Kast’s Campaign to Balance Chile Budget Gets Off to Tough Start

Chile’s President José Antonio Kast went on TV this week and warned the nation it couldn’t keep racking up debts like it was — then outlined a series of tax cuts and subsidies that may widen the deficit in the near term.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — Chile’s President José Antonio Kast went on TV this week and warned the nation it couldn’t keep racking up debts like it was — then outlined a series of tax cuts and subsidies that may widen the deficit in the near term.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.Among the 43 measures contained in a flagship bill that was presented by Kast on Wednesday night and is likely to go to Congress next week were cuts to corporate levies, a statute of guarantees for big investment projects and a subsidy for formal job hires.“In the short term, from a fiscal perspective, it’s marginally expansionary,” Chile’s Finance Minister Jorge Quiroz said in a press conference Thursday. “If we want to recover growth and investment, we need to restore tax competitiveness.”Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.Kast and Quiroz are betting that lower taxes and less red tape will lift economic expansion, boosting tax revenue and enabling them to meet their goal of balancing the budget by the end of their four-year administration. But that is a risky strategy given the global environment, with soaring energy prices prompting analysts to cut their growth forecasts for this year.To compensate for the tax cuts, the government is including measures within the legislation that will limit public expenditures. That is on top of the 3% in spending reductions Quiroz mandated across all ministries in March, though he later excluded the Public Security Ministry from those plans as officials clamp down on clandestine immigration and crime.Balancing OutEconomists at LarrainVial in Santiago estimate spending cuts will just about balance out lower taxes.“We are considering a $2 billion cut in our base scenario in 2026 and non-additional spending cuts in 2027,” economists including Javier Salinas wrote in a report Thursday. In regards to the bill, “overall, we estimate a fiscal cost of $1.8 billion to $2 billion, with the impact to be reflected from 2026 to 2027.” Given this, LarrainVial expects public debt to keep rising. The financial company sees debt at 42.8% of gross domestic product at year-end and 43.4% in 2027, up from the current 41.7%. That indicates a fiscal deficit of 1.2% of GDP in 2026 and 1.3% in 2027.Still, that is a significant improvement over last year — if it is a realistic forecast. LarrainVial’s estimates hinge on economic growth of 2.7% this year and 3.1% in 2027, driven by investment, above most other analysts. The previous government posted a shortfall of 2.8% of GDP in 2025, well above the 1.7% target, and forecast deficits through the end of the decade. To address this, Kast pledged during his campaign $6 billion in spending cuts in his first 18 months in office, of which $3 billion would materialize in 2026.“There is still limited clarity on compensatory measures to offset the revenue shortfall, beyond higher tax collection stemming from an assumed acceleration in GDP growth,” said Samuel Carrasco, chief economist for Chile at Credicorp Capital. Growth TargetBut the acceleration in growth can’t be taken for granted in the current environment.The economy contracted 0.3% year-over-year in February, while the output of copper, the country’s main export, slumped to a nearly nine-year low. And that was before the war in Iran, which could further dampen activity.Chile central bankers cut their 2026 growth forecast last month to between 1.5% and 2.5%, from 2% to 3%. The institution’s latest economist survey also showed a downward revision in estimates, to 2% from 2.5%. Still, Kast showed his willingness to make tough fiscal decisions last month when he allowed fuel prices to jump as much as 54%, loosening a mechanism that would have muted the increase.The government is now betting the omnibus bill can restore growth and, ultimately, the fiscal balance. In his address to the nation, Kast pointed to $29 billion in investment projects sent to environmental regulators since he came to office on March 11.“We’re going to see significant expansionary effects from the growth in investment,” Quiroz said. “We’ll start to see it toward the end of the year.”Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.