The fiscal rule in Chile operated adequately until the 2008 global financial crisis. The accumulation of surpluses during the copper boom enabled an unprecedented fiscal policy to be implemented, helping to mitigate the effects of the crisis. However, fiscal policy during the crisis deviated from the rule, even though this was justified by the severity of the crisis. By contrast, the rule was not very stringently applied after the crisis. Figure 1 shows the deterioration in the structural and actual deficits that ultimately led to a substantial accumulation of public debt.
Chile’s Fiscal Balance: Effective & Structural Percent of GDP
Chile’s Fiscal Balance: Effective & Structural Percent of GDP
Chile’s Fiscal Balance: Effective & Structural Percent of GDP
In most emerging economies, we observe the failure to eliminate fiscal stimulus completely (Figure 2), primarily because fiscal expenditure did not decline to precrisis levels (Figure 3). There is substantial fiscal inertia that leads us to question the capacity of fiscal policy, in contrast with monetary policy, as an instrument to stabilize fluctuations, particularly when they are severe, as was the case of the global financial crisis.
Fiscal Balance for Select Emerging Market Economies
(Percent of GDP)
Fiscal Balance for Select Emerging Market Economies
(Percent of GDP)
Fiscal Balance for Select Emerging Market Economies
(Percent of GDP)
Fiscal Expenditure for Select Emerging Market Economies
(Percent of GDP)
Fiscal Expenditure for Select Emerging Market Economies
(Percent of GDP)
Fiscal Expenditure for Select Emerging Market Economies
(Percent of GDP)
The fiscal rule is now somewhat more ambiguous, and has been subject to changes. There are also problems in measuring the structural balance. The structural parameters used for that purpose include the long-term price of copper and trend GDP. The average copper price during the past 17 years is approximately US$2.6 per pound, exceeding the long-term price used to calculate the structural balance by approximately US$.50. Measurement of the gap between trend GDP and effective GDP is also problematic, and makes it a complicated matter to produce accurate estimates of the structural situation of the fiscal balance.
Interestingly, the effective fiscal balance deteriorated every year from 2012 until 2017, while the structural balance was only found to deteriorate at the end of the period. The structural balance estimates created the illusion of fiscal discipline, when fiscal deterioration had in fact occurred. Accordingly, the structural balance does not reflect the trend in the actual balance. As a result, in the future, it also important to monitor the actual balance closely, to avoid having to rely on a figure that is estimated and that is not directly measured.
Public debt also deteriorated significantly within a relatively short period of time. As shown in Figure 4, while gross debt was situated at 3.9 percent of GDP in 2007, it rose to 25.6 percent of GDP, its highest level in the past 25 years, in 2018. In comparison with the fiscal deficit accumulation, the increase in annual gross debt during the period 2010–2017 exceeded the average annual fiscal deficit by just under one percentage point, as opposed to the situation observed in the group of emerging countries, in which the average increase in the fiscal deficit exceeded growth in gross debt by almost two percentage points (Table 1). This point is significant as it shows that deterioration in public debt exceeds the levels potentially deriving from the accumulation of budget deficits. After all, a country’s fiscal soundness is determined by its level of debt and future outlook. If there are any relevant statistical discrepancies between the data on debt and the cumulative deficit, in defining fiscal objectives, we should also consider debt levels as a separate variable, rather than simply taking into account the annual flow results.
Chile’s Public Debt & Copper Price
(Percent of GDP & 2017 USD)
Chile’s Public Debt & Copper Price
(Percent of GDP & 2017 USD)
Chile’s Public Debt & Copper Price
(Percent of GDP & 2017 USD)
Fiscal Deficits & Changes in Public Debt for Select Emerging Market Economies
Fiscal Deficits & Changes in Public Debt for Select Emerging Market Economies
| Fiscal Deficit | Gross Debt | Net Debt | |
|---|---|---|---|
| Argentina | 4.4 | 2.3 | - |
| Bangladesh | 3.4 | -0.2 | - |
| Brazil | 5.8 | 2.8 | 2.1 |
| Bolivia | 3.1 | 1.4 | 2.3 |
| China | 1.9 | 1.8 | - |
| Chile | 1 | 1.8 | 2.1 |
| Colombia | 2.2 | 1.3 | 1.2 |
| india | 7.4 | 0.2 | - |
| Mexico | 3.3 | 1.3 | 1.1 |
| Pakistan | 6.3 | 1.3 | 1.2 |
| Peru | 0.6 | 0.1 | 0.1 |
| Russia | 1.2 | 0.5 | - |
| South Africa | 4.5 | 2.3 | 2.5 |
| Thailand | 0.4 | 0.2 | - |
| Average | 3.2 | 1.2 | 1.6 |
| Median | 3.2 | 1.3 | 1.6 |
Fiscal Deficits & Changes in Public Debt for Select Emerging Market Economies
| Fiscal Deficit | Gross Debt | Net Debt | |
|---|---|---|---|
| Argentina | 4.4 | 2.3 | - |
| Bangladesh | 3.4 | -0.2 | - |
| Brazil | 5.8 | 2.8 | 2.1 |
| Bolivia | 3.1 | 1.4 | 2.3 |
| China | 1.9 | 1.8 | - |
| Chile | 1 | 1.8 | 2.1 |
| Colombia | 2.2 | 1.3 | 1.2 |
| india | 7.4 | 0.2 | - |
| Mexico | 3.3 | 1.3 | 1.1 |
| Pakistan | 6.3 | 1.3 | 1.2 |
| Peru | 0.6 | 0.1 | 0.1 |
| Russia | 1.2 | 0.5 | - |
| South Africa | 4.5 | 2.3 | 2.5 |
| Thailand | 0.4 | 0.2 | - |
| Average | 3.2 | 1.2 | 1.6 |
| Median | 3.2 | 1.3 | 1.6 |
The usefulness of the structural balance rule is undeniable, particularly as it has enabled substantial savings to be achieved during the copper price boom. However, there are difficulties involved in measuring the balance, and, although there is scope for fine-tuning, we must take other variables into account in defining the fiscal policy objectives, as we have discussed. For example, it might be useful to incorporate a public debt limit, with a fiscal commitment not to exceed a target of 25 percent of GDP, taking into account cyclical slippage. It is also an important matter to focus more on net debt, which provides a better overview of fiscal solvency, in light of all of the problems involved in measuring assets.
The role of the Autonomous Fiscal Council should be to make these measurements more precise, both for the structural balance and the stock of debt, and to provide an analysis of the implications of different fiscal objectives in light of the complexities involved in measuring this type of variable.
