When viewed from all angles, Chile’s fiscal rule can be given a positive assessment. Its operation has been a key factor in responsible public financial management. However, this does not mean that there are no aspects of fiscal policy in which there is room for improvement. A number of concerns are provided below, and measures are proposed to improve the fiscal policy framework.
First and foremost, a fiscal rule must be simple. In Chile’s case, the official calculation is very difficult to replicate, and its complexity has increased over time. We should mention that the rule acquired 12 components between 2001 and 2009. Currently, the structural balance is calculated with six elasticities and three prices for copper. We cannot help but wonder whether this level of sophistication is truly necessary. With a simple exercise, Juan Pablo Medina demonstrated that the rule can be replicated with only five parameters.
Another area of discussion relates to the use of the cyclically-adjusted balance or the structural balance, the latter being regarded as somewhat more akin to a permanent revenue and expenditure balance. In Chile, the cyclically-adjusted balance is used as it is more transparent and allows less scope for discretion. In fact, with a structural balance, it is necessary to define whether or not unexpected revenue and expenditure are permanent, which can lead to a substantial level of discretion. With a cyclically adjusted balance, this is not necessary as only GDP and the price of copper are cyclically adjusted, without the inclusion or exclusion of any special items. Even so, we have observed different criteria for different items in recent years. For example, extraordinary taxes in connection with a temporary window to declare capitals abroad and pay a reduced tax rate, were not included in tax revenue as they were one-time levies. By contrast, amounts owed in connection with the Substitute Tax on balances of profits under the Taxable Earnings Fund (FUT), were included in tax revenue, as the one-time-only component of these amounts was not known. It would seem to me that this is a valid discussion and that the new Autonomous Fiscal Council will make an important contribution in this connection. Its involvement will ensure that decisions on issues that will occur in the future will have the technical content required for the rule to be credible and meaningful.
A third point for discussion involves the escape clauses. There are certain special economic circumstances in which the rule cannot be complied with. This was clearly demonstrated in the 2009 crisis. However, the escape clauses should be designed with a formal mechanism. One option is to prepare an explanatory report for Congress that includes information from the Autonomous Fiscal Council providing an opinion on the decision to bypass the rule temporarily, and providing the relevant explanations. However, there is a risk with this clause that the report to Congress will come to be considered routine or normal, and accordingly, it is important to ensure that it is given genuinely extraordinary status.
The discussion as to whether the target should apply to the primary balance or total balance is also an important matter. We should point out that the International Monetary Fund’s programs apply to the primary balance, and that the Corbo Commission Report recommended moving in this direction. The problem is that the public has little knowledge or understanding of the primary balance, which may affect its credibility. In addition, since much of the debt is arranged on a long-term basis with fixed rates, the interest is fairly stable and therefore the conclusions obtained using different measurement techniques do not change substantially. Accordingly, I would propose continuing with the total balance, at least for now.
The discussion as to whether the fiscal rule of the balance should be supplemented with a debt limit is also valid. However, when the level of debt is relatively low, as it is in Chile, how can we prevent the debt limit from gaining attraction? I have no answer to this question, although I am skeptical of a debt rule for this reason, at least in the current circumstances. The other point involves the type of debt that should be used if we intend to establish a debt limit. In my opinion, it is clear that net debt should be used, as it is indicative of a country’s solvency.1
Substantial progress has been made in terms of the institutional framework. The main recent development is the approval of the draft law establishing the Autonomous Fiscal Council. Chile also has a Fiscal Responsibility Law, and the committees responsible for forecasting copper prices and trend GDP are independent. All of these factors taken together form a cohesive institutional framework.
Last, fiscal policy in Chile is self defined as acyclical, leaving the countercyclical role to monetary policy. In this context, there are doubts as to whether Chilean fiscal policy is and has been truly neutral, and if it has, what are the underlying reasons? Why give up a powerful policy instrument? One of the possible explanations for Chile’s adoption of an acyclical fiscal policy is simply due to the fear that an active fiscal policy will ultimately lead to substantial deficit levels and unsustainable growth in public debt. Interestingly, one of the proposals of the Corbo Commission was to make fiscal policy somewhat countercyclical, without overlooking long-term equilibrium.
We might consider debt net of surplus assets over a minimum level.
