Michelle Bachelet, who seeks to recapture the Chilean presidency on Dec. 15, has promised free education for all while improving state finances. Declining copper revenue and a slowing economy will make it hard to do both.
Bachelet, who was president from 2006 to 2010, won 47 percent in first-round voting Nov. 17 on a platform of raising corporate taxes to finance more spending on health and education in the world’s largest copper producer. Evelyn Matthei, the ruling coalition’s candidate, took 25 percent.
With copper prices near a three-year low and growth slowing more than the government expected, Bachelet may be forced to choose between spending an additional $15.1 billion on her social program or balancing the budget by the end of her four-year term, said Alfredo Coutino, director for Latin America at Moody’s Analytics. In 2009, she ran the widest budget deficit since the return of democracy in 1990 as she cut taxes and increased cash handouts to poor families to offset a recession.
“The devil always comes when you don’t call,” Coutino said in a phone interview from West Chester, Pennsylvania. “Expected tax revenue has a high probability of not being fulfilled for various factors, among which are slower-than-forecast growth and that Congress doesn’t approve all the proposed taxes.”
Policy makers at the central bank forecast the economy will decelerate for a second straight year in 2013 as the pace of investment growth slows. The Imacec, a proxy for gross domestic product published monthly by the central bank, expanded 2.8 percent in October from the year earlier, the slowest pace in more than two years.
“In the next four years the country faces a complicated scenario due to the economy’s deceleration in the coming months,” Bachelet said in an interview on Canal 13 on Dec. 2. Her campaign manifesto doesn’t say what growth forecasts her budget is based on.
Matthei said she represents continuity of “a successful economic model,” which allowed unemployment to drop to the lowest in at least 30 years.
In her manifesto, Matthei has pledged to create 600,000 new jobs and raise the minimum wage and pensions. She said the state should not fund education for the richest 10 percent of the country and that she wouldn’t raise taxes.
The yield on dollar bonds due 2022 have risen 26 basis points to 3.65 percent since Nov. 1, touching almost a three-month high of 3.76 percent on Dec. 4, according to data compiled by Bloomberg.
In Chile, spending plans are based on the so-called structural budget, a concept created in 2001 that reflects the fiscal situation should growth and copper prices stay in line with the government’s long-term forecasts. The mechanism prevents public spending from being pegged to copper revenue, which accounted for 14 percent of the tax collection last year, by allowing the budget to accommodate for higher or lower prices of the metal.
Bachelet has pledged to eliminate in four years the structural budget deficit, which will narrow to 1 percent of GDP in 2014 from 1.2 percent this year, according to the government.
The government is forecasting growth of 4.9 percent for next year, while former central bank presidents Jose De Gregorio and Vittorio Corbo say expansion may slow to less than 4 percent, the worst performance since the recession in 2009, damping tax collection.
Public spending during Bachelet’s presidency grew an annual average of 10.5 percent, including 16.5 percent in 2009 when she tapped the sovereign wealth fund to stimulate an economy that contracted 1.1 percent. After inheriting a surplus, she left behind a structural deficit equivalent to 3.1 percent of GDP when she stepped down in March 2010.
The policies to spur growth boosted her approval rating to 78 percent by the end of her term, the highest of any president since the return of democracy, according to Santiago-based polling company CEP. Chilean law bars presidents from seeking a second consecutive term.
President Sebastian Pinera’s approval rating is 34 percent, according to CEP’s Sept. 13 to Oct. 14 poll of 1,437 people. The survey has a margin of error of three percentage points.
Bachelet in a second term also would face the challenge of helping copper producer Codelco finance $20 billion in investment over the next five years to avoid a decline in output, Chief Financial Officer Ivan Arriagada said Nov. 29.
An 8.8 percent drop in copper prices this year is stalling the mining boom that has helped economic growth average 5.7 percent during Pinera’s time in office. Barrick Gold Inc. (ABX:US), Goldcorp Inc. and Teck Resources Ltd. have all delayed mining expansions in Chile.
Lower prices have been accompanied by an increase in mining costs that climbed more than 40 percent in the past five years, said Joaquin Villarino, president of the Mining Council, an industry association. As a result, tax revenue from mining contracted 23 percent in the first nine months of the year to $2.5 billion, according to the budget office. Copper was largely unchanged yesterday at $3.332 per pound.
To finance more spending, Bachelet plans to raise the corporate tax rate to 25 percent from 20 percent, a move Finance Minister Felipe Larrain says will further hurt the economy.
With growth slowing, Chile needs to consider policies that “promote investment, and not policies that punish it,” Larrain told reporters on Dec. 5.
The IPSA (IPSA), an index of Chilean stocks listed in Santiago, has lost 14.6 percent this year as investors shift money to developed markets. Sao Paulo’s Ibovespa dropped 17.8 percent in the same period
Bachelet won’t back out of her proposals to increase investments in health and education even if slower growth and a drop in copper prices crimp the budget, Alejandro Alarcon, an economist at the University of Chile, said in a telephone interview.
Her spending pledges seek to address the concerns of hundreds of thousands of students who clashed with police on the streets of Santiago during Pinera’s rule to demand better education.
“The bad news behind falling copper prices, less government income and higher social spending is that accomplishing a structural balance will be very difficult,” Alarcon said.
If copper prices stay at about $3 a pound and the tax increases are implemented, Bachelet’s pledges can be fulfilled, her chief economic adviser Alejandro Micco said in an e-mailed response to questions.
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