Chile Politics November 2021

Chile

Chile: Presidential race grows more polarized; large policy swings are on the horizon

November 8, 2021

On 21 November, Chileans will head to the polls to elect a president, the lower house of parliament and around half of the members of the senate. Gabriel Boric, of the left-wing Apruebo Dignidad alliance, and right-wing J.A. Kast, of the Frente Social Cristiano coalition, are the current favorites to win the presidential race according to opinion polls—although these predictions should be treated with caution, as polls for recent elections in the country have proven wildly inaccurate. Victory for Boric would likely shift the country markedly to the left economically, with higher taxes and increased government spending, and a greater focus on the environment. In contrast, Kast proposes slashing taxes and trimming the size of the state, and puts emphasis on law and order. That said, neither candidate would be guaranteed a parliamentary majority, which could frustrate their ability to implement their policy platforms. Moreover, the approval of a new constitution next year could condition the direction of policymaking to an extent. Uncertainty over the content of the new constitution is likely to hold back investment next year even after a new government is formed.

Gabriel Boric’s program suggests raising additional taxes worth 8.0% of GDP, through extra levies on high earners, wealth, the environment and the mining sector. This new cash would, among other things, be directed towards creating a universal public pension system, and increasing spending on health and education. His program also commits to reducing the structural fiscal deficit “in a gradual and sustained manner”. As the program marks a notable departure from Chile’s economic model in recent decades, it has the potential to dampen business sentiment—at least in the near term—and thus hurt private investment. That said, efforts to improve the quality of public services could boost human capital in the longer term, while a reduction in economic inequalities should calm social tensions.

J.A. Kast offers a radically different approach: He proposes a “small, strong and austere” state, cutting VAT from 19% to 17%, slashing the corporate tax rate from 27% to 17%, making the labor market more flexible, reducing government regulation and implementing a series of measures to aid SMEs. These policies could spur investment and growth in the near term, although existing economic inequalities could widen further, posing risks to social stability, while the quality of public services could fall further behind other OECD nations. In addition, his policy stance is likely to run counter to the new constitution that emerges next year from the constituent assembly, which is set to dictate a greater role for government. Depending on the exact wording of the constitution, the text could limit Kast’s room to shrink the role of the state and potentially set up clashes between the executive and the judicial system.

More centrist candidates Yasna Provoste and Sebastián Sichel are also in with a chance of obtaining the presidency, even though they are currently polling well below Boric and Kast. Both candidates’ policies would mark a midpoint between those of the two frontrunners, with a greater role for the state than is currently the case, while preserving elements of the current economic model.

The next president will face a series of challenges. Firstly, a parliamentary majority in both houses of Congress could prove elusive. Giving the increasingly polarized political climate, this would likely stymie many of the president’s policy proposals—as has been the case for incumbent President Sebastián Piñera. Moreover, presenting a credible plan to reduce the fiscal deficit and stem the surge in the public debt-to-GDP ratio will be important in order to retain investor confidence and preserve the country’s credit rating. Thirdly, the early part of the next presidency will be overshadowed by the constitutional assembly, which is due to present a new constitutional text by July 2022 for ratification in a referendum.

On the new constitution, analysts at the EIU comment:

“Our baseline scenario is that voters will approve the new constitution in next year's referendum. However, there are risks to this forecast, such as if the new constitution is too far to the left politically. In this case, we believe that voters would narrowly reject the new constitution and that the current one would remain in place. In this scenario, political instability would rise, as politics would become even more polarized and a wave of large-scale protests could occur, posing major governability challenges for the next administration.”


Author:, Economist

Sample Report

Looking for forecasts related to Politics in Chile? Download a sample report now.

Download




Chile Economic News

More news

Search form