Chile Has Scope to Address Social Priorities

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Page 14

Over the past 15 years, Chile's economic reforms and prudent macroeconomic policies have delivered strong growth and low inflation. Per capita income has tripled in U.S. dollar terms, and poverty has been cut by two-thirds to 13 percent. Growth has slowed in recent years from its breakneck pace in the mid-1990s but continues on a 5 percent trend.

In the staff report discussed by the IMF's Executive Board in July 2007, the economy was expected to grow by almost 6 percent in 2007, following a broad-based upswing in the first half of the year. Since then, the outlook has weakened as global food and energy price shocks have pushed inflation above 6 percent, eroding real incomes. However, the medium-term inflation outlook remains anchored around the central bank's 3 percent target, and risk premiums in the interbank market and sovereign spreads have risen only moderately in recent months.

With Chile's open economy and liberal trade regime, the country's macroeconomic policy framework-a floating exchange rate, inflation targeting, and a commitment to running a fiscal surplus- is aimed at mitigating volatility from economic shocks. It has also helped maintain the economy's competitiveness despite the high price volatility of copper, Chile's main export product, and has provided added scope to address social priorities.

Surplus rule anchors fiscal policy

Fiscal revenues have continued to benefit from strong copper prices, but susceptibility to commodity price fluctuations remains a concern. Public spending increases are in line with revenues under the country's "fiscal surplus rule," which targets the structural surplus (that is, the fiscal surplus adjusted for deviations of output and copper prices from their long-term equilibriums). Chile adopted this rule in 2000 to insulate the economy from the effects of volatility in the price of copper. This has helped the country's floating exchange rate to remain both stable and broadly in line with fundamentals.

Chile's nominal fiscal surplus is expected to be well above 7 percent of GDP in 2007, thanks to strong corporate tax receipts and a rebound in value-added tax revenue. Invested government financial assets exceed 10 percent of GDP, and the central government has become a net creditor. Reflecting its stronger financial position, Chile has reduced its fiscal surplus target to ½ of 1 percent of GDP from 1...