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Chile Politics December 2021

Chile: Boric and Kast to face off in run-off; political gridlock likely regardless of victor

In the 21 November presidential elections, Gabriel Boric, of the left-wing Apruebo Dignidad alliance, and right-wing J.A. Kast, of the Frente Social Cristiano coalition, made it through to the second-round run-off to be held on 19 December. The latest polls put Boric ahead, although the result is still hard to predict. Both candidates are moderating their policy proposals ahead of the second round in a bid to win over centrist voters and ensure the political support of the other parties present in the legislature. However, neither the left- nor right-wing political groupings have a majority in both houses of Congress: While the left has a small majority in the lower house, it lacks a majority in the Senate. This will complicate policymaking going forward regardless of who becomes president and could lead to legislative gridlock, potentially generating further social discontent and unrest. However, by making radical reforms to the status quo unlikely, a divided Congress will also relieve investors, who had been worried about a sharp lurch to the left economically under a Boric presidency.

Gabriel Boric’s original program suggested raising additional taxes worth 8.0% of GDP, through extra levies on high earners, wealth, the environment and the mining sector, in order to fund a large expansion in public spending. These ambitions are now likely to be curtailed, with the candidate opting for a smaller increase in the size of the state. Similarly, J.A. Kast had originally proposed a “small, strong and austere” government, and suggested cutting VAT from 19% to 17% and the corporate tax rate from 27% to 17%. Such large tax cuts are set to be removed from the candidate’s program, with a greater emphasis placed on fiscal discipline.

On the situation awaiting the next president, Sergio Armella, economist at Goldman Sachs, said:

“The new president will assume office with high inflation, a restrictive monetary policy stance, slowing growth, deteriorating fiscal and debt dynamics needing consolidation, and voters’ high expectations and social pressure. In addition, the new president will assume office amid a process to draft a new constitution and will have to govern with a fragmented Congress. It will not be easy to build consensus, and the cohabitation of a new president, a new Congress, and a constitutional convention could prove challenging for governability.”

On the convention, analysts at the EIU commented:

“The election result will have particularly important implications for the constitutional reform process. Mr Kast opposes rewriting the constitution, and his own policy agenda differs markedly from that of the left-leaning constituent assembly. If he does win, we would expect a combative political environment in Congress and outside it. If the new constitution is approved by referendum in 2022, Mr Kast would not pursue enabling legislation. In this environment, post-election unrest would complicate matters further and tarnish governability going into 2022.”

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