The New York Times
December 30, 1999

Argentina's New Chief Wins $2 Billion Increase in Taxes


          BUENOS AIRES, Dec. 29 -- After weeks of tough negotiations, the
          Congress gave President Fernando de la Ruá his most important
          victory today by raising taxes more than $2 billion to counteract an
          expanding budget deficit.

          Along with a $1.4 billion cut in spending, enacted on Tuesday, the package
          should reassure foreign investors and lower interest rates to speed business
          expansion, government officials said. Most economists expect a $4.5 billion
          deficit for 2000, which the government should be able to finance as long as
          economic activity continues to pick up.

          Passage of the economic package should help dispel fears that President
          de la Ruá will be unable to work with a Senate controlled by former
          President Carlos Saúl Menem's Justicialist Party. Mr. de la Ruá, who has
          been in office for only 18 days, was able to break a deadlock by
          negotiating with congressional allies of Mr. Menem and with several
          Justicialist governors now competing with the former president to take
          charge of the opposition.

          The emergence of a working détente has led some members of the left
          wing of President de la Ruá's governing alliance to grumble that he is
          backsliding on campaign promises to open a serious investigation into
          alleged corruption in the last government.

          Not surprisingly, the president's allies characterized the series of
          congressional votes as a big victory. But the legislative achievements may
          end up planting seeds for political problems in the future.

          The tax increases will primarily affect the middle class, which is the base
          of support for President de la Ruá and his Alianza coalition, which will face
          a mayoral election in Buenos Aires next year and congressional elections
          in 2001. But the president is betting that his economic program will spur a
          bond and stock rally and bring down the 14 percent unemployment rate
          much as some economists have credited President Clinton's deficit-cutting
          package as having done in his first term.

          The de la Ruá package levies new taxes on soft drinks, alcoholic
          beverages, cigarettes, airport use and private medical services. A separate
          tax on automobiles costing more than $20,000 will go toward increasing
          teacher salaries modestly.

          The Justicialist opposition proposed a package that would have hit upper
          income people harder, including taxes on interest from bank accounts. The
          opposition also wanted to exclude fruit juices and tobacco from the new
          taxation to protect provinces dependent on agriculture.

          But in the end, the Alianza majority in the lower house of Congress was
          able to block opposition amendments today and the tax package was

          "This sends exactly the right message to the country and investors,"
          Senator José Genoud of Alianza said today.

          Martín Redrado, an economist who was once a close aide to President
          Menem, said the new budget was more "credible" than the one inherited
          from the last administration. But he estimated that $1 billion of the $1.4
          billion in cuts was merely "accounting cosmetics."

          President de la Ruá's economic package will also take aim at tax evasion,
          which is estimated to cost the treasury $25 billion a year, or half the total
          owed by taxpayers. The tax collection agency will now have the power to
          freeze bank accounts, and special prosecutors will be appointed to
          investigate high-income tax evaders.

          In his Christmas message, Mr. de la Ruá made the budget deficit his
          primary economic concern. "The deficit is our worst enemy," he said,
          adding that "it is suffocating us."

          The 1999 budget deficit of $6.2 billion far exceeded guidelines set by the
          International Monetary Fund and increased concerns among foreign
          investors that the government would have trouble servicing its debt.

          But there are signs that the worst recession of the decade bottomed out in
          the final weeks of the Menem government, although the auto industry is
          still contracting and retailers complained that their holiday sales were
          below those of last year. Government and private statistics show that
          industrial production has been slowly picking up momentum since August,
          and improved agricultural commodity prices should help cut a trade deficit
          that has grown sharply since Argentina's major trade partner, Brazil,
          devalued its currency in January.

          Mr. de la Ruá will need an improving economy to sustain his recent
          electoral mandate, given that the Senate, most of the nation's governors
          and the judiciary are controlled by the opposition. In his first three weeks in
          power, Mr. de la Ruá has governed cautiously, offering few initiatives
          apart from the plans to trim the deficit.

          He campaigned on a platform that promised to clean up official corruption,
          but government prosecutors have so far indicted only one official in the last
          government, Víctor Alderete, the former head of the state-run pensioners'
          welfare institute. He faces 17 corruption charges and a $6,000 lien has
          been placed on his assets.

          Mr. Menem quickly came to Mr. Alderete's defense, charging that there
          was a witch hunt against his supporters. Without specifying what he would
          do exactly, the former president told reporters that if prosecutions of his
          former aides continued "I will have to speak up."