While the cyclical component of Chile’s fiscal policy in the last 15 years seems broadly appropriate, the fiscal rule has suffered a number of changes throughout this period, suggesting that it was not delivering suitable guidance. At the same time, the fact that the latest structural results are close to 3% of GDP below those 15 years ago, reveals a persistent deterioration that needs attention. Here I present a few comparisons that are useful in identifying areas that need improvement in the fiscal rule design.
First, let’s consider the behavior of the overall fiscal balance. Compared to Norway (an exemplary case of a fiscal rule), Chile has a strikingly similar volatility in the last 15 years. In the last five years, however, the deterioration in Chile was smaller. In contrast to Australia, another interesting benchmark, Chile seems to have a more marked cyclical pattern. Finally, in comparison to the average of commodity exporters Emerging Markets (EMs, as per the IMF classification), while Chile had a similar behavior between 2001 and 2013, it suffered a smaller deterioration in the following years. The cyclical behavior has been adequate: significant saving in good times and relevant dissaving in bad times. Notably, the 2009 crisis policy reaction appears quite large.
The second element relates to debt accumulation and levels. In comparison to the average of EMs, Chile’s debt accumulation has been smaller, both since 2011 and since 2014, and especially in comparison to oil-exporters. The sharp increase in Chile’s debt over the last five years has been the norm across EMs rather than the exception. In fact, compared with all countries with debt data (IMF debt database), Chile’s gross public debt-to-GDP ratio has remained stable in the lower 10th percentile since 2012. The only relevant increase against this benchmark happened in 2009–2011.
These comparisons reveal that the (local) notion that fiscal policy was “irresponsible” in the last few years is simply wrong. It is of course debatable whether policies should have been more or less supportive, but such a discussion is very different from the usual (local) perception. Sovereign spreads tell the very same story: they remained low in comparison to all relevant benchmarks (although credit rating agencies downgraded Chile one notch in 2017).
Chile: Debt to GDP and ratio relative position
Chile: Debt to GDP and ratio relative position
Chile: Debt to GDP and ratio relative position
These results, however, were not the consequence of the simple and mechanical application of the fiscal rule. On the contrary, as other sections of this booklet discuss, there have been several changes and tweaks to the rule, including adjustments to the numerical target and the calculation mechanics. To deliver (a cyclically appropriate) fiscal policy, the rule had to change. With this in mind, one can identify four concerns that a new rule design should consider.
Concern #1. Procyclical effects of structural parameter volatility. Chile saved significantly only in 2004–2008. After this period, in 2010–2013 long-term copper prices increased quickly, allowing for what can be considered excessive fiscal space. And when it declined in 2015–2017, the rule had to be adapted (from a level target to yearly changes) to avoid a knee-jerk adjustment, unreasonable from a macro perspective, and politically unattainable.1
Concern #2. Lack of a proper anchor. The fact that the structural balance had deteriorated by almost 3% of GDP between the early 2000s and 2017 reflects obvious fiscal pressures. But it also reflects the fact that Chile has never seriously discussed an appropriate debt level and the feedback that this should exert into the fiscal target (and rule design).
Concern #3. Lack of an escape clause. Fiscal stimulus after the Global Crisis was appropriately large (albeit the magnitude and spending combination is debatable). However, this contradicted the rule which was de facto abandoned.
Concern #4. Annual targets. In 2010 the government moved to a 4-year horizon target. This was again repeated in 2014, leaving the annual budget process anchorless (until 2015 when annual targets were reinstated). Having clear annual targets facilitates fiscal discipline and monetary/fiscal coordination, and should be the norm.
Solution alternatives to these concerns are discussed in Medina, Silva, Soto and Valdés (forthcoming).
