Which Provinces will be Most Impacted by Milei’s Adjustment?

The recent surge in inflation has led to a significant reduction in the buying power of a large portion of the population. This situation is made worse due to job losses in the private sector amid a recession.

While this issue affects the entire country, the ongoing dispute between the Government and the provinces over the distribution of co-participation funds means that the decline in buying power could be more severe in certain provinces.

A report from IERAL predicts a 3% drop in GDP this year and a greater decrease in the total wage bill (after accounting for inflation). This primarily represents “bad news for the commercial sector” since a hit to consumer pockets generally leads to a slump in consumption.

Primarily, the provinces that are most dependent on discretionary transfers (as a percentage of their current income), and where the public wage bill forms a high percentage of the total wage bill would be the hardest hit. According to the report, this group typically includes the northern provinces.

As IERAL analysts point out, in previous adjustment periods, the public wage bill in the provinces decreased less than the formal private wage due to higher co-participation funds received. However, that is unlikely to be the case this year as discretionary transfers and provincial tax collection are set to be minimized, leading to a lack of financing.

February data analysis by the Center for Argentine Political Economy (CEPA) reveals a “20.2% real term drop in Resources of National Origin” and a 16.2% year-on-year decrease in Federal Tax Co-participation.

IERAL suggests that during an adjustment period, the most economically vulnerable provinces should be the ones receiving the most financial support. The Mediterranean Foundation questions why this isn’t happening, attributing it to excessive public spending during prosperous times, which prevents the accumulation of savings to be used during “lean times”.

CEPA economist Hernán Lechter explains that “provincial income primarily comes from two sources: their own resources (mainly Gross Income, Real Estate, Automotive and Stamps) and tax resources of national origin, primarily from Co-participation transfers. National origin tax transfers account for a significant portion of provincial income, averaging 56.6% in Federal Tax Co-participation (CFI) resources.”

“Including the rest of the transfers of national origin (RON) raises the figure to 70.3% of the total,” according to the Center. “Provinces like Formosa, La Rioja, Catamarca, Chaco, Jujuy, San Juan have a high level of dependence on national origin tax resources, primarily co-shareable resources. On the other hand, local tax collection is significantly higher in places like the City of Buenos Aires,” the analyst explained.