• Overview of the Economic Survey of Chile

Chile’s strong recovery lost some momentum as the world economy slowed, weakening copper prices and consumer confidence in Chile. Given considerable uncertainties regarding the health of the world economy, more supportive macroeconomic policies may be needed in the short run. In the longer run, reducing poverty and inequality is a key challenge. Both remain high by OECD standards, notwithstanding impressive progress. Redistributive transfers and progressive taxes are very limited. Better education and job opportunities for the poor would enable more Chileans to contribute to a more dynamic and productive economy and thus to higher welfare.

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The following measures would help Chile overcome the challenging situation of the world economy in the short run and attain stronger growth and a more inclusive society in the longer run:

Supportive macro policies in the short-run. Given the uncertain global environment monetary policy should remain on hold for now. A slow pace for consolidation is appropriate at the moment, but once the external environment improves the government should return to a structural fiscal balance to rebuild buffers against shocks.

A strengthened fiscal rule and higher tax revenues to finance long-term spending increases. Chile’s structural fiscal balance target has led to low debt and large assets in the sovereign wealth funds. The government plans to create an independent fiscal council, which could validate the correct application of the rule and assess the target chosen by the government as well as changes in the methodology applied. This shift should strengthen Chile’s fiscal framework. There is also strong demand for higher quality education and social services in Chile, which is likely to mount as the country develops. The government already plans significant spending increases on such programmes, which will need to be financed on a sustainable basis. Higher environmental taxes would be a particularly efficient source of revenue. A reduction of regressive tax loopholes and of still-pervasive income taxes evasion would also make the tax system more progressive.

Higher cash transfers for the poor combined with support for recipients to find employment, as envisaged by the government through the new Ingreso Ético Familiar programme. The government currently plans to target the bulk of the transfers to families living in extreme poverty. Over time, it should consider opening all new transfers to a wider range of participants, for example through a more gradual benefit withdrawal. This would also enhance work incentives for beneficiaries and limit fraud. To assess whether transfers should increase over time the government should evaluate the impact of higher cash transfers on recipients’ work incentives, employment opportunities and capacity to invest in their human capital.

Better access to quality housing along with measures to reduce residential segregation and enhance mobility. This could improve access for the poor to higher-quality education, social services and jobs. Better targeting of housing subsidies will be essential to free resources for those truly in need. At the same time the government should rethink subsidies, which are currently directed exclusively at home ownership. Means-tested rental cash allowances coupled with more balanced tenant-landlord regulations would strengthen the rental market, thus enhancing residential mobility and potentially reducing segregation. Other measures that would contribute to lowering segregation and inequality include: better enforcement of social housing quotas, more investment in infrastructure and social services in poorer neighbourhoods and development of unused land in urban areas.

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