Chile’s Central Bank Backs Valdes’s Belt-Tightening Campaign

  • Central bank governor concerned by rising spending commitments
  • Vergara stresses need to stick to Chile’s fiscal rule

When it comes to fiscal policy, Chilean Finance Minister Rodrigo Valdes and central bank Governor Rodrigo Vergara are singing from the same hymn sheet.

Two days after Valdes said it would be a “fundamental error” to deviate from the government’s long-term commitment to a balanced budget, Vergara stressed the same point in a speech to senators Wednesday.

Valdes has said he will narrow the so-called structural deficit by 0.25 percent of gross domestic product a year, even as social demands mount for increased spending on health care, education and pensions. With the 2017 budget to be presented by the end of September, he has been preparing his cabinet colleagues to expect limited spending increases, with any gain by one ministry financed by reductions at another. Vergara couldn’t agree more.

"I am especially worried that the accumulation of commitments ends up putting pressure on public finances," Vergara said as he presented the bank’s quarterly monetary policy report.

Chile’s fiscal prudence has made it the darling of credit rating agencies, which rank it one notch ahead of Japan and several notches above Italy, Ireland and its former colonizer, Spain. As spending commitments rise, some analysts are concerned Chile will lose that premium.

The government will post a structural deficit, which takes into account cyclical factors, of about 1.4 percent of gross domestic product this year, the government estimates. The total fiscal deficit will widen to about 3.2 percent of GDP from 2.2 percent last year.

For more on the outlook for this year’s budget, click here

The target to narrow the structural deficit a quarter-point each year is a good way to gradually adjust to the new spending limits, Vergara said, while warning it also meant that spending would exceed revenue for a few more years.

“I am not calling for total inflexibility, or the mechanical adherence to the rule, as I believe there are moments when you need to be flexible,” Vergara said. “My concern is rather that we have exhausted the level of flexibility.”

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