Fynsa
I want to start this space by apologizing. Apologizing because, no matter how much one wants to explain it in simple terms, fiscal issues are difficult to explain in straightforward terms, especially in our country. However, seeing how the larger-than-projected deficit for 2025 has flooded headlines, columns, and debates, I wanted to take a moment to talk about a detail that few or no one has commented on.
It is not possible to begin the analysis without first explaining, in simplified terms, how fiscal institutions work in Chile. After a fiscal rule for determining public spending was established in 2001, it has undergone numerous modifications in order to refine it and adapt it to the country's economic contexts. Thus, the current cyclically adjusted balance rule has a methodology that, at the end of the day, attempts to set a framework so that public spending does not depend on the cyclical conditions of the economy. To be generous with the reader, I will use a saying that has been widely used to describe it (although it is not entirely correct): save in times of plenty, so you can spend when times are lean.
With some reservations, the rule worked well until the pandemic, forcing us to save surpluses when they existed, so that we could draw on them in times of crisis, such as the subprime crisis, the 2010 earthquake, and, of course, the pandemic. However, over the last three years, the ex-post rule has not been followed, which had never happened before. While attention has focused on declaring that there was "excess spending," the truth is that what has been happening is a "revenue shortfall," which may sound the same on paper, but in practice is something very different.
To construct the budget, there are two vital inputs: the estimate of the economy's trend or long-term growth, and the long-term projection for the price of copper. To ensure technical excellence, these values are not determined by the government in power, but rather by two committees of experts from academia and business, the private and public sectors, etc. These values are used to project the "structural" revenues that the treasury would have, using a series of equations to describe the economy. Then, the target set by the government for that year (for example, a deficit of 1%) is taken, which results in a consistent amount of spending. For example, if it is estimated that, in a fictitious scenario in which growth is at the long-term rate and copper reaches the same value, government revenue would be 10% of GDP, a deficit of 1% would then allow for maximum spending of 11% of GDP. That 1% is what we call the "structural deficit." So far, so good. However, in a given year, things could turn out better than long-term projections (for example, a boom in the price of copper), which would have resulted in actual revenues of 13% of GDP. Subtracting expenditures, we then have a effective surplus of 2% of GDP. Therefore, it is perfectly compatible to have a fiscal deficit and a fiscal surplus in the same year, as long as we are explicit about which one we are referring to.
The problem now is that the Budget Office (Dipres), using the parameters provided by the expert committees, has systematically overestimated structural revenues over the last three years. Therefore, we are facing a completely new problem, since the disagreement is not about whether spending was set too high or too low, but rather that the sudden change in the country's economic structure rendered the methods used to project revenues obsolete. Multiple tax reforms, forced changes in production during the pandemic, and the greater efficiency of some sectors over others (especially in terms of international expansion) have changed how and how much tax revenue is collected in Chile. If anyone had any doubts that agents are motivated by incentives, here we have yet another proof that this is the case, regardless of what a couple of laws try to put on paper.
Could something have been done earlier? Yes. Could measures have been taken to contain public spending more decisively during a fiscal year? Yes. Instead of a neutral approach, could a conservative approach have been taken in estimating revenues, as recommended by the Independent Fiscal Council? Undoubtedly. But that's done now. Dipres is working with an external IMF commission to remedy the problem and improve predictive errors in the future, which could take a couple more fiscal years to correct. It will be a challenge for the next administration to resolve "the tax issue," which is no small matter, as it will face the objectives of wanting to be prudent versus being too prudent and affecting the social benefits that the state currently provides to citizens. In the opinion of this writer, in a much more dynamic economic context and structure than we have seen in the country's history, this is just the beginning. If the way we collect taxes is not adapted to economic reality, good intentions and spending cuts will not be the solution to the underlying problem.
