Chile’s fiscal rule, in operation since 2001, has been a benchmark for international observers as a result of its acyclical fiscal policy and its widely recognized effectiveness in fiscal and macroeconomic management. The rule’s main contributions include making counter-cyclical spending possible, promoting a competitive exchange rate, and enabling Chile to maintain a low sovereign spread with respect to the region and the world.
However, Chile has had almost 12 years of structural deficits, with a deterioration in the fiscal accounts reflected in the persistent effective deficits observed in recent years. Gross public debt is close to levels not observed since the early 1990s, registering sustained increases since 2008, and interest payments as a percentage of GDP are once again on the rise.
As a result, we must evaluate Chile’s fiscal rule. A three-dimensional approach is proposed: impact on expenditure growth, the rule’s complexity, and institutional setting.
1. Impact on expenditure
While the implementation of the rule has not led to stable expenditure growth during all periods, the effective revenue variance has been greater than the expenditure variance for the past 27 years. During the period 1990–2017, we observe three structural breaks in expenditure: in 2001 with the introduction of the fiscal rule; in 2009 with the global financial crisis; and in 2014 with the structural reforms associated with higher spending levels.
In terms of expenditure patterns, we observe that expenditure has a certain tendency to persist above its trend levels, i.e., it is more difficult for expenditure to adjust in the downward direction to reach its trend level than in the upward direction.
Expenditure performance under the rule, beyond the periods with de facto escape clauses, permitted expenditure increases in line with the levels experienced in other economies. When we compare Chile with other OECD economies during the period in which they experienced per-capita GDP (PPP) increases similar to those observed in Chile during 2001–2017, we observe that Chile is above the average level.
2. Complexity of the rule
As far as the rule is concerned, there is a trade-off between simplicity, predictability, and accuracy in the calculation of the cyclically-adjusted revenue parameter. The changes that have occurred since the rule was established were designed to make the calculation of structural revenue more accurate, albeit with a limited loss of simplicity and predictability. However, the adjustments made in 2009 greatly reduced these two features. Subsequently, the simplicity and predictability of the rule were restored with the adjustments incorporated into the 2011 Budget Law.
3. Institutional setting
Chile has only one type of fiscal rule, in contrast to other OECD economies that also have expenditure, revenue, and public debt rules. In this context, Chile’s Fiscal Council had lagged substantially with respect to international best practice across several dimensions, including the fact that it did not consider long-term sustainability analysis, ex-post analysis, public reporting, media impact, nor did it have legal nor operational independence. However, substantial progress has been made in these aspects in recent months with the submission of a methodological decree at the level of the Comptroller General’s Office on the calculation of the cyclically-adjusted balance indicator, and the approval of the Autonomous Fiscal Council Bill that will include all of the functions discussed above, leading to a substantial improvement with respect to international benchmarks.
However, a series of challenges remain to be addressed in the future:
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1. Need to improve Chile’s fiscal position and restore its sovereign credit rating;
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2. Need to promote transparency while improving the replicability of the instrument and access to information;
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3. Need to fine-tune the calculation of the indicator, and more specifically, to make the reference parameters (such as trend GDP, the reference price of copper, and non-copper cyclical adjustments) less procyclical.
We conclude by saying that Chile’s experience in the use and maintenance of the structural balance rule has been successful. However, certain fiscal metrics have deteriorated. The challenge is to strengthen the rule, leading to an improved fiscal position in the medium term.
Some tasks are still awaiting completion, such as restoring the structural balance, explicitly defining escape clauses and criteria for returning to the target, making the calculation of structural parameters less procyclical, strengthening institutional behavior in the operation of expert committees, improving reporting and fiscal transparency, and enhancing medium and long-term public financial planning.
