Government's strong showing at polls increases likelihood of tax and labour reform being approved in Argentina

President Mauricio Macri celebrates the results of the PASO on 13 August.

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On 13 August, Argentina held simultaneous and mandatory open primaries (Primarias Abiertas Simultáneas y Obligatorias: PASO) ahead of the 22 October mid-term elections, when Congress will renew one-third of the 72-seat Senate and half of the 257-seat Lower Chamber. The PASO formally functions to elect candidates from each of the separate political parties, or in some cases their competing internal factions. Additionally, because both the ruling Cambiemos ("Let's Change") coalition and former president Cristina Fernández de Kirchner's opposition Citizen's Unity (Unidad Ciudadana: UC) ran uncontested primaries in Buenos Aires province, the PASO was a clear indicator for voting intention in the October mid-terms. Buenos Aires province holds 40% of the electorate.

Cambiemos positioned itself as the largest political force in the country, obtaining 35.9% of the total votes for candidates for deputy. The various factions of the main opposition Peronism followed with 20.34% for Kirchnerism and its allies, and 17.09% for the Justicialist Party (Partido Justicialista: PJ).

Cambiemos obtained most votes in the City of Buenos Aires (only renewing deputies), a stronghold of President Mauricio Macri's Republican Proposal (Propuesta Republicana: PRO). Government ally Elisa Carrió obtained 49.55% of the vote, followed by the Kirchnerista Daniel Filmus (15.61%). More surprisingly, the ruling coalition led in the important Buenos Aires province, which traditionally votes Peronism and currently holds half of the province's 70-seat representation in the Lower Chamber of national Congress (Cambiemos holds only four). Cambiemos Senate candidate Esteban Bullrich obtained 34.19% of the vote, on a technical tie with Fernández, with 34.11%, who considerably dropped compared with the 56% support she got in the 2011 presidential election in the province.

Cambiemos also led in opposition-controlled provinces, including Córdoba, San Luis, Santa Fe, and even Kirchnerista stronghold Santa Cruz, and was getting more support also in Corrientes, Entre Ríos, Jujuy, La Pampa, Mendoza, and Neuquén. The opposition was winning in Catamarca, Chaco, Formosa, La Rioja, Misiones, Río Negro, San Juan, Santiago del Estero, and Tierra del Fuego.

Local markets reacted with guarded optimism, with the Buenos Aires MERVAL improving by 4.26%.

Economic recovery will influence results

Ever since taking office Macri has pledged economic growth in hand with investment. Both have been slow to come. However there are signs of incipient economic recovery – IHS Markit is forecasting 2.2% economic growth for 2017 and 3% for 2018, following a 2.2 contraction in 2016. This has nevertheless not influenced public perception; consumer confidence fell 6.9% in July year on year, according to official figures.

If Macri manages to prove that the economy is recovering, he will likely increase or at least maintain his support in October. In Córdoba, for example, Cambiemos got more votes than the ruling Peronist provincial government. That province grew faster than the national average (5.2% in the second quarter of 2017 compared with the third quarter of 2015, according to private estimates), partly driven by the agriculture sector, which has benefitted from the removal of export taxes since Macri took power.

Tax and labour reform will take priority

In the second half of his term, Macri will focus on passing tax and labour reform, with the aim of reducing operating costs for companies, in order to attract more investment to Argentina. The government has not yet revealed the details of the proposals, but will seek gradual tax reductions for companies. Taxes likely to be reviewed include those on banking transactions and cheques. Revenue sharing with provinces (co-participación) and income tax are also likely to be discussed.

On labour reform, Macri's focus will be reducing labour costs, which act as a deterrent for doing business in Argentina. The proposals will include easing the terms of collective agreements, by giving more flexibility to contracts, with the aim of reducing the risk of litigations. They will also include reducing social charges and removing contributions to unions.

Outlook and implications

If the PASO results are replicated in October, the government and its allies would increase their Senate seats from 15 to 24; and in the lower house from 86 to 104. That would still leave them short of a majority in both chambers, so it would still need to work with other allies to pass legislation. There will likely be cross-party consensus on a tax reform, particularly on income-tax issues, while co-participación will face more challenges, as all provinces will seek to increase or maintain their share.

A labour reform will face stronger opposition, particularly because Fernández is still likely to win a senatorial seat, even if as runner-up, and will therefore act as a magnet for anti-government sentiment. There, with at least one eye on the 2019 presidential election, Fernández is likely to work to build her support from the major labour unions, among them factions which had highly conflictive relations with her 2007–15 governments. The major concern for the government will be the extent to which other Peronist opposition factions are prepared to work with Fernández and how likely insurmountable legislative blockages would be. In that respect, the likely weakening of the Fernández-aligned opposition Front for Victory (Frente para la Victoria: FpV) caucus in both the Upper and Lower House would be an important indicator to the likelihood that Macri's government can push its policy agenda more effectively in the second half of its mandate. In this case, Macri would likely position himself for re-election, which means his economic agenda would last beyond 2019.