Macri Flexes Political Muscle in Deal With Argentine Provinces

(Bloomberg) -- President Mauricio Macri sealed a fiscal agreement with governors of nearly all Argentine provinces on Thursday in a sign of his growing clout in upcoming negotiations to close the budget deficit and open up the economy.

Governors of 23 out of Argentina’s 24 provinces agreed to drop legal claims estimated at 740 billion pesos ($42 billion) over their share of federal taxes in exchange for the proceeds of a 10-year, 80 billion peso ($4.6 billion) bond issued by the federal government. They also agreed to reduce local turnover taxes by 1.5 percent of gross domestic product over the next five years while limiting spending and supporting a reform of the pension system.

Macri seeks to impose fiscal discipline on the provinces as part of an effort to cut the primary budget gap, which excludes interest payments, by one percentage point next year. Thursday’s deal shows how the president’s hand has been strengthened by his alliance’s positive performance in mid-term congressional elections last month, said Daniel Kerner, head of Latin America analysis at Eurasia Group.

“It shows that he’s going to have room to pass a lot of things” in Congress, Kerner said in a phone interview from Mexico City, noting that Macri’s victories had so far been much costlier and more scarce. “It bodes well for what’s coming up.”

Buenos Aires, the country’s largest province, will drop its 400 billion peso claim for a larger share of federal taxes as part of the deal. The remaining provinces agreed that Buenos Aires will receive an additional 40 billion pesos in 2018 and 65 billion pesos in 2019.

Governors will also support a new method for pension increases based on inflation rather than the current formula that takes into account private sector wage growth and social security contribution increases. They also agreed to eliminate costly public sector benefits in pensions.

Macri’s alliance increased the number of seats in both chambers of Congress in elections that were seen as a gauge of enthusiasm for his program to reform Argentina’s protectionist economy. His alliance won 41 percent of the national vote, as well as the five largest electoral districts, as his opponents lost ground.

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