The $5.7 billion increase in Chile’s public spending will offset falling tax revenues as the economy skids, but isn’t likely to get it back on the fast track anytime soon.
The government announced Monday it will increase spending this year 14.5% from 2008 as it seeks to boost sagging economic growth and cover the gap in tax receipts.
The spending will create a projected deficit of 4.1% of gross domestic product, or some $6.1 billion, this year – the first time Chile has posted a deficit since 2002.
The increased spending “is absolutely essential to inject more dynamism and energy into the economy,” Finance Minister Andres Velasco told reporters Tuesday.
The ministry and the central bank expect GDP to move in a range of -0.75% to +0.25% this year.
Analysts are more cautious about the economic impact of the increase in fiscal spending.
“There is nothing new here we didn’t know before,” said Alberto Ramos, senior economist at Goldman Sachs. The spending increase “basically compensates for lower revenues and a higher deficit,” he said.
The government announced it will withdraw another $4 billion from its sovereign wealth fund after the $4 billion tapped for its January fiscal stimulus package, and issue another $1.7 billion in sovereign debt on the local market.
However, in contrast to the January stimulus, which included $1 billion for state copper miner Corporacion Nacional del Cobre’s capital expenditures and $3 billion to finance infrastructure plans, direct transfers and employment subsidies among other uses, this latest repatriation from the sovereign wealth fund is a stop-gap measure rather than stimulus.
“There is no new extra stimulus in this package,” said Juan Pablo Castro, an economist with Santander GBM. “It is just financing to compensate for the higher deficit.”
Total public spending is expected to run up to $10.7 billion in 2009, of which $8 billion will be financed through sovereign wealth funds and the remainder through sovereign bonds issued in the local market, government Budget Director Alberto Arenas said Monday.
The surge in spending is necessary given the “badly damaged economy in the context of a severe recession,” said Goldman’s Ramos. “The country can afford it and the economy needs it.”
The fiscal stimulus package announced in January “is having a positive effect on the economy through increased aggregate demand, but it’s still too early to say how much,” said Cesar Guzman, a macroeconomic analyst at Estudios Security.
The central bank estimated an impact of one percentage point on GDP, but it could be lower at around half of a percent, he said.
There are concerns the increased spending could restrict government stimulus down the road.
“The deficit…is reducing the room to maneuver in the future for new fiscal stimulus,” said Rafael Guilisasti, president of the country’s leading business trade group, known as the CPC.
The government will also violate a temporary agreement to keep the structural balance, which is the sum of fiscal income and spending, at zero this year, dragging the balance down to -0.4%.
Ahead of an election in December, the government may have an eye on the political benefits of increased public spending, but it’s not irresponsible macroeconomic policy, argues Ramos.
“It’s a small deviation,” he said. “As long as it is a one-off and not the beginning of a trend,” it’s not a problem, suggested Ramos.
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Elections would naturally elicit increased spending. That will be a good news for the economy along with the negative growth in Inflation rate. We cant do much with the deficit in the recessionary period. We can replenish that with the future spending.