Chile Economic Structure

Chile’s fiscal policy has allowed the government to implement a powerful stimulus package to arrest the effects of the economic crisis on Chile’s economic structure. The government, in combination with the Central Bank, continues to collaborate to manage the use of revenues from the country’s Social Stabilization Fund. In 2009, Moody’s Investors raised Chile’s foreign debt rating to A1 from A2 due to the country’s resilience to the recession and solid policy framework.[br]

Chile’s fiscal policy has allowed the government to implement a powerful stimulus package to arrest the effects of the economic crisis on Chile’s economic structure. The government, in combination with the Central Bank, continues to collaborate to manage the use of revenues from the country’s Social Stabilization Fund. In 2009, Moody’s Investors raised Chile’s foreign debt rating to A1 from A2 due to the country’s resilience to the recession and solid policy framework.[br]

 

During the Latin American commodities boom a few years ago, Chile, the world’s largest copper producer, was reaping the benefits of high metal prices. The government then decided to save a sizeable portion of the sales, despite protests from the Chilean public. Then the recession occurred and copper prices went down by more than 50%, in-line with the sharp decline in other commodities. Thanks to Finance Minister Andres Velasco’s fiscal policies, Chile was in a better position to recover from the downturn and could create a stimulus plan, tax breaks for businesses and investments to keep its copper mines in operation. As a result, Chile’s stimulus plan accounted for 2.8% of its GDP, more than that of the US.

 

The implementation of a counter-cyclical fiscal policy was also attributed to Chile’s relative stable economic condition, compared to other countries. With the help of the $4.5 billion stimulus, the government tried to reduce the structural surplus to 0% and increase the lending by public banks.

 

Chile Economic Structure: The Road Ahead

As Chile is transitioning to higher living standards, it is likely that demand for public services will also increase. The goal to build an equitable society will call for further development of fiscal and public policies such as reduction of poverty, better education for all, and enhancement of existing social standards.[br]

 

To keep public finances sustainable in the medium term, government tax revenues may need to be expanded. Broadening the tax base and eliminating regressive tax exemptions would contribute to this vision. The government should also strengthen subsidies for the low and medium income population, while capping tax benefits for high income earners.