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Fernández and Larreta take aim at each other through taxes

President and Mayor are finding creative ways to siphon money off each other

By | [email protected] | November 25, 2020 12:02am

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Coexistence between a Peronist president and a BA City Mayor from an anti-Peronist coalition had started surprisingly well.

Alberto Fernández and Horacio Rodríguez Larreta seemed to be finding common ground by being the centrist wing of their respective coalitions, with Cristina Fernández de Kirchner to Fernández’s left and Mauricio Macri to Larreta’s right.

With the start of the pandemic, that duo plus Buenos Aires Governor Axel Kicillof took center stage, as the Greater Buenos Aires region was the epicenter of nationwide cases. Fernández, Larreta and Kicillof’s press conferences, with its charts on how the country was doing in its fight against COVID and the latest updates to lockdown restrictions, had a much higher audience than anything else on television, and the approval ratings of the President were rising on par with those of the Mayor.

Dislike for Larreta was waning among quite a few Peronist militants, seeing him as a reasonable man that their government could work with. But even more crucially: the nationally televised press conferences were suddenly turning Larreta into a well-known figure outside of Buenos Aires.

The Buenos Aires Mayor still emphasized his opposition to some of the government’s most polarizing moves, especially those perceived as initiated by Vice President Cristina Kirchner, like the judicial reform bill, thus maintaining credibility with the more hardline opposition to the administration. But Larreta was mostly in a win-win situation, rising to the nationwide stage and suddenly seen as a viable presidential candidate, while his PRO party machinery and Buenos Aires City Peronists close to Fernández focused on their common interests.

The police mutiny

Economic stress, however, can bring conflict even to the loveliest of couples. In spite of their honeymoon, Fernández and Larreta did not manage to be the exception.

The country was in dire need of economic help for the unprecedented recession it was facing, but the government’s pockets were empty after years of bipartisan mismanagement. As opposition to the lockdown grew and Fernández’s popularity regressed to the mean, more and more groups started airing their demands against him and his allies.

Most notable among them was the Buenos Aires Province Police, the largest force in the country, overworked and underpaid in the district that national authorities lose more sleep over in the country, as well as generally hostile to Governor Kicillof, who is seen in the force as a potential trouble-making outsider. By September, policemen were protesting en masse, bringing worrying memories of 2013, when a series of police strikes ended up with lootings and deaths in some of the country’s Northern provinces amid a very passive response from the national administration.

Fernández had to act quickly, and knew that protecting the country’s largest province and Governor Kicillof (one of his VP’s closest allies) was a first-order priority, especially after the tense night that the Governor went through with his house surrounded by the protests. The loser was Larreta, as the President re-allocated some of the nationally-collected funds reserved for provincial re-distribution from Buenos Aires City to Buenos Aires Province, creating a special fund with them to get provincial police officers paid and bring relief to Kicillof’s coffers.

A cold tax war

The potential for tax conflict between Fernández and Larreta had always been there, but both parties had initially been happy to keep it at bay, despite VP Cristina Kirchner seemingly pushing in a different direction.

“The President said any change regarding the Federal government’s (tax co-participation) policy towards the city would be the result of talks and consensus, and I trust what the President said,” Larreta said early in February. But too many things changed between February and September, and Larreta only got a text message warning from Fernández 5 minutes before the press conference unilaterally announcing that he was going for the city’s money.

The move was certainly politically creative, easing short-term tensions after an evening in which a small group of policemen even reached the presidential residency. But it obviously sparked a new conflict with Larreta, who responded on the next day in a press conference where he looked fiery when compared to his usually mild-mannered standards.

“We came out in support of democratic institutions yesterday (during the police protests), and I will always look for unity among Argentines. I will always look for ways to settle differences and end the country’s long, damaging history of conflicts. Sadly, however, the government practiced exactly the opposite of the dialogue that Argentina needs and that I have always strived for. The government damaged the political harmony we had achieved right when Argentines needed it the most. It chose to divide us again through an improvised resolution, with no consultations, taking funds from us right in the middle of the pandemic,” Larreta said that day.

The mayor took aim at the central government, asked for the solidarity of provinces against national arbitrariness, and promised to challenge the decision in courts, arguing that it violated the constitution.

But Larreta’s response did not end there.

City budget payback

Facing a much tighter budget for 2021, the BA City Government went for a mix of lower spending and higher taxes. Subway improvements, waterways, cycling paths and other infrastructure projects were put on hold. And, crucially, two new taxes were created.

First, and most notably for his relationship with Fernámndez, was the elimination of tax exemptions on Central Bank short-term notes, whose transactions are often done through banks headquartered in the city of Buenos Aires.

This affects the Central Bank’s peso-denominated 7-day Leliqs, as well as the 1-day Pases, which the national administration uses to reduce the amount of circulating money, by offering banks an extra interest rate to keep the money that the government prints off the street.

This might seem technical and minor, but Leliqs and Pases are a huge deal. They were one of the main driving forces behind the run against the peso that put Macri against the ropes since 2018, when the government struggled to secure their renewal, and have doubled in size since Alberto Fernández took office, as money printing has been ramping up even further, especially since the COVID-19 crisis. Raising taxes on these notes increases the cost that the Central Bank has to pay to keep the mountain of printed pesos off the street, and will definitely add a new headache for the bankers that hold them, as well as for the economic cabinet that wants bankers to keep renewing them.

In addition, Larreta created a new 1.2 percent tax on all credit card purchases, which will fall directly on consumers and be charged with their monthly credit card bill.

A new headache for Fernández

According to analysts, the new tax on Central Bank notes will either force bankers to lower the interest rates offered to depositors (which would likely send more of them running to buy US dollars), or negotiate with the Central Bank to pay them higher rates. Otherwise, their profitability will take another hit, after two years in which the sector has been in steep decline.

In the end, as is often the case, it will all go back to one of Fernández’s biggest problem: the Central Bank, which is already struggling to contain a run against the peso, and whose balance sheet has been deteriorating consistently for more than a decade.