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Chile May Delay Public Spending Curbs Until 2014, Dittborn Says

Chile will increase public spending by as much as 5 percent in real terms next year before curbing expenditure in 2014 to meet election pledges, Deputy Finance Minister Julio Dittborn said.

Spending increases will match economic growth of 4 percent to 5 percent in 2013, before falling behind similar expansion the year after, when this government’s four-year term ends, Dittborn said in an interview in Santiago.

Public spending in the world’s top copper producer expanded 3.3 percent in 2011, when gross domestic product climbed 6 percent, while expenditures will grow 6.4 percent in 2012, according to the Budget Office. Limiting gains in spending helps limit gains in the peso and allows policy makers to keep borrowing costs lower, Dittborn said.

“We made a promise to grow the budget in real terms at a slower pace than the economy to leave more space for the private sector to grow,” said Dittborn, who studied economics at the University of Chicago. “One year we did that and the other one we did not -- the budget increased more than the economy. So we probably should apply some brakes.”

Public spending plans may change along with the outlook for the global economy, with expenditures possibly rising in line with expansion for two years, with Dittborn said. The government hasn’t yet introduced budget legislation to Congress for 2013.

Monetary Policy

Chile’s central bank yesterday kept its benchmark interest rate unchanged at 5 percent for the seventh straight month, saying in a statement that “financial tensions” in Europe and a “tight” local labor market were partially behind its decision.

Dittborn said borrowing costs are “in the higher range,” adding that the central bank is free to make its own monetary policy.

Inflation has eased in the past five months, reaching 2.5 percent in July, the lowest level in 20 months. While inflation rates probably will end this year on the lower end of the central bank’s 2 percent to 4 percent target range, the drought in the U.S. threatens to increase food prices in Chile, Dittborn said.

Chile’s economic growth also poses a risk to consumer prices as a falling unemployment rate causes labor shortages in some regions of the country, he said. The jobless rate dropped to 6.6 percent in the second quarter from 7.2 percent in the same period last year.

“The foundations of our economy are very sound: we don’t have any fiscal problems and we have very little public debt,” he said. “The central bank could lower interest rates. They have not and have been very conservative.”

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