million a year.

Future subsidies will be determined by a new commission that will decide who truly needs them, Planning Minister Julio de Vido said, then enumerated a list of industries that will immediately lose 100 percent of their government help: oil, gas and mining companies; casinos, bingo parlors and racetracks; banks and insurance companies, and airports and other passenger terminals.

"We are beginning a new era of personalized subsidies. No one will be able to receive a subsidy that he doesn't need, because that's what all other Argentines end up paying for," de Vido said.

The move could provide another motive for Argentina's already high inflation rate to increase. Anticipating that possibility, de Vido warned industries that have long benefited from reduced prices for energy, electricity and water not to pass their added costs on to consumers.

But some economists were dismayed the cuts announced Wednesday were so small, affecting just 1.3 percent of the government spending that now goes to subsidies and leaving direct subsidies to consumers untouched.

Fausto Spotorno, an economist with Orlando Ferreres and Associates, said the government should be cutting more at a time when its budget surplus has fallen 86 percent from the year before, to $105 million as of September.

Analyst Daniel Kerner welcomed the move, but said it raised questions.

"While the decision represents a positive development for fiscal policy, it does not constitute a game changer either in terms of macroeconomic policy or energy policy," Kerner said.

Since de Vido appeared to rule out price increases for residential customers, "the outlook for the energy sector will remain challenging, since the government is not willing to provide clear price incentives," he added.

Argentina has spent about $12 billion on energy subsidies so far in 2011, according to the Argentine Budgeting and Public Finance Association.

The government began subsidizing utilities to get the economy moving again after its devastating 2001 financial crisis. Nearly a decade of strong growth since then has made the subsidies harder to justify. Many businesses have said they cause economic distortions that hinder competition and future development.

De Vido said the money saved will go to more productive uses, such as infrastructure development.

But Amado Boudou, the economy minister and vice president-elect, held out the possibility that poorer people may even get more help from the commission. He said future subsidies will be determined strategically, to decrease income inequality and encourage job growth and industrialization.

Boudou said the subsidies have been a part of Argentina's economic success, "helping the country re-establish its industrial base and create a more competitive economy, drawing in sectors of the population that didn't have basic services."

But with the global economy becoming increasingly volatile, these government payments have to be made more strategically, he said.

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Michael Warren can be reached at http://www.twitter.com/mwarrenap