Minister Guzman has finally shown some details of the “Law of Social Solidarity and Productive Reactivation”. The Bill includes a set of fiscal measures both from the income and the expenditure side and seeks to delegate extensive legislative attributions to the executive.
What’s the fiscal impact of the reform?
We estimate that the combined impact of the announcement is 2.5% of GDP, with upside risk. Starting from an estimation of an endogenous deficit of 2.5% in 2020 – assuming no change in fiscal policy – the new measures may allow the Treasury to reach primary balance in 2020.
In light of this news we adjust our 2020 primary deficit forecast to 0% with the following incidences:
Incidence of new fiscal Bill
% of GDP
| The Law of Social Solidarity and Productive ReactivationMinister Guzman has finally shown some details of the “Law of Social Solidarity and Productive Reactivation”. The Bill includes a set of fiscal measures both from the income and the expenditure side and seeks to delegate extensive legislative attributions to the executive. Within the most relevant fiscal measures we highlight the following:On the spending side: The Social system indexation rule is abandoned, and an ARS 5.000 special bonus for two months will be given to the retirees earning the minimum pension.180 days of tariffs freeze.From the tax collection side:An increase in export tax for primary products. 33% for Soybeans, 30% to soy derivatives, 15% to corn, sunflower and wheat, 9% for meat, rice and more and 5% for all the rest, the Energy sector will have lower export taxes (from 12% to 8%).Reversal of Macri’s property tax reduction to 2015 levels and allowing to charge double on foreign assets and reducing the rates for repatriated assets.30% taxes on FX purchases both for hoarding and with credit card use, with some exceptions, made such as health or sovereign (and sub-sovereign) R&D expenditures.A freeze of the reduction of social contributions, as was expected from the 2017 tax reform.The “Fiscal responsibility law” with the provinces is canceled, freezing the reduction in provinces’ sales taxes, and the transfer of “Coparticipation” funds from the Nation to the Provinces.A 0.5% increase in the statistical import fee.Expanding the financial transaction tax to cash withdrawals from ATMs for the corporate sector (small and medium enterprises are exempted).Internal tax for Automotives: 20% for goods between ARS 1.3m and ARS 2.4m, and 35% for all sales above that. |
| What’s the fiscal impact of the reform? We take as a starting point our “endogenous primary deficit” estimation of 2.5% for 2020 – that is, what the primary deficit would have been in the absence of any fiscal policy. As we stated in our Special Report: Medium-term Sustainability Analysis. endogenous dynamics would have lead to a worsening of 0.5% primary deficit of 2019 for a variety of reasons.Endogenous primary result %GDP  We assume that:Export taxes in 2019 were atypically high due to advance sales in anticipation of the new taxes. We estimate that to cost 0.5% in 2020. Capital: No extra incomes for privatizations are programmed for 2020Coparticipation rule: 0.17% GDP of tax collection perceived by the central government should be returned to the provincesWealth tax and Social security incomes are a component of the “fiscal pact” signed in 2017Social expenditure: increment due to the previous indexation ruleSubsidies: We assume a real decrease of 15% in real tariffsRest: we assume a real constant growth of expenditures |
| Social Security Desindexation We estimate the possible evolution of social security expenditure in 2020. In December and January, we assume the payment of the announced bonuses (0.17% GDP) and the actualization of December (+8.7%). A constant nominal pension level from January to June (without the increase of 12.1% in March from the previous rule).Since June and adjustment of 10%, 10% in September and 9% in December, assuming a new indexation rule for all the Social Security (we assume the restitution of the previous law with adjustment of the past six months). This set of assumptions would imply an average increase of 37.5% in the pensions, and 32% EOP, vs our previous estimate of 51% and 51% respectively with Macri’s indexation rule. This implies a decrease of 9% YoY in average real income, assuming inflation of 49% in 2020. The overall fiscal impact of this dynamics is 0.74% in 2020, and a negative of 0.1% in 2019 from the bonus. Comparative social security indexations  Total impact of reform in 2020  Combining both effects, the positive real impact of this combination will be perceived since the second semester. Cumulative incidence of desindexation% of GDP  |
| Export Taxes The new export tax scheme has a rate of 33% for Soybeans, 30% to soy derivatives, 15% to corn, sunflower and wheat, 9% for meat, rice and more and 5% for all the rest, the Energy sector will have lower export taxes (from 12% to 8%). The average tax rate on agricultural products will rise to 24%, slightly lower than 2015 (28.5%) although with lower commodity prices. However, the average incidence on all exports is now 14% higher than the 2015 level (10%) This implies 0.5% GDP of extra incomes in 2020, which will offset the extraordinary collection of the last quarter of 2019. when sales burst in anticipation of new taxes. The full extent of new taxes will be felt fully in 2021. The net result is a constant level of Export tax revenue in 2020. Export tax rate evolution  |
| Total incidence We estimate that the combined impact of the announcement is 2.5% of GDP, with upside risk. Starting from an estimation of an endogenous deficit of 2.5% in 2020 – assuming no change in fiscal policy – the new measures may allow the Treasury to reach primary balance in 2020. |
