Chile: Chile's 2015 budget boosts government spending to counteract a sluggish economy
October 13, 2014
Chile’s government projects a hefty 9.8% increase in government expenditure next year in an effort to revive the economy, which is growing at the slowest pace in four years. On 30 September, President Michelle Bachelet presented the budget for 2015, which is aimed at fulfilling some of the promises that she made in her campaign last year in the areas of education, health and social welfare. Real growth in government expenditure would be close to 8.0% since the spending forecast for this year is higher than that projected in the 2014 budget. This is due to the additional reconstruction expenses stemming from the earthquake in the north in April and the raging fire in Valparaiso in the same month. In any case, the increase is the biggest since the 2009 recession and significantly exceeds the 6.6% rise projected in this year’s budget. The budget proposal was sent to parliament and is expected to be approved before the end of November. Bachelet’s majority in parliament makes it very likely that the budget will be approved without major changes.
The rise in expenditure mainly reflects an increase in public investment, which are projected to be 27.5% higher compared to the 2014 budget. The 2015 budget envisages a 10.2% rise in education spending, an 85.0% increase in health investment and an 11.8% jump in infrastructure investment. The private sector will play a crucial role in the execution of the planned spending. The government has justified the boost in expenditure mainly by pointing to the extra revenue it will collect from the tax reform presented earlier this year that became law on 26 September. The reform, which increased corporate and other taxes and removed tax breaks, is expected to raise an extra USD 2.3 billion for the country’s budget next year.
Lately, the Chilean economy has been decelerating rapidly due to a slowdown in private consumption and a sharp drop in fixed investment. The uncertainty surrounding the recently-approved tax reform has been one of the main drivers behind low confidence among investors and consequently weak investments. However, growth is expected to recover gradually in the last quarter of the year as the government will inject USD 500 million into the economy through December as an emergency plan to boost investments.
The 2015 budget is expected to give a strong fiscal impulse to the economy and create around 139,000 new jobs. In addition, it allows the government to issue up to USD 7.5 billion in debt. However, compliance with the proposed budget will depend on the domestic and global economic situation next year. The behavior of copper prices as well as the effectiveness in collecting the expected revenues from the tax reform will be key to the execution of the spending that is promised for next year. The government might need to sell public assets up to USD 3.0 billion to cover its funding needs. Jorge Selaive Carraso, Chief Economist at BBVA comments:
“In a risk scenario in which the economy grows below our baseline scenario (3.5%) or in which the copper price shows more severe falls, financing needs—and, ergo, asset liquidation—will be greater. On the other hand, there is a risk that the revenue associated with the tax reform does not reach the amount forecast in the Financial Report, which would imply that the expenditure which has been committed to will have to be funded with additional asset liquidations.”
Author: Dirina Mançellari, Senior Economist