Cablegate: Argentina's New Federalism: Politicized Revenue Sharing


DE RUEHBU #1549/01 3171847
R 121847Z NOV 08



E.O. 12958: N/A
SUBJECT: Argentina's New Federalism: Politicized Revenue Sharing
with Provinces

Ref: Buenos Aires 976

Introduction and Summary

1. (SBU) Argentina's federal government collects the lion's share of
national revenues, and a "co-participation" revenue-sharing scheme
mandates that fixed shares of most federal taxes be distributed to
the nation's 24 provinces. Controversial earmarks and other
alterations to the distribution formula over time have charged
public debate on Argentina's federalist model, and a 12-year-old
constitutional mandate to negotiate a new revenue-sharing scheme
remains unfulfilled. In part, this delay reflects the Kirchner
administration's increasing reliance on new taxes not fully shared
with provinces -- including new taxes on agricultural and
hydrocarbon exports -- to support politically sensitive spending on
national infrastructure projects. At the same time, growing
supplementary and wholly discretional federal transfers to provinces
have many Argentine analysts charging that the Kirchner
administration is using provincial revenue distribution as a
patronage tool to reward supporters and punish opponents. President
Fernandez de Kirchner's remote home province of Santa Cruz receives
the highest co-participation revenue distribution share relative to
its population and the largest share of supplemental discretionary
transfers relative to its base co-participation receipts.

2. (SBU) This cable is the first in a three-part series. It reviews
the historical development of Argentine revenue sharing, and
compares current co-participation distribution shares to provincial
population and to provincial contributions to national GDP. Septels
will consider current federal/provincial funding tensions in more
detail as well as review the funding strategies of Buenos Aires,
Argentina' largest province, to balance its own books. End
Introduction and Summary.

Argentina Revenue Sharing: Historical Context

3. (SBU) Argentina's 1853 constitution established a federal
republic in which provinces were granted considerable autonomy in
administrative and fiscal matters. Despite this provincial
autonomy, the bulk of consolidated government revenues in this era
was generated by federal-level tariffs on imports, which accounted
for roughly 90% of consolidated Argentine tax revenues. Provinces
collected the remainder via consumption taxes. The 1853
constitution granted the federal government (GoA) the power to grant
discretionary subsidies (Aportes del Tesoro Nacional, ATNs) to
provinces with "fiscal imbalances" and such directed federal subsidy
payments to provinces grew to over 60% of total GoA tax collection
by the early 1900s. Historical data shows considerable temporal
variations in the distribution of provincial ATN subsidies and, as a
consequence, in individual provincial spending patterns.

4. (U) The first formal Argentine federal/provincial revenue sharing
("co-participation") regime was launched in the wake of the 1930
global economic crisis, as a dramatic fall in GoA's foreign trade
tax collections prompted the creation of new domestic revenue
generating vehicles, including federal income and federal sales
taxes. Congress passed the currently effective co-participation Law
in 1988 (see para 5). Subsequent 1996 amendments to Argentina's
1853 constitution required that a new co-participation agreement be
developed and approved by Congress before January 1997, but this
mandate has yet to be fulfilled.

5. (SBU) In the aftermath of Argentina's 2001/2 economic crisis, a
2003 IMF financing and restructuring agreement included
conditionality requiring the GoA to meet its 1996 constitutional
amendment mandate to negotiate a new co-participation agreement with
provinces. However, in lieu of this, the IMF ultimately accepted
congressional passage of the August 2004 Fiscal Responsibility Law
(FRL), which imposed significant restrictions on the GoA's
discretional use of budget funds. Subsequent enhancement of the
GoA's "Superpowers" budget authority (federal power to unilaterally
re-direct budget revenues with only nominal Congressional oversight)
hollowed out the FRL. The GoA pre-paid US$ 9.5 billion in IMF
borrowings in December 2005 and rejected any further IMF

--------------------------------------------- -
Current Co-Participation Regime: The Labyrinth

6. (U) The 1988 Co-Participation Law (CL) established a list of
federally collected taxes to be shared with the provinces. The GoA
retains 42% of revenues generated, 57% is distributed among the
provinces, and 1% is held in reserve "to finance unforeseen crises"

in the provinces. The main co-participable federal taxes are the
Value Added Tax (VAT) and the Income Tax, which together accounted
for 53% of total GoA tax revenues in 2007. Additional
co-participable taxes include 30% of collections on the Financial
Transactions Tax, some consumption taxes ("impuestos internos"),
taxes on extraordinary profits, and taxes on interest income.
Non-co-participable taxes include those on foreign trade (many of
which are controversial export taxes - Ref A); taxes on insurance
and on cigarettes; specific taxes directed to finance public
fiduciary funds; and social security contributions.
7. (SBU) Notwithstanding the broad array of non-co-participable
taxes, the 1988 CL law included a clause setting a floor
distribution to provinces of 34% of total federal tax collections.
In 1991, provinces received 46% of total federal tax collections,
excluding contributions to the pay-as-you-go social security system.
In sharp contrast, between March 2002 and December 2007, provinces
received an average 31.9% of total federal tax collections, with a
low in August 2002 of 23.4% and a high in June 2006 of 36.2%. After
this 2006 peak, the distribution trend has again decreased, with
provinces receiving an average of only 33% of total federal tax
revenues in 2007. (Note: Some local analysts believe that a proper
definition of "federal tax collections" should include worker
contributions to the pay-as-you-go social security system. If these
revenues are included in total federal tax collections, provinces
received only 27% of the total in co-participation receipts in

8. (SBU) The CL also set "secondary" distribution shares of
co-participable federal revenues among Argentina's 24 provinces and
federal capital district. Such secondary distribution, by general
consensus, was to have been based on provincial population,
population density, area, and level of development criteria, though
no formal criteria or specific calculation methodologies were
written into the CL. Since its 1988 inception, the CL has been
supplemented by amendments regulating the distribution and
destination of specific taxes and by a series of "fiscal pacts,"
including a 1994 pact which cut the proportion of revenues to be
shared with provinces by 15% in order to finance national social
security reform and privatization. (This 1994 reduction of
provincial revenues is currently a topic of contentious debate in
Congress as it representatives consider a controversial
nationalization of the private pension system.)

9. (SBU) Additional supplemental GoA regulations have earmarked
shares of specific tax collections for specific spending
obligations. For example, the wealth tax pool to be shared with
provinces first subtracts US$1 million to finance the federal organ
transplant agency. A share of federal income tax collection is set
aside for Buenos Aires province (Argentina's largest) as an
"automatic transfer" above and beyond the province's
co-participation share. This mix of overlapping fiscal pacts and
specific tax earmarks have complicated Argentina's revenue sharing
system to the point that it is commonly referred to by local
economic analysts as the "co-participation labyrinth."

Current Provincial Co-Participation Shares

10. (SBU) Current provincial co-participation shares display a
notable gap between relative size (as measured by population and
contribution to national GDP) and revenue sharing distributions.
Argentina's largest province, Buenos Aires, is the clearest example.
Despite holding 38% of Argentina's population and contributing some
34% of national GDP, Buenos Aires province received only 20% of
total co-participation distributions in 2007. Similarly, the
autonomous City of Buenos Aires, despite holding 8% of Argentina's
population and contributing some 21% of national GDP, received only
1.9% of total 2007 co-participation distributions.

11. (SBU) Numerous local budget analysts justify this distribution
on relative economic development grounds. They note that Buenos
Aires province and Buenos Aires City are the nation's two wealthiest
jurisdictions with the most highly developed economic
infrastructure. Interestingly, President Fernandez de Kirchner's
home province of Santa Cruz receives the single highest
co-participation revenue distribution share relative to its
population. The below table contrasts co-participation shares,
percentage population, and percentage GDP contribution for a
representative sample of 11 Provinces and the Federal Capital

Province % Coparticipation % Population % GDP
Share 2007 2007 2007
39.3 Million US$261 Billion
Buenos Aires 20.1 37.9 34.4
City of BsAs 1.9 7.7 21.3
Cordoba 8.6 8.4 8.0

Formosa 3.5 1.4 0.6
Jujuy 2.8 1.7 1.0
Mendoza 4.1 4.4 4.3
Misiones 3.4 2.7 1.4
Rio Negro 2.5 1.5 1.3
San Luis 2.2 1.1 1.3
Santa Cruz 1.7 0.6 0.9
Santa Fe 8.8 8.2 8.4
S. del Estero 4.0 2.2 0.8

Source: Economy Ministry Secretariat of Political Economy Office for
National Fiscal Coordination with Provinces

Discretional Federal Transfers to Provinces

12. (SBU) The GoA has long supplemented formal co-participation
payments to provinces with discretionary direct transfers. Local
analysts note that such discretionary transfers have grown
considerably since the implementation of federal "Superpower" budget
authority following the 2001/2 economic crisis. This authority,
which was recently renewed as a provision of the 2009 budget, allows
the GoA to re-allocate budget revenues with minimal congressional
oversight. Many analysts charge that such federal discretionary
payments have been allocated as political patronage to reward
supporters and punish opponents of the current administration.

13. (SBU) In 2007, co-participation funds of ARP 55.2 billion
(roughly US$ 16.5 billion) were supplemented by ARP 12.7 billion
($3.8 billion) of discretionary GoA transfers. Notable here is the
large share of discretionary payments made to Buenos Aires province
(a ruling coalition stronghold) and the small share granted to the
City of Buenos Aires (which has traditionally voted in opposition to
the Peronist party). Also notable is the outsized share of
discretionary payments granted to the current and former presidents'
home province of Santa Cruz (equivalent to 130% of its formal
co-participation payments).

2007 Discretionary Transfers (DT)

Province DT Received as DT Received as % of
% Total 2007 DT Co-Part Funds Rec'd

Buenos Aires 30.1 34.2
City of BsAs 1.8 20.9
Cordoba 8.2 21.8
Formosa 2.2 14.1
Jujuy 3.5 28.8
Mendoza 2.3 12.8
Rio Negro 1.1 9.9
San Luis 0.6 6.5
Santa Cruz 9.4 129.9
Santa Fe 5.6 14.6
S. del Estero 2.2 12.4

Source: Economy Ministry Secretariat of Political Economy Office for
National Fiscal Coordination with Provinces


14. (SBU) Argentina's "co-participation" federal revenue sharing
scheme has been a perennial sticking point in federal/provincial
relations. The GoA's 12-year delay in meeting its constitutional
mandate to negotiate a new Co-participation agreement reflects
federalist center/periphery tensions that have shaped much of
Argentina's historical political development. Presently, the delay
also indicates the Kirchner administration's preference for taxes
not fully shared with provinces - including taxes on agricultural
and hydrocarbon exports and on financial transactions - to support
its discretional and politically sensitive spending on national
infrastructure projects. The Kirchner administration's recent
failed effort to impose a variable export tax regime led to a
six-month long GoA confrontation with the agricultural sector
"campo" that significantly weakened the administration's popularity.
Governors routinely grumble about their dissatisfaction with the
current revenue-sharing scheme and with the GOA's laxity in
remitting funds to the provincial governments on a timely basis.

15. (SBU) Septels will review current federal/provincial funding
tensions in more detail as well as review the funding strategies of
Argentina' largest province, Buenos Aires province, to balance its
own books.


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