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ECONOMY | 17-08-2022 13:05

Subsidies slashed – sharp rises coming for more than four million households

Government hopes to save US$3.2 billion in 2023 with partial removal of subsidies for electricity, gas and water services; New Energy Secretary Flavia Royón announces a plan to trim assistance for the wealthiest, starting September.

Officials from the Economy Ministry this week laid out a new plan to slash utility subsidies for the nation’s highest earners while protecting low-income users, a move it helps will boost efforts to reduce Argentina's fiscal deficit.

Around four million households will be hit with sharp rises starting next month following the partial elimination of subsidies for public utilities, according to the government. A total of 270,000 households will lose all gas subsidies; some 400,000 will lose electricity subsidies; and 3.5 million will lose water tariff benefits from November, officials announced.

Argentina hopes to save some US$3.2 billion next year thanks to the move, said Energy Secretary Flavia Royón at a long press conference on Tuesday.

Royón, who took office last week in a rejig following the arrival of new Economy Minister Sergio Massa, described the move as “a very important plan in terms of fiscal savings and fairer distribution of subsidies.”

The partial elimination of benefits will save 47.5 billion pesos (US$340 million) by December this year and another 445 billion pesos (US$3.178 billion at today’s exchange rate) in 2023, the secretary claimed.

The official confirmed that new tariffs for gas and electricity services would be applied from September, with those for water beginning in November.

The new scheme will see the wealthiest sectors of the population stripped of subsidies, which will be maintained for the poorest and gradually reduced for middle-income sectors, according to a calculation based on a household’s income and assets.

Royón urged Argentines to use energy and water “efficiently and sustainably,” and said that the country is moving towards “a more orderly state.”


Sustaining subsidies

Subsidies for public services have been maintained as government policy for years in inflation-wracked Argentina, forcing the government to spend more and more to sustain them. In the case of water, for example, subsidies currently represent 70 percent of the overall bill.

In 2021, energy subsidies represented US$11 billion of expenditure, equivalent to 2.3 percent of GDP.

The government is seeking to reduce its fiscal deficit as part of a credit agreement with the International Monetary Fund.  President Alberto Fernández’s government has a commitment to reduce the fiscal deficit from three percent of GDP in 2021 to 2.5 percent this year, 1.9 percent in 2023 and 0.9 percent in 2024, targets agreed with the multilateral lender earlier this year, following the refinancing of Argentina’s US$44.5 billion debt, contracted by former president Mauricio Macri’s government in 2018.

Argentina is going through a deep exchange rate crisis and is wracked by runaway inflation.  Prices have increased 46.2 percent this year so far already and the removal of subsidies is a sensitive issue in a country where 37 percent of the population already lives in poverty.


'Efficient use' 

Royón said Tuesday that the new policy prioritised “the efficient use of resources by electricity and natural gas users” and that subsidies should only “reach those who really need them.”

Underlining that the new scheme would be introduced gradually, the official also said the plan would “affect sectors with high purchasing power” as well as households exceeding 400 kw in electricity consumption and high-volume water users receiving a total removal of subsidies. 

Royón said that a total of 399,156 users would lose all electricity subsidies, while some 3.5 million water users will lose all benefits from November. All changes would come “in instalments,” with “only a portion of the population” affected.

“This is a distributive policy with a social sense,” she added. “We are working on data collection and we are working to identify people who need state assistance and have not been able to fill out the form.”

Rejecting a description of the move as a “tarifazo,” Hydrocarbons Undersecretary Federico Bernal said in an interview Wednesday that higher costs to a household would depend on “whether a customer starts to look at his meter.”

According to the official, the decision to apply a gradual reduction of subsidies “is the first time it has been done in Argentina, because it implies a segmentation policy for a new order or tariff reordering and, at the same time, it allows savings and an efficient use of resources” and state assistance to users.



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