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The following excerpt summarises Chapter 5 of Challenges to Fiscal Adjustment in Latin America: The Cases of Argentina, Brazil, Chile and Mexico by José Pablo Arellano (Fundacion Chile), published on 22 February 2006.
One of the strengths of the Chilean economy is its fiscal performance. Several indicators are worth pointing out. The public debt-to-GDP ratio fell from 45% in 1990 to 13% in 2004. The budget has been in surplus almost without interruption, averaging 1% of GDP between 1987 and 2004. Exceptionally, a deficit was recorded in 1999-2003 when growth slowed down and the price of copper fell sharply. Measured in cyclically-adjusted terms, a budget surplus was nevertheless posted in the period. At the same time, country risk has been reduced and is now among the lowest among the emerging-market economies. Chile is rated among the top performers in international competitiveness rankings on account of its fiscal policy. This has nevertheless not always been the case. The average budget deficit was 1.9% of GDP between 1950-86, except for just five years of surplus and public indebtedness was on the rise.
The fiscal consolidation effort of the last 18 years has been a key instrument for reducing inflation and ensuring high economic growth. Fiscal policy has ceased to be a cause of macroeconomic imbalance; it has permitted the adoption of a counter-cyclical policy stance, which has brought about greater stability of growth and employment in the face of external shocks. Thanks to the reduction in public indebtedness and the improvement in fiscal performance, the country was able to cope better with the negative effects of the Asian crisis in the late 1990s and, in part, to mitigate these effects. At the same time, fiscal policy has made it possible to set medium-term objectives for social development and public investment which is difficult in situations of fiscal weakness. Not only was social spending not reduced at the time but it has also continued to rise uninterruptedly. The main focus of this chapter is to identify the factors behind this structural change.
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