6.6. Structural surplus rule66

Although there is consensus in Chile regarding the effectiveness of using the rule of 1% of GDP, an anchor on public spending, there have been recent suggestions to prevent that fiscal policy becomes pro-cyclical and in the case of modification of the structural surplus, the evolution of three considerations must be observed: the regular operational Central Bank’s deficit; contingent liabilities especially in the social security sector and, the fact that Chile is an emerging country, normally it has to run into debts in foreign currency, so it should follow a more conservative fiscal policy than that of United States, Japan or the European Union.

In this regard, those who defend this position, state that a level over the 1% established might put the macroeconomic performance in checkmate, since risk rating companies and investment banks give great importance to fiscal performance in their analysis, and it would be necessary more indebtedness to maintain surplus higher. All this would affect Chile’s rating.

In turn, they indicate that its is necessary to maintain a lower degree of expansion, since it is not necessary to restrict fiscal spending to give room to private disbursement as a result from the fact that Chile neither has access restrictions to international capital markets; nor needs to alleviate foreign accounts, because the moderate deficit of the current account does not endanger the economic stability of the Nation.

Anyway, up to now, there are supporters who are in favor of gradually reducing the level of the goal of 1.0% of GDP, up to a surplus of 0.6% in 2006, reaching a 0.3% the next year to end in 0.0% towards 2008. As this is important form the point of view of fiscal accounts sanity, this is the situation of the public sector debt.

In four years we would have a consolidated debt in a range very similar to the current one, between 5.0% and 6.0% with a goal of the rule in zero per cent (with figures of economic growth between 5.5% and 6.5%),

When it was estimated in a level of 1% the intention was to compensate the deficits of state-owned companies and the Central Bank, nevertheless, whilst state-owned companies should tend to eliminate their losses, while those of the issuing institute are getting lower.

In fact, it has been explained that the negative balance of the governing body is less strong today than five years ago, or when it stood for near 1% of the GDP; today it is near half point.

The ideas suggested by the IMF and OECD are positive since it is a relevant criterion to maintain balance both in mid-term finances and spending, but having a balance of zero percent would also be positive. The essential thing is that public spending does not grow too much because these resources are used inefficiently.

The fact of achieving a structural balance is the best thing in the long term, but made on the basis of a consolidated position of the public sector, including explicitly, the Central Bank’s losses or otherwise, capitalizing this institution.

Besides, it would be necessary to make an allowance for future spending in social security that exceeds the amounts allocated nowadays.

At any rate, it would be advisable that the government has some degree of flexibility to reach the goal depending on the conditions present in the macroeconomics.

Therefore, it is postulated that in the periods of fast advance of domestic demand it would be justified to have a positive surplus, because the private sector is carrying out an expansion of the economic activity that does not require a great support from the public sector. However, in periods similar to the one of the Asia crisis, which unfortunately could happen again, it could be justified that the Treasury temporally, spend more, have more support for the creation of job positions and, therefore, face a situation of unbalance; a little structural deficit during these periods.

Along these lines, studies indicate that certain deviations might occur because of the existence of some unforeseen events, such as, errors in the prediction of potential GDP or failures in the estimation of some variables used for the calculation of structural surplus, that might prevent the enforcement of the rule or that require excessive actions to balance it. This could be solved, fixing a goal range, and not a specific value, like Central Banks and their objective levels of inflation. The foregoing could be justified, considering an eventual rigidity with which the fiscal policy would be operating and the limited information with which decisions are taken.67

Other economists are in favor of keeping the goal in the current figure. The fact that the surplus is 1% has its grounds in terms of the deficit close to 1% of the Central Bank, originated by the help operations performed during the 1982 crisis. However, in the case of a complete prepayment of this debt, this figure would not be necessary any longer.

66 Taken, summarized and modified from: Opinan economistas ¿Balance o Superávit Estructural? Diario Estrategia, September 26, 2005.

67 Taken, summarized and modified from: Opinan economistas ¿Balance o Superavit Estructural? Diario Estrategia, September 26, 2005.