March 22, 2017 / 10:08 PM / a year ago

Argentina to pursue plan to freeze provinces' spending

BUENOS AIRES, March 22 (Reuters) - Argentina’s provinces have agreed to craft a new law with the federal government that would prevent provincial spending from rising faster than inflation, the Treasury Ministry said in a statement on Wednesday.

The proposed law, which would have to be approved by the country’s Congress, comes as President Mauricio Macri aims to cut Argentina’s fiscal deficit in part to lower the country’s high borrowing costs.

Last month, Treasury Minister Nicolas Dujovne announced targets for a primary deficit of 4.2 percent of GDP this year, 3.2 percent next year and 2.2 percent in 2019. Last year’s fiscal deficit was 4.6 percent of GDP.

But as Argentina’s 23 provinces and the autonomous city of Buenos Aires depend on transfers from the central government for a substantial portion of their revenue, a failure to reduce provincial spending could complicate the federal government’s own deficit-reduction efforts.

Federal transfers to provinces increased to 1.8 percent of GDP in 2016, according to JPMorgan Chase & Co. Several provinces have followed the national government’s lead in tapping international bond markets after Macri ended a dispute with holders of defaulted debt last year.

According to the Treasury Ministry’s statement, the so-called ‘Fiscal Responsibility Law’ would freeze current account spending in real terms and require that primary spending - which does not include payments to service debt - remains below inflation through 2019.

The statement did not say when the proposal could be sent to the country’s opposition-controlled Congress, and a Treasury Ministry spokesman did not respond to a request for comment.

Though he had some early successes in pushing bills through an opposition-controlled Congress, Macri has run into increasing resistance to his agenda of market-friendly reforms. Late last year, lower house opposition forced the administration to re-negotiate its income tax reform, while a proposed capital markets reform package has yet to be considered.

Dujovne is also preparing to present a reform to the country’s tax code to Macri, though Congress is not expected to debate it until next year.

Popular opposition to Macri’s austerity measures, including cuts to electricity and home-heating natural gas subsidies, is growing. More Argentines now disapprove than approve of his performance for the first time since he took office in December 2015, and the country’s largest labor union has planned a general strike for April 6. (Reporting by Luc Cohen; Editing by Lisa Shumaker)

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