Chile Puts Its Reputation Above Stimulus in 2017 Budget

  • President Michelle Bachelet announces 2017 budget proposal
  • Government reining in fiscal stimulus to narrow budget gap

Chile’s government plans to raise spending by the least in 14 years in 2017 as it looks to narrow the budget deficit, prioritizing its hard-won reputation for fiscal prudence over the need for further stimulus.

Spending will rise 2.7 percent next year, President Michelle Bachelet said in a televised address late Thursday, without giving details of the deficit or revenue forecasts. The last time spending rose that little was 2003.

“This is a fiscally balanced and responsible budget,” Bachelet said. “We will continue to carefully apply the fiscal rule, because our institutional credibility depends on it, and the confidence needed for foreign and national private investment.”

Chile, the only net creditor in the Americas, is reining in fiscal stimulus as a precautionary step to maintain its credit rating, the highest in Latin America at AA-. South America’s wealthiest nation has a fiscal rule to balance the budget if copper prices hit the government’s medium-term forecast and the economy grows in line with trend. It hasn’t met that goal for the past nine years and won’t do so next year either. Analysts are concerned its reputation for fiscal prudence is at risk.

For more on Chile’s tightening fiscal position, click here

Fiscal spending will rise an estimated 4.2 percent this year, after jumping 7.4 percent in 2015 and 6.1 percent in 2014. Still, higher spending has failed to revive the economy, which is enduring its third year of sluggish growth following a slump in the price of copper, the country’s leading export.

Gross domestic product contracted 0.4 percent in the second quarter from the previous three months and the third quarter has had an inauspicious start. The Imacec index, a proxy for GDP, gained 0.5 percent in July from the year earlier, the slowest pace in almost two years.

Even as growth slows, the government will scale back investment 3.7 percent next year, Finance Minister Rodrigo Valdes told reporters Friday. Capital expenditure will represent about 4 percent of GDP, compared with 4.2 percent this year.

The government will look to stimulate investment through concessions, Valdes said, without giving details. Bachelet said Thursday that the government would continue to provide funds for state-owned Codelco, the world’s largest copper miner.

"The country needs to have the capacity to generate a budget that limits spending increases and that, at the same time, promotes infrastructure investment," said Raphael Bergoeing, an economist at Universidad de Chile. "The challenge is to adjust spending without affecting the development of long-term infrastructure projects."

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