VZCZCXYZ0001
RR RUEHWEB

DE RUEHBU #1549/01 3171847
ZNR UUUUU ZZH
R 121847Z NOV 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 2450
RUCNMER/MERCOSUR COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS BUENOS AIRES 001549 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV PREL PGOV AR
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 
conditionality. 
 
--------------------------------------------- - 
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 
2007.) 
 
¶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 
District. 
 
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 
 
------- 
Comment 
------- 
 
¶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. 
 
KELLY