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UPDATE 1-Argentina signs fiscal pact with provinces, to deliver 80 bln peso bond

bond@ (Adds background on Argentina's political and economic context, details of the deal, quote from Dujovne)

BUENOS AIRES, Nov 16 (Reuters) - Argentina will deliver a bond totaling 80 billion pesos ($4.57 billion) at 6 percent interest maturing in 10 years to most of its provinces, after reaching a deal to lower provinces' fiscal deficits, Treasury Minister Nicolas Dujovne said on Thursday.

As part of the deal, nearly all of the 24 provinces agreed not to hike spending above the inflation rate and to lower some taxes. To receive the bond, the provinces agreed to drop pending litigation against the national government for underpayment of fiscal resources owed under Argentina's co-participation scheme.

The agreement came after President Mauricio Macri's coalition swept to victory in last month's legislative elections, providing him political capital to broaden his market-friendly reform agenda. Since the Oct. 22 vote, the government has proposed labor and tax reforms to be weighed by congress.

Argentina's provinces depend on transfers from the central government for a substantial portion of their revenue, and Macri's administration has been negotiating with their governors since early this year to reduce their spending as the national government tries to reduce its own fiscal deficit.

The 23 provinces that signed the deal agreed to unify the maximum tax rates on their gross income taxes, and lower those rates over the course of five years, Dujovne said.

Economists say the gross income tax is one of the most distortive duties in heavily taxed Argentina because it is charged on transactions at every stage of the supply chain, contributing to high consumer prices.

"At the end of the road, a good portion of export activities, which today accumulate a lot of cascading taxes, will be exempt from the tax," Dujovne said.

Argentina's financial markets cheered the deal between the government and the provinces, traders said, with the Merval stock index up 3.3 percent and government bonds up an average of 0.9 percent. ($1 = 17.4875 Argentine pesos) (Reporting by Luc Cohen, Maximiliano Rizzi, Eliana Raszewski, and Jorge Otaola Editing by Jonathan Oatis)