Chile Eases Fiscal Stimulus, Delays Plan to Balance Budget

  • Government proposes to raise spending by 4.4% next year
  • Chile won't balance structural budget by 2018, Valdes says

Chile’s government said it plans to slow spending growth next year, while admitting that a slump in copper prices and sluggish growth will force it to ditch plans to balance the budget by 2018.

Expenditure will rise 4.4 percent in 2016, compared with the 9.8 percent increase budgeted for this year, President Michelle Bachelet said in a televised address to the nation Wednesday. She didn’t give estimates for the budget deficit, which Finance Minister Rodrigo Valdes forecast will reach 3.3 percent of gross domestic product this year.

Chile’s government, which can still boast the only net savings position in South America, has been ramping up spending to fulfill Bachelet’s commitments on education and health-care and to revive sluggish economic growth. Now the government is changing its tone, curtailing spending growth as it looks to boost business confidence and halt a two-year slump in private-industry investment.

“We have fixed priorities and organized our commitments in line with our capabilities,” Bachelet said. “It is a responsible budget.”

Valdes later said that despite the “prudence” of the spending plans, the government wouldn’t be able to eliminate the structural, or cyclically-adjusted, deficit by 2018 as previously planned. The shortfall would narrow by about a quarter-point a year, he said.
The 2015 budget envisaged a structural deficit of 1.1 percent of GDP, though the government has indicated it will be wider than first forecast.

Spending Plans

A quarter of the extra spending next year will go to education, with health-care, security forces and reconstruction after recent natural disasters also set to benefit, Bachelet said, before calling on lawmakers to approve the proposal. The budget was immediately welcomed by industry group Sofofa.

“We value this announcement,” Sofofa said in an e-mailed statement. It “consolidates one of the most important assets that our economic institutions have and that the administration has decided to safeguard: genuine fiscal responsibility.”

The net savings of Chile’s central government and central bank fell to 7.5 percent of gross domestic product in March from 22.6 percent in 2008. When the debt of state-owned companies, such as the $13.3 billion owed by copper giant Codelco, is included, Chile probably has a net debt.

The slowdown in spending growth is likely to coincide with a withdrawal of monetary stimulus, crimping demand in the economy. Central bank President Rodrigo Vergara said last week that interest rates would need to rise in the “short-term” to combat persistently high inflation.

Still, Valdes said in July that fiscal spending will rise by less than budgeted this year, increasing about 8.8 percent. If that proves accurate, spending next year would rise closer to 6 percent.

Chile’s economy expanded 1.9 percent in the second quarter from the year earlier, down from 2.5 percent in the previous three months. Growth remained subdued in the third quarter, with mining output tumbling 9.3 percent in August from a year ago and manufacturing down 1.4 percent.

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