The Chilean government sent the 2012 budget to congress on 27 September. The budget calls for a 5% increase in real spending. The economy minister, Pablo Longueira, said that the increase was in line with the GDP growth the government expects for 2012. For 2011 the government expects GDP growth of about 6.5%.
As the region’s best credit, in the eyes of the credit rating agencies, the country has little room for manoeuvre. Indeed, as a member of the Organisation for Economic Cooperation and Development (OECD), theoretically, Chile has to commit to keeping the growth in public spending below the rate of GDP growth over the economic cycle. This means that in times of fast growth the economy builds up a reserve, which can be drawn upon when growth falters.
Despite the economy’s strong performance, there is some evidence of economic problems ahead. One is that labour productivity has stopped rising. This means that growth has been a bit slower. Other problems are the relatively narrow range of exports and labour market inefficiencies.
One interesting suggestion is to extend VAT to private health and education services. Revenues raised here could be earmarked for public health and education spending.
Longueira argued that the budget was balanced and yet provided for increased spending on education, health and social security. He said that of the extra US$3bn that the GDP growth in 2012 (and 2011) would produce, US$750m were earmarked for education.
Longueira is confident that the economy cannot be derailed by the international financial turbulence caused by the renewed slowing down of the US economy and the crisis in the European banking system. He added that the government’s economic priorities were to maintain the rate of growth and to create better jobs.
In the latest quarter (June to August), the unemployment rate rose slightly from 7.5% in the previous three months to 7.6%.
The central bank is less bullish than the government about growth. In its most recent report on the economy, published on 7 September, it clipped 0.25 of a percentage point off its forecast for GDP growth in 2011. It now expects GDP growth of between 6.25% and 6.75%, down from a range of between 6% and 7%.
For 2012, the central bank is forecasting a rate of between 4.25% and 5.25%.
On 21 September the finance minister, Felipe Larraín, said that the government was pencilling in GDP growth of 4.9% in 2012, based on an average copper price of US$3.02 per pound, up from an average price of US$2.59 forecast for 2011.
The assumption among local economists is that the central bank has changed its stance on interest rates and will no longer push them up. And it may, indeed, start to cut rates in the final quarter of 2011.
Interest rates currently stand at 5.25% while inflation for the 12 months to August stood at 3.1%
Power cut: The dodgy state of the country’s infrastructure was underlined by a major power cut in central Chile on 27 September, which may cost power companies US$9m in fines, the energy minister, Rodrigo Alvarez, said. Around 10m people were affected and some households were without power for three hours.
Inflation: In August consumer prices rose by 0.2%, bringing the 12 month rate to 3.2%.
