Claudia Ramírez Bulos
OECD
Adolfo Rodríguez-Vargas
OECD
OECD Economic Surveys: Chile 2025
Abstract
After the overheating of the economy in the aftermath of the pandemic, GDP growth moderated in 2023 and inflation decelerated considerably on the back of tighter macroeconomic policies. As domestic demand normalised, GDP growth stabilised in the second half of 2023 and recovered in 2024 supported by less restrictive monetary and slightly expansionary fiscal policies, while financial stability risks have been contained. The government is committed to fiscal sustainability and is planning to finance investment, social needs, health, and security spending while keeping debt contained through reforms to strengthen tax compliance, enhance spending efficiency, and boost growth. However, further reforms to finance additional spending needs and growth-enhancing investments will be needed.
1.1.1. Macroeconomic imbalances built during the pandemic have largely resolved
After growing 11.6% in 2021, following the oversized fiscal support delivered in face of the COVID pandemic, and the massive liquidity from voluntary pension fund withdrawals, GDP growth significantly moderated in 2022 as policy support was gradually withdrawn and household consumption slowed on the back of high inflation (Figure 1.1, Panels A and B). The sizable fiscal adjustment the government implemented when coming into office in 2022, and the withdrawal of pandemic-related support, contributed to a fiscal surplus in 2022, along with higher revenues from lithium production. Moreover, decisive monetary policy tightening helped to further cool down the economy slowing consumption and investment, narrowing the output gap, and lowering inflation (Figure 1.1, Panel B). Activity stabilised in the second half of 2023 with annual GDP growth at 0.3% in 2023. Headline inflation has been on a rapid downward path slowing from an average of 11.6% in 2022 to 4.2% in November 2024, while core inflation stood at 3.7% in November 2024.
Note: Shaded area is a forecast.
Source: OECD Economic Outlook database.
Investment has slowly recovered from the pandemic, largely driven by machinery and equipment. Investment in construction and other works has been weak on the back of high interest rates, tight credit conditions, and low business confidence (Figure 1.2, Panels A and B). Investment fully recovered from the pandemic in some sectors, including energy and technology but remained subdued in others such as industry and mining (Figure 1.2, Panel C). Survey data points towards higher private investment in the coming years, largely driven by mining projects (Figure 1.2, Panel C) (BCCH, 2024[1]) benefiting from the approval of the mining royalty law and lower domestic economic uncertainty. Economic uncertainty in Chile spiked in 2022 with the war of aggression against Ukraine, the discussions on pensions funds withdrawals, macroeconomic imbalances and the constitutional reform process (CLAPES UC, 2024[2]), but has come down since, as the constitution process is closed and imbalances have narrowed (Figure 1.2, Panel D).
Note: LAC is a simple average of Colombia, Mexico, Argentina, Brazil, and Peru.
Source: OECD Economic Outlook database; Capital Goods Corporation; Central Bank of Chile; Bank of Spain.
Besides short-term challenges, Chile’s income convergence to more advanced OECD economies has stalled since 2012 (Figure 1.3), partially reflecting declining productivity (see Chapter 3) and weaker investment, particularly in new technologies (OECD, 2022[3]). A long-standing driver behind weaker investment is the permit system that makes investment approvals costly and lengthy (CNEP, 2020[4]). The amount of time and money to comply with permits and licences is excessive. Processing times take on average 6.6 years, ranging from 2.8 years in telecom to 8.9 years in mining (Comité de Expertos, 2023[5]), imposing significant burdens on enterprises. In a welcome step, the government presented an ambitious reform bill in January 2024, that aims to reform all permits, except environmental ones, by streamlining procedures, reducing processing times, and providing more certainty to investors for all procedures involved in the permit course. The reform introduces proportionality criteria, clarifies the rules for the application of “silence is consent” provisions, requires an assessment of admissibility before starting a permit review process, and creates a digital one-stop shop for all permits. The reform is welcome and should be swiftly approved and adequately implemented. Strengthening public communication and clearly and extensively informing the public about the new rules, particularly about the implications of the “silence is consent” provision, would be crucial. If adequately implemented, the reform would further ease firms’ entry and formalisation, accelerate investment and growth, and attract more investment, particularly in green-related industries to implement the green hydrogen and lithium national strategies (see Chapter 4).
Convergence of GDP per capita, current prices, USD, PPP, % of OECD average
Note: LAC is a simple average of Colombia, Costa Rica, Mexico, Argentina, Brazil, and Peru.
Source: World Bank, World Development Indicators.
Labour regulations to gradually reduce the working day from 45 to 40 hours per week over a 5-year period and to provide flexibility to caregivers of children younger than 14 years old were modified in April 2023.
The real minimum wage increased by 22% in real terms between early 2022 and July 2024. This growth was driven by two laws passed in June 2022 and June 2023. To support small businesses, wage subsidies were provided.
A new mining royalty was approved in 2023 with the goal to raise an annual revenue of 0.45% of GDP. The new tax framework includes: i) an ad valorem tax on annual sales of large copper mining companies, and ii) tax applicable on the mining operator’s Adjusted Taxable Mining Operating Income (“RIOMA” or Renta Imponible Operacional Minera Ajustada). The total tax burden on mining activity cannot exceed 46.5% of the taxable adjusted mining operational income. Revenues will be partly allocated to three new government funds for regional governments and municipalities where mining is a relevant activity.
A public procurement reform approved in December 2023 increased the standards of probity and transparency, seeks better planning of public procurement and promotes small companies and local suppliers.
The Law to Strengthen the Resilience of the Financial System and its infrastructures approved in October 2023, expands access to the central bank’s payment and liquidity systems to some non-bank entities and facilitates the development of repo markets, enhancing policy responses in scenarios of financial distress to promote financial stability, competition, and neutrality among institutions in the use of the central bank’s payments infrastructure. It also strengthens liquidity regulation for investment funds and promotes the internationalisation of the Chilean peso by simplifying operations between local and international banks.
A new law establishing a Consolidated Credit Registry, approved in June 2024, aims to enhance the functioning of credit markets and to improve the monitoring of both firms’ and households’ indebtedness.
A new law on tax compliance aimed at addressing tax evasion and strengthening the Chilean tax administration was approved in September 2024. The government expects to raise 1.5% of GDP from this reform.
Reforms under discussion in Congress:
Pact For Growth aims at increasing the government total revenues to finance pensions, health, social assistance, and public safety. It includes measures to boost investment, productivity, and formalisation, that together would raise revenues by 0.5% of GDP by 2028. Besides additional revenues from the tax compliance law, the government expects to raise 0.1% from efficiency gains in operational spending. Additionally, the government plans to add revenues through an income tax reform that still needs to be defined in terms of scope and expected revenues.
Measures to reduce informality in the Pact for Growth include a single tax rate for SMEs (for up to two years) replacing income taxes, value added taxes and social security contributions; the possibility for companies to recover 100% of VAT in the first year, gradually decreasing this percentage in the second year; and raising the threshold for annual sales that a business can make while still qualifying for the tax benefits that apply to SMEs.
Pension reform increases pension contributions paid by employers to 6% of workers’ salaries, on top of the 10% paid by workers. The reform also seeks to change the pension industry structure to promote greater competition and efficiency. A state-run alternative to the private pension funds will be created and the investment scheme will change to a target date funds system to better align investment decisions in the long run. The reform aims at gradually raising the amount of the universal guaranteed pension from USD 225 to 272.
A reform on regulations and permits was presented to Congress in early 2024 aimed at simplifying non-environmental permits for investment projects and activities in regulated areas. To fully implement the reform, 360 sectoral permits would be modified along with 37 laws. Estimates suggest that GDP would increase by 0.24% annually in the next 10 years if the time to process permits decline by one-third (Comité de Expertos, 2023[5]).
Bill to create the Agency for the Quality of Public Policies and Productivity (presented in April 2024), which will promote public policy initiatives to ensure the efficient use of resources and will fully merge with the National Evaluation and Productivity Commission (CNEP). It aims at implementing independent evaluations and providing recommendations.
Bill to create the Agency for Development Financing and Investment (“AFIDE”), which aims to improve business competitiveness, diversify production, and foster sustainable economic growth. It will offer financial instruments, coordinate, advise, and invest in business projects focused on technology adoption and innovation. The government estimates that over 450 thousand companies will benefit in the first five years of its creation.
1.1.2. The labour market recovery is slow in tandem with economic activity
The labour market is gradually recovering, and job creation continues to be slow consistent with the economic cycle (Figure 1.4, Panel A). The labour force participation rate gradually expanded from 59.8% in 2022 to 61.2% in 2023 but remains below pre-pandemic levels in November 2024, with a notable recovery in female participation. The delay in returning to the workplace is partly explained by the impact of fiscal transfers during the pandemic and extraordinary pension fund withdrawals, with more persistent effects in participation of the young and elderly (Briones, Carlomagno and García, 2023[6]). Participation rates of workers between 25 and 54 years have recovered. By contrast, participation rates of people younger than 25 and older than 54 have had a slower recovery and show stagnation. Participation rates of the elderly may not recover to pre-pandemic trends due to more structural factors such as a more generous minimum pension scheme and skills obsolescence (BCCH, 2024[7]). Total employment rate at 56.5% continue to be below pre-pandemic levels in November 2024. The unemployment rate stood at 8.2% in November 2024, above the pre-pandemic rate of 7.2% in 2019 (Figure 1.4, Panel B).
Policy efforts to address income inequality and raise labour market formalisation should continue, together with progress in raising the still low female labour force participation, including by ensuring sufficient childcare (see Chapter 2). Chile has experienced a substantial reduction in labour informality since 2010, with a fall from around 40% to around 27% of the total workforce in November 2024. Nonetheless, informality remains high compared to the OECD average. Informality is higher among self-employed workers and has increased over the past decade among lower income deciles (CASEN, 2022[8]). As discussed in the 2022 Economic Survey of Chile (OECD, 2022[3]), the causes of informality are multidimensional and a comprehensive strategy is needed to foster formalization, including lower non-wage labour costs, better skills, stronger enforcement, and improvements in tax administration. The government aims at promoting formality among SMEs and new companies as part of the pact for growth (Box 1.1). Furthermore, an adequate implementation of the tax compliance law can reduce informality.
The government increased the minimum wage by 8.4% in real terms in July 2024 relative to May 2023. Minimum wages were already high relative to median wages (70.07%) in Chile and compared to other OECD countries in 2023 (OECD, 2024[9]). The authorities have implemented temporary subsidies to help SMEs adjust to the recent increases in minimum wages and lower the risks of job displacement or informality. A relatively high minimum wage reduces the prospects for low-income workers to obtain formal employment, particularly for women, young and rural workers, as analysed in the 2022 Economic Survey of Chile (OECD, 2022[3]). Further increases in the minimum wage will need to be carefully evaluated as they could potentially lower formal employment prospects, especially for low-skilled workers, and people located in rural and less developed regions. To analyse and generate income indicators and reports to inform the 2025 minimum wage discussions, Chile established an “Income and cost-of-life Observatory,” a technical committee comprising representatives from workers’ organisations, employers, and the government in 2024. To further support the social dialogue and negotiations between social partners and authorities for setting the minimum wage, a permanent and independent commission could regularly provide recommendations on setting minimum wage increases, in line with changing labour market conditions and productivity, as in other OECD countries, and as recommended in the 2022 Economic Survey of Chile (OECD, 2022[3]).
Note: LAC is a simple average of Colombia, Costa Rica, Mexico, Argentina, Brazil, and Peru.
Source: INE; CEIC; and World Bank World Development Index.
1.1.3. The reform to the pension system remains a priority
Few people have adequate old-age pensions, owing to low contributions and contribution gaps due to informal employment. The challenges of the pension system, such as low replacement rates, contribution density and returns, aggravated with the pension withdrawals over 2020-21. To address old-age poverty risks, the government, in 2022, approved a new minimum guaranteed universal pension (MGUP) for people over 65 years of age who do not belong to the richest 10% of the population, greatly improving the replacement rate for lower-income pensioners (OECD, 2022[3]). As it stands, for the minimum wage earners the replacement rate is 43% (not considering savings in individual accounts), which is somewhat below the OECD low earners’ replacement rate of 63.8%. Moreover, the government proposed to reform the pension system and gradually raise the benefit to USD 272 per month (CLP 250 000), costing an additional 1.2% of GDP per year (see Box 1.1). Under this proposal replacement rates for minimum wage earners (not considering self-financed pensions) would increase to 50%, closer to the OECD average.
Further reform of the contributory pension system has been high on the political agenda in Chile for more than a decade and the current government put forward a reform in 2022. The reform under discussion in Congress aims at increasing pensions of current and future retirees and envisages an increase in pension contributions, enhancing the solidarity of the system.
To improve the adequacy of contributory pensions, several governments have proposed that employers pay a pension contribution of 6% of workers’ salaries, on top of the 10% that salaried workers contribute to an individual account. Political disagreement on which share of the additional 6% to be assigned to workers’ individual accounts, and which to a state-run solidarity fund to top up pensions for current retirees, women and lower-income contributors has stalled the reform. Raising pension contribution rates is critical to ensure the adequacy of contributory pensions, and the sustainability of the pension system. The view underlying the current government proposal is that higher contributions to finance collective pension savings, of which low-income formal workers would receive more than their additional contribution, could strengthen formalisation incentives. But this may depend on the degree to which workers value the additional pension promises made to them, with high uncertainty around the issue (BCCH, 2023[10]). Hence, the pension reform should be mindful of the effects it has on formalisation incentives, as increasing contribution rates leads to higher cost of formal employment and could further increase informality, particularly for low-income workers. Applying a progressive contribution or benefit rate schedule, as recommended in the 2022 Economic Survey of Chile, lower for low-income workers, particularly around the minimum wage, and increasing gradually for higher wages would ensure strong incentives for formal job creation while increasing replacement rates.
The reform also seeks to change the pension industry structure to promote greater competition and efficiency, reduce administrative costs and strengthen public trust in the pension funds managers (APFs), systematically among the least trusted institutions in Chile since 2015. The reform proposes a separation of the financial management of savings from the administrative processes, assigning the administration to a separate private, single-purpose corporation through a public tender for a 10-year period maximum. The proposed legislation also changes the system for charging management fees and the bidding mechanism for affiliates, and modifies investment strategies, transitioning from a multifund scheme to a target date funds system, reallocating contributors’ savings to generational funds according to their age. Ensuring good governance of the pension fund administrators including transparency and accountability in the management and allocation of resources, would help to strengthen confidence and boost savings. Approving a pension system reform is necessary to raise pension payouts and replacement rates, increase domestic savings, and ensure fiscal sustainability. However, authorities should be mindful of the reform effects on capital markets and the functioning of the financial system (as it will lead to significant changes in the pension industry structure), the transition to target date funds, as well as governance and supervision, as described in section 1.3.
1.1.4. The current account has normalised
After the large deficit expansion experienced in the aftermath of the pandemic, the current account deficit significantly narrowed to 3.6% of GDP in 2023, amid improving terms of trade compared to 2022 (Figure 1.5, Panels A, and B), a decline in imports and lower domestic demand. The current account deficit widened sharply to 8.7% of GDP in 2022 due to terms of trade shocks, supply disruptions, ample policy stimulus and exceptional pension withdrawals over 2020-21. The current account deficit is financed largely by net foreign direct investment inflows, that in 2023 grew by 19.2%, and the issuance of government debt (Figure 1.5, Panel C).
Exports continue to rely on mining, representing more than 50% of total export volumes (Figure 1.6, Panel A). Exports as percentage of GDP have been falling in the last 20 years, from 37% in 2003 to 28% in 2023, in line with lower copper production overall, and relative to global production. The reliance on natural resource intensive sectors has limited exports diversification in terms of goods, firms, and destinations. Some progress has been made in developing comparative advantages in sectors such as wine, salmon, forestry, and fruit production, while manufacturing exports account for a third of total goods and services exports. Nevertheless, further diversification of exports and production structures remains a significant challenge, as pointed out in the 2022 Economic Survey of Chile. China remains Chile’s leading trading partner (Figure 1.6, Panel B) posing upside and downside risks for Chilean exports. On the upside, growing demand for minerals amidst the green transition in China could support exports, while a protracted economic deceleration could hit export growth.
Source: Central Bank of Chile; OECD Economic Outlook database.
Source: Central Bank of Chile.
1.1.5. Growth will recover in 2024 and will remain solid in 2025 and 2026
OECD projects that GDP growth will recover to around 2.4% in 2024, 2.3% in 2025, and 2.1 in 2026 (Table 1.1). Recovering real wages and monetary policy easing will support higher real income and consumption growth. A gradual improvement of credit and financial conditions in Chile should increase access to credit for consumers and spur investment growth. Investment in mining projects for copper and lithium will grow on the back of sustained demand for minerals required for the global green transition. Exports will improve amid higher copper demand, while imports will recover along with consumption. The current account balance will narrow to 2.2% of GDP in 2024, 2.3% in 2025 and 2.5% in 2026, amid higher copper prices and better prospects for exports. The OECD also projects that government revenues will benefit from rising copper prices and additional revenues from the new mining royalty, and the fiscal deficit will narrow over 2024-2026. The unemployment rate will edge down further in 2024-2026, and job creation will grow in line with the projected economic expansion. Headline inflation will continue to fall in 2024-2026 and reach the central bank target of 3% in early 2026, whereas core inflation will close 2025 at around 3%. With inflation receding and expectations firmly anchored at the target, monetary policy is expected to continue its gradual, prudent, and data-based easing cycle.
Annual percentage change unless specified, volume (2018 prices)
1. Contribution to changes in real GDP.
2. As a percentage of the labour force.
3. As a percentage of GDP.
Source: OECD (2024), OECD Economic Outlook.
1.1.6. Risks around the outlook remain high
Chile continues to experience significant risks and could also be subject to severe shocks (Table 1.2). On the external side, a stronger and protracted slowdown in China, Chile’s main trading partner (Figure 1.6, Panel B), could reduce demand for minerals and lower export prices, particularly in copper, hurting Chile’s exports and growth. Additionally, uncertainty around the magnitude and pace of monetary easing in the main economic areas, and higher-for-longer interest rates in the US could increase Chile’s borrowing costs, reduce capital inflows, and increase financial market volatility. The intensification of regional conflicts in the world may trigger greater risk aversion and increase financing costs and foreign exchange market volatility.
Domestically, the difficulty to reach political consensus may delay the implementation of reforms, while implementing policies such as additional extraordinary pension funds withdrawals, would be highly disruptive for the economy and the financial system. Additionally, climate-change induced extreme events like a stronger drought, heatwaves, floods, or more widespread wildfires could hurt crops and mining, and damage infrastructure, reducing growth, and requiring fiscal support. On the upside, the global green transition may result in increased foreign direct investment and output growth, given Chile’s rich endowments with copper, lithium, and renewable energy.
Gross external debt at 72.6% of GDP has significantly risen over time and remains high compared to other countries in the region (Figure 1.7, Panel A). However, international reserves, representing around 18% of total external debt in 2023 can serve as buffer for immediate shocks, together with the two-year Flexible Credit Line (FCL) arrangement with the IMF renewed in August 2024 (Figure 1.7, Panel B).
Note: LAC is a simple average of Colombia, Costa Rica, Mexico, Argentina, Brazil, and Peru.
Source: IMF IFS and WEO databases.
Chile’s central bank responded decisively and early to inflationary pressures and rising inflation expectations in the aftermath of the pandemic. Headline inflation swelled from 1.7% in February 2019 to a peak of 14.1% in August 2022 spurred by strong domestic demand fuelled by pandemic-related fiscal support of around 12.7% of GDP and extraordinary pension fund withdrawals in 2020-2021, aggravated by surging international food and energy prices. Monetary authorities timely and decisively lifted the policy rate from 0.5% in June 2021 to 11.25% in October 2022. These actions, along with the sizable fiscal tightening in 2022 and the decline in commodity prices, helped the economy to rebalance and inflation to drop (Table 1.1). Headline and core inflation significantly softened as the economy cooled down and headline inflation stood at 4.2% in November 2024, above the 3% target (Figure 1.8). Goods inflation fell faster than services inflation, consistent with a moderate pass-through of the exchange rate depreciation, lower global costs pressures, and the high inertia of service inflation due to some indexation (BCCH, 2024[11]). In 2024, headline inflation has slightly increased, in part due to the expected raise in electricity rates, however core inflation remains closer to 3%. One-year-ahead inflation expectations have remained close to the central bank target of 3% since July 2023 and two-year ahead expectations are firmly anchored at the target since the beginning of 2023 (Figure 1.8).
%, y-o-y changes
Source: Central Bank of Chile.
The central bank started easing monetary policy in July 2023 with an initial reduction of 100-basis points, gradually decreasing the size of cuts as inflation declined and real rates fell. The central bank has controlled inflation while lowering interest rates, with the policy rate reaching 5.0% in December 2024 (Figure 1.9, Panel A) (Table 1.3). Following the monetary policy easing, local financing costs have fallen, especially for shorter-term loans that typically have stronger pass-through from monetary policy actions (BCCH, 2024[7]). Financing cost for longer-term loans remain high, in line with external conditions.
Note: Panel B: a decrease implies a depreciation of the currency and indicates an improvement in competitiveness.
Source: CEIC; Banco Central de Colombia; Banco Central de Costa Rica; OECD Economic Outlook: Statistics and Projections.
Given firmly anchored inflation expectations and projected falling inflation, monetary policy can continue its gradual, prudent, and data-based easing cycle. Policy rate cuts are projected to continue in 2025, bringing inflation to target by early-2026. The nominal monetary policy interest rate is expected to return to a broadly neutral level, estimated by the central bank at between 3.5% and 4.5% (BCCH, 2024[12]) by the end of 2025. The central bank has enhanced its communication strategy throughout the years, notably by improving its forward guidance with the inclusion, in 2020, of an interest rate forecast corridor (BCCH, 2020[13]). Given high external uncertainty, it is necessary that the central bank clearly communicates its risk assessments to limit monetary surprises and to maintain the effectiveness of the monetary policy transmission mechanism. Inflation projections are surrounded by risks. While the pass-through of the sharp depreciation of the exchange rate in 2023 was limited (Figure 1.9, Panel B) (BCCH, 2024[11]), a peso depreciation in a context of additional monetary policy cuts and narrower short-term interest rate differentials with the US may push up inflation. On the contrary, higher copper prices could induce an appreciation of the peso, generating higher exchange rate volatility. This warrants the need for the central bank to continue closely monitoring inflationary developments and risks.
The flexible exchange rate regime has served Chile well as a shock absorber, and together with international reserves has played an important role against financial market disruptions. However, reserves are low compared to peer countries (Figure 1.7, Panel B). To replenish reserves used during the last exchange rate intervention in July 2022, the central bank started accumulating international reserves in June 2023, with a total USD 10 billion purchases programmed over a year. Notwithstanding, the programme was suspended in October 2023 in face of stressed global financial markets. To further strengthen Chile’s international liquidity position, the central bank should resume the accumulation of international reserves when market conditions are favourable to reinforce external buffers.
The financial system remains sound and financial stability risks are contained, even though the depth of financial markets has narrowed following the pension fund withdrawals. Vulnerabilities that emerged during the pandemic in specific sectors persist, specifically among indebted low-income households, smaller firms, and in real estate and construction sectors, largely affected by the pandemic and higher costs. Financial burdens started to recede as interest rates decreased, while banks hold adequate capital and liquidity levels to cope with stress (BCCH, 2024[14]). Banking system capitalisation exceeds regulatory minimums, even though Tier 1 capital is low compared to other countries (Figure 1.10, Panels A and B). Banks have adapted their capital levels to higher regulatory requirements converging towards Basel III rules, which are almost fully implemented, in line with the established schedule. As the financial sector remains liquid, solvent and well capitalised, the unwinding of extraordinary liquidity support measures, such as Facilidad de Crédito Condicional al Incremento de las Colocaciones (FCIC), proceeded as planned and ended in July 2024.
Financial authorities continued to strengthen the resilience of the financial sector through the implementation of the Resilience Law of the Financial System, the FinTech Law and the Framework Law on Cybersecurity and Critical Information Infrastructures, among others in 2023 (See Chapter 3), while incorporating tools to safeguard financial stability, such as the countercyclical capital buffer (CCyB). In May 2023, the central bank decided for the first time to activate the CCyB, setting the measure at 0.5% of risk-weighted assets for one year as a precautionary measure given the higher level of external uncertainty derived from the turmoil in the global financial markets in early 2023, as well as the local risk assessment scenario. In its financial policy meetings in May and November 2024, the bank maintained the CCyB level at 0.5% of risk-weighted assets. Evidence suggests that activating the CCyB along with the progressive implementation of Basel lIl requirements and other measures implemented since 2022, did not have a significant effect on aggregate credit supply but impacted some individual banks with lower capital buffers and less capacity to replace their funding sources (Cortés and Toro, 2024[15]). In November 2024, the central bank announced a CCyB neutral level at 1%, which will provide more certainty to the banking system.
Non-performing loans started to increase at the end of 2023, but banks are prepared to face a deterioration of repayment capacity. Furthermore, monitoring of firms’ and households’ indebtedness is likely to improve with the newly created Consolidated Credit Registry (Box 1.1). Among households, delinquencies raised particularly for consumer loans, while mortgage delinquencies remained at relatively low levels (Figure 1.10, Panel D). For commercial loans, delinquency rates raised largely explained by firms that received state-guaranteed loans during the pandemic, smaller firms and those in retail, construction, and real estate sectors. Banks remain adequately provisioned due to provisions accumulation since 2021, anticipating an increase in credit risk (Figure 1.10, Panels C and D). Bank profitability returned to historical levels after increasing in 2022 and early 2023 (Figure 1.10, Panel E) while keeping adequate capital and liquidity levels in face of stress scenarios modelled by the central bank and the IMF (BCCH, 2023[16]; IMF, 2024[17]; BCCH, 2024[14]). In line with the economy’s rebalancing process, credit growth decelerated, across all loan types, reflecting the normalisation of the economy and the effects of tight monetary policy (Figure 1.10, Panel F). The slowdown was particularly pronounced for commercial loans but slightly resumed by the end of 2023. Households and corporations remain financially sound with reduced debt levels in 2023 as compared to 2022 and no relevant currency mismatches (BCCH, 2024[14]), lowering financial vulnerabilities.
1.3.1. The depth of the financial market has fallen, increasing dependence on external financing
A sound financial system and deep financial markets have long benefited Chilean firms and consumers through low capital costs and expanded borrowing opportunities. Pension funds have played a key role in capital market deepening in Chile, serving market segments not covered by other institutional investors, favouring local equities and corporate bonds, showing more appetite for longer-term maturities, and acting as shock absorber (IMF, 2023[18]). However, pension withdrawals in 2020 and 2021 of around 20% of GDP (Figure 1.11, Panel A) structurally hurt the depth and liquidity of the domestic capital market (BCCH, 2023[19]), increasing Chile’s vulnerability to external shocks and dependence on external financing. Several funds had to liquidate long-term assets in their portfolios, exacerbating increased volatility in long term interest rates and the exchange rate, while fixed-income trading activity in the stock exchange plunged. Total credit to the private non-financial sector as percentage of GDP fell around 9 percentage points between 2022 and 2023, but it remains high compared to other countries in the region (Figure 1.11, Panel B).
Shallower financial markets increase dependence on external financing, hindering savings accumulation, and limiting access to long-term financing in local currency, increasing external vulnerabilities and limiting the financial system capacity to absorb shocks. Promoting policies that encourage long-term savings will help capital markets to recover their shock absorbing capacity. The government and the central bank, through the Law to Strengthen the Resilience of the Financial System, the FinTech law, and the envisaged pension reform (see Box 1.1), are planning and implementing measures to deepen capital markets, including the development of a repo market, and a primary dealer system for government bond issuance, the creation of a fund of funds, facilitating cross border peso transactions, while promoting the development of FinTech, which has been growing in Chile in recent years and has the potential to expand even more (see Chapter 3). Since 2020, the central bank has the possibility to address increased volatility by temporarily buying government securities in the secondary market under extraordinary circumstances. Looking ahead, it will be crucial to avoid additional extraordinary pension withdrawals and to channel at least part of new pension contributions envisaged by the pension reform into savings invested in Chile’s financial markets, while ensuring policies contribute to the development and recovery of capital markets to preserve Chile’s distinct competitive advantage in access to credit.
Source: IMF Financial Soundness Indicators; Central Bank of Chile.
Note: Vertical lines mark pension fund withdrawals. LAC is a simple average of Colombia, Mexico, Argentina, Brazil.
Source: Banco Central de Chile Financial Stability Report, second half of 2024; BIS.
1.3.2. Preparing the financial system to cope with climate-related risks
Extreme weather events are relatively frequent in Chile (Chapter 4), posing financial stability risks that should be assessed and integrated into the financial system’s risk management frameworks. Since 2021, the central bank is member of the Network for Greening the Financial System (NGFS) and is working on integrating climate-related risks into regular prudential supervision, build awareness of climate-related risks among financial institutions, and integrating sustainability considerations into monetary policy. Since 2021, regulators have issued regulatory disclosure guidance mandating sustainability-related disclosures by banks, insurance companies and other financial institutions. Companies are also required to disclosed climate-related risks following the Task Force on Climate-Related Financial Disclosures (TCFD) lines. Financial sector authorities are developing the tools and capacities to identify, assess and monitor climate related risks and in 2024 updated their climate-related commitments, including new targets for public and private entities. A green taxonomy is under development largely based on the EU model to mobilise resources to finance Chile’s transition to a climate resilient and low carbon economy (See Chapter 4). These commitments and advances are welcome, but implementation should accelerate given Chile’s exposure to climate change.
Financial institutions in Chile present significant disparities in their climate-related risks assessments, mainly in terms of governance, disclosures, and risk management strategies (Mesa Público Privada de Finanzas Verdes, 2020[20]). Chile’s financial regulators and supervisors are committed to build awareness of climate-related risks in the financial system and develop tools to assess these risks. The Financial Markets Commission (CMF) has progressed in the development of climate stress test for banks and insurance companies, however, further efforts are needed to help financial institutions understand and manage these risks, particularly institutions lagging the most. To further improve the understanding of climate issues and related risks among financial institutions, the central bank could publish its assessment of climate risks and stress tests. Moreover, to strengthen financial institutions capacities to identify and incorporate the opportunities and risks of climate change in their strategies and decision making, financial authorities could further promote learning and knowledge sharing. Options include fostering e-training and developing workshops on sustainable finance, climate scenarios analysis, or financial instruments to mobilise resources for sustainable activities. Finally, in the medium term, authorities could envisage requiring financial institutions to integrate climate risk in corporate governance and risk management practices.
Chile’s government is committed to debt sustainability and fiscal responsibility. The government implemented a sizable fiscal adjustment when coming to office in 2022 (Figure 1.12, Panel A), benefiting from revenue generated from lithium, the withdrawal of COVID-related support measures and spending cuts totalling 23.1%, significantly contributing to a fiscal surplus of 1.1% of GDP. However, as the economy slowed in 2023, weaker tax revenues, lower copper prices, coupled with higher spending from pension benefits and public wages, widened the structural fiscal deficit to -2.7% of GDP in 2023 (Figure 1.12, Panels B and C), above the target of -2.6%. Moreover, the government adopted by decree a prudent gross debt ceiling of 45% of GDP from 2022, even though the Fiscal Responsibility Law was only modified in 2024 to include it. Fiscal plans foresee some fiscal consolidation in 2024-2026, with a headline deficit of - 2.0% of GDP in 2024, -1.0% in 2025 and -0.3% in 2026. Government’s planned adjustment comes from expected higher mining revenues, particularly in 2025, higher tax revenues due to the implementation of the tax compliance law, and less expansionary government expenditure, growing on average in real terms 2.6% per year in 2024-2026, compared to 4.9% over 2010-2019.
Note: Data for the years 2024 to 2026 are current government plans.
Source: Chile Dirección de Presupuestos, Informe de Finanzas Públicas, Tercer Trimestre de 2024; Central Bank of Chile.
Government medium-term fiscal plans are aligned with the fiscal rule and imply a broadly balanced structural fiscal position by 2028, and gross debt at 40.4%, below the prudent ceiling of 45% of GDP. The government’s commitment with fiscal sustainability is reflected in the Pact for Growth, Social Progress and Fiscal Responsibility (“Pact for Growth”) presented to Congress in early 2024, that pledges to increase permanent spending only if structural revenue increases (Box 1.2). The pact identifies as priority, higher spending in minimum guaranteed pensions, health, the national system of care, broadening childcare provision (Sala Cuna para Chile), and security (totalling a cumulative 2.7% of GDP by 2028). Higher spending outlined in the pact is expected to be financed through ambitious measures to fight tax evasion, boost growth, modernise the state and increase spending efficiency (totalling a cumulative 2.1% of GDP by 2028). Caution is needed, as the measures outlined in the pact may not lead to the expected returns, in particular the ambitious gains anticipated from combating tax evasion and avoidance may not fully materialise. An income tax reform, that has yet to be agreed upon, is warranted to face increasing spending needs, as explained below.
The main measures reflected in the pact are as follows:
Spending measures:
Gradually raise the Universal Guaranteed Pension to USD 272 (CPL 250 000), and increase employers’ social security contribution rate to 6%. The fiscal cost is projected at approximately 1.2% of GDP per year over the next six years.
Increasing healthcare spending (0.9% of GDP, per year by 2028), allocated primarily to reducing waitlists for surgical procedures, strengthening the Primary Health Care Universalisation Programme (Programa de Universalización de la Atención Primaria de Salud), especially through its extension to all communes, and constructing 30 Mental Health Community Centres.
Increasing security spending (0.3% of GDP per year by 2028), to create a National System for the Protection of Victims and Witnesses of Organised Crime, invest in new prisons, improve street lighting and surveillance cameras, and increase border security.
Increasing social protection spending (0.3% of GDP, per year by 2028) to implement a national system of care and expand childcare services (Sala Cuna para Chile) to all formal workers’ children (aged 0-2) through a fund co-financed by the government and with employers’ contributions (see Chapter 2).
Implementing measures to increase government spending efficiency through reallocation measures in operational, IT, real estate and personnel expenditures, (cumulative savings of 0.1% of GDP).
Revenue raising measures:
A new law on tax compliance aimed at addressing tax evasion and strengthening the tax administration was approved in September 2024. The government expects to raise 1.5% of GDP from this reform.
Implementing policies to boost growth through investment and productivity gains (increasing total revenues by 0.5% of GDP by 2028). The main reforms would be:
Introduction of preferential regimes to boost private investment with positive externalities, particularly in the green energy and digital economy sectors through a tax credit that can be applied against future income tax liabilities for certain investments.
Allow for instant depreciation of 50% for fixed asset investments made in the first year of new projects.
Cut the corporate tax rate from 27% to 25%.
Source: Pacto Para el Crecimiento, el Progreso Social y la Responsabilidad Fiscal (Ministerio de Hacienda, 2024[21])
In the medium term and considering that the government’s medium-term fiscal plans presented in the Pact for Growth (Box 1.2) are fully implemented, OECD projections suggest that gross public debt will stabilise around 38% of GDP by 2060 (Figure 1.13, black line), below the debt ceiling of 45%. However, there are significant risks around this scenario. The ambitious gains from combating tax evasion and avoidance may not fully materialise, and higher spending will be needed for spending on wildfire assistance and prevention, and climate risk mitigation investment, estimated at 0.28% of GDP annually in the next 30 years (Gobierno de Chile, 2020[22]) leading the public debt-to-GDP ratio to increase significantly (Figure 1.13, red line). To put debt on a declining path, while addressing climate spending needs, will require higher tax revenues and to improve spending efficiency (see Table 1.4), as discussed in the next section. These, coupled with an ambitious package of structural reforms (Table 1.5), would raise growth and reduce the debt-to-GDP ratio, putting debt on a declining path (Figure 1.13, green line).
Central government gross debt, % of GDP
Note: The dotted line reflects the prudent debt ceiling. The “Government plans from Pact for Growth” scenario assumes the government implements the Pact for Growth as presented in Box 1.2 with higher spending totalling 2.7% of GDP per year by 2028 and total tax revenues gradually increasing to 2.2% of GDP by 2028 and to 3.1% by 2034. This scenario also assumes real GDP growth and inflation to follow OECD projections over 2024-25 as in Table 1.1, after that, real GDP growth gradually converges to a potential output growth of 2.1%; the inflation rate is assumed at the target of 3%. The government primary balance is assumed to comply with the fiscal rule, and constant primary surpluses are maintained until 2060. The “Lower revenues from combating tax evasion plus higher climate spending needs” scenario assumes the committed expenditures as per the Pact for Growth, plus spending on wildfire assistance and prevention and climate risk mitigation investment needs amounting to around 0.28% of GDP annually, along with revenues from tax avoidance amounting to half the government plans at 0.8%, resulting in higher primary balances of 0.9% of GDP in 2025-2029 than in the “Government plans from Pact for Growth” scenario, leading to non-compliance with fiscal targets. The “Selected tax, spending efficiency and growth enhancing reforms outlined in the Survey” scenario assumes on top of the “Lower revenues from combating tax evasion plus higher climate spending needs” scenario, the implementation of tax measures comprising higher marginal tax rates at higher incomes, immovable property, transitory revenues from environmental and tobacco taxes, lower personal income tax exemptions and improved spending efficiency as recommended in Table 1.4 and the implementation of an ambitious package of selected growth-enhancing structural reforms as the ones recommended in Table 1.5 from 2026 onwards. All scenarios account for ageing-related costs, which are estimated to total 2.5% of GDP over the entire period to 2065 (Pessino and Ter-Minassian, 2021[23]).
Source: OECD calculations.
Source: 1/ Scenario B in the Report of the Expert Committee on Fiscal Space (Comité de Expertos, 2023[5]), 2/ Ministry of Finance (Ministerio de Hacienda, 2024[21]), 3/ (IMF, 2023[18]), 4/ OECD estimates, 5/ (Gobierno de Chile, 2020[22]) 6/ Government plans consider 1.5% of GDP.
Estimated impact of selected reforms on potential GDP per capita after 15 years
Note: Potential output estimation is based on a Cobb-Douglas production function with constant returns to scale based on the OECD long-term growth model (Guillemette and Château, 2023). Scenario A assumes that female employment rates reach the average employment rate for men by 2050. Scenario B assumes that Chile’s administrative burden PMR score converges to the OECD average by 2050. Scenario C assumes government R&D spending converges to the OECD average in 10-15 years, a 1-year increase in schooling relative to today and that average PISA scores in reading, math and science converge to OECD averages by 2050. The individual reform effects do not sum up to the effect of the ambitious reform scenario due to non-linear effects in the model.
Source: Simulations using the OECD long-term model (Guillemette and Château, 2023).
1.4.1. Further refining the strong fiscal framework
Chile’s strong fiscal policy framework has served the country well. Compliance with fiscal targets has been strong since 2001, when the structural fiscal balance rule was established, with 70% of compliance with fiscal targets in 23 years and most deviations occurring during crisis periods (Valdivieso Sastre et al., 2022[24]). Furthermore, the current administration has implemented a handful of enhancements to the fiscal rule to continue strengthening Chile’s fiscal framework (Box 1.3), included in the most recent updates of the Fiscal Responsibility Law. Despite a strong fiscal framework, the structural fiscal balance rule has not been effective in containing gross public debt growth (Figure 1.14) that increased strongly between 2008-2022 (OECD, 2022[3]). Higher debt partially reflects increasing debt-servicing costs, which are expected to recede in the future. After the pension funds withdrawals in 2021, some factors raised debt servicing costs, including higher global interest rates and tighter domestic financial conditions, amidst higher risk premia and increased volatility in interest and exchange rates (BCCH, 2023[19]). Because of these dynamics, the Fiscal Responsibility Law was updated in July 2024 to consider a dual fiscal target encompassing the structural fiscal balance target and a gross debt ceiling. Additionally, the updated law incorporates an escape clause to allow future governments to deviate from the structural balance fiscal targets, for up to two years, in case of extraordinary and transitory events and a mechanism for corrective actions to return to the targets (Box 1.3).
Every quarter, Chilean authorities publish medium term budgetary projections and risks to inform their plans to comply with fiscal targets in the four years ahead. To enhance fiscal sustainability in the longer term and account for long-term spending needs (including ageing- and climate-related costs), it is advisable that budget projections go beyond this time horizon. Chile could benefit from developing and publishing long-term budget projections on the impact of ageing and climate change at the beginning of each administration to shed light on long-term challenges and ensure budgetary discipline and alignment of medium-term spending plans with long-term needs. This would increase predictability of public finances and facilitate the adoption of multi annual budgets across administrations. For instance, Australia’s Parliamentary Budget Office publishes projections of key budget outcomes over the next decade and a long-term fiscal sustainability analysis considering ageing and climate related costs (Parliamentary Budget Office, 2024[25]). The Netherlands budgetary framework is structured around multiannual expenditure ceilings, which promote budget control and transparency. Governments adhere to these pre-agreed expenditure ceilings over a four-year term, with exceptions to address unforeseen crisis. This medium-term projection assumes unchanged policies and includes an assessment of the long-term sustainability of public finances (Government of the Netherlands, 2024[26]).
Chile’s sovereign wealth funds were established to encourage savings over time and have provided buffers to stabilise the economy in the face of shocks. Chile appropriately drew down the funds, especially the Economic and Social Stabilisation Fund (ESSF), to provide swift and impactful support to protect people during episodes of low revenues, such as the pandemic (CFA, 2024[27]; Ministry of Finance, 2023[28]). Chile will need to replenish the stabilisation funds gradually after its large draw-down to ensure government flexibility to respond to shocks. In adverse times if debt becomes too costly to roll over, having liquid assets allows the government to avoid rolling over maturing debt and frees resources to stabilise the economy. The ESSF assets declined significantly, with total accumulated stocks falling from 5.2% of GDP in 2018 to 1.9% in 2023, and it would be desirable to gradually restock the fund. The ESSF is closely linked to the structural budget balance rule, transferring the amount exceeding the structural balance under the fiscal rule, and follows international best practice in having flexible inflow and outflow mechanisms (IMF, 2024[17]). Rebuilding buffers by setting structural balance targets that allow a gradual building of the funds, especially the ESSF, while stabilizing debt below the prudent debt ceiling would be necessary, particularly if resources from this fund could also be used in case fiscal support is needed to face climate-related emergencies. Chile could take advantage of potential higher-than-expected natural resource revenues to accumulate assets in the funds.
Chile’s fiscal council (Consejo Fiscal Autónomo, CFA) underpins the country’s strong fiscal framework since 2019. Since its creation, the Fiscal Council has evolved significantly, supporting transparency and accountability, contributing to fiscal sustainability. Its main functions include monitoring compliance with the fiscal target, recommending mitigation measures in case of deviations, and evaluating the sustainability of public finances in the medium and long term. The council’s technical team and budget have grown since its inception, while the new Fiscal Responsibility Law strengthens it by redefining rules to appoint counsellors, limiting the number of meetings, and establishing rules for information requirements from the Council. However, it still faces challenges in effectively fulfilling its duties (Caldera Sánchez et al., 2024[29]). For instance, the council has been costing the fiscal impact of reforms, in particular those that pose a risk to fiscal sustainability, which often require high technical capacity and time, necessitating a larger technical team and more resources. The council's operational independence is limited by its dependence on other bodies for administrative matters and the fact that none of the board members are full-time (Caldera Sánchez et al., 2024[29]). There is also a need for better access to timely information and enhanced resources for communicating the council's work to the general public.
Note: LAC is a simple average of Colombia, Costa Rica, Mexico, Argentina, Brazil, and Peru; Emerging Market Economies (EMEs) are a simple average of ARG, BRA, CHN, COL, EGY, HUN, IND, IDN, MYS, MEX, PER, PHL, POL, ROU, RUS, ZAF, THA, TUN, TUR.
Source: Ministry of Finance; IMF, WEO.
Introduction of a lithium cyclical adjustment (2023). The fiscal rule was adjusted in 2023 to ensure that transitory revenue windfalls from lithium lease contracts are saved from 2024 onwards. This cyclical adjustment corresponds to the amount of revenue considered transitory and that should be saved. The new rule defines a new structural parameter –the lithium reference threshold– to be computed as the simple average of lithium revenues from mining contracts granted by Corfo, as a share of GDP, during the last five years. If revenues from lithium mining contracts are higher than the threshold, they are adjusted by an amount equal to the difference between the actual value and the threshold, whereas if they are lower no adjustment is made.
Output gap estimations used by the Ministry of Finance to estimate the structural balance were improved by including a broader set of information (2023), addressing the limitations and biases of simpler versions. This enhancement addresses shortfalls that consistently led to negative output gaps, which allowed for higher spending.
Setting of annual structural fiscal targets (2023). The setting of annual structural fiscal targets will increase the transparency and accountability of the fiscal rule and ensure that fiscal consolidation is not postponed to the last years of an administration.
Inclusion of a prudent gross debt ceiling in the Fiscal Responsibility Law (2024), alongside the structural fiscal balance path, that links the annual budget operations to debt sustainability and considers the impact of below-the-line operations. Targets set by each administration should be evaluated by the CFA.
Adoption of an escape clause (2024) that will allow governments to deviate from the structural balance fiscal targets, for up to two years, in case of extraordinary and transitory events, and mechanisms for corrective actions.
Source: (Ministerio de Hacienda, 2023[30]) Decreto 346 aprueba metodología, procedimiento y publicación del cálculo del balance estructural.
Chile’s green transition is an opportunity to bolster fiscal sustainability, particularly considering the potential for lithium production (Chapter 4). Even though lithium represents a lower share of exports and fiscal revenues than copper, its participation has significantly increased (Table 1.6). Estimations suggest that revenues stemming only from higher lithium production in the Atacama salt flat could bring an additional USD 1 billion per year in 2028 and USD 400 million by 2034, taking only into account mining leases paid to Corfo (Comité de Expertos, 2023[5]). In a welcome step, the structural balance rule was amended in 2023 to ensure that transitory revenue windfalls from lithium lease contracts are saved from 2024 (Box 1.3). The fiscal council has warned that this amendment reduces the risk of assigning potentially transitory revenue to finance permanent spending but would not eliminate the risks completely (CFA, 2023[31]). The new rule considers revenues from Corfo (which represent between 66% and 80% of total lithium-related revenues) but leaves aside revenue from taxes on lithium companies because of data challenges to estimate those revenues. To further strengthen the methodology, the Council recommended applying an adjustment for the totality of lithium revenue and strengthening access to tax data on lithium mining companies, via agreements for data sharing with the Internal Tax Service. Refining the fiscal rule over time by accounting for the totality of revenues from lithium as the industry evolves would be desirable.
Source: IMF; Banco Central de Chile, Ministry of Finance.
The fiscal framework could be further strengthened by integrating fiscal risks associated with climate change. Chile’s medium-term fiscal framework already provides budgeting planning and risk analysis over several years (Ministerio de Hacienda, 2024[32]), and the Ministry of Finance has been estimating climate-related costs. Starting in 2025, the budget will clearly identify which expenditures are climate-related. However, the fiscal framework could be further strengthened following the example of other OECD countries. Some OECD countries incorporate climate change considerations into their long-term fiscal plans. For instance, Denmark adopted macro-fiscal forecasting and modelling tools that incorporate climate and environmental impacts to inform the preparation of the country’s fiscal budget. Sweden integrates climate and budgetary targets, presenting annually a climate report in its budget and every four years, designs a climate policy action plan detailing strategies for achieving climate targets. Chile could incorporate climate-related expenditures and revenue measures into the medium-term fiscal framework with macro-fiscal forecasting and modelling tools to align fiscal policies with climate objectives (OECD, 2024[33]).
1.4.2. Raising additional tax revenues
Chile’s tax-to-GDP ratio of 21% is low compared with the OECD average of 34% in 2023. A comparison with the average OECD tax structure indicates that on average, OECD countries’ revenues depend more on personal income taxes and social security contributions whereas Chile derives the highest share of its tax revenues from value added taxes and corporate income taxes. Personal income taxes are low (Figure 1.15) and this structure has been relatively stable in recent years. Social security contributions as a share of tax revenues gets closer to the OECD average when mandatory contributions to private sector pension funds are included (OECD, 2022[34]). Compulsory contributions to the private sector represented 5.8% of GDP in 2022 or 24% of total tax revenues, financing 85% of social security benefits in Chile.
Mobilizing more tax revenues will be needed to address spending needs in key areas, such as social protection, security, health, education, and climate change mitigation, while maintaining Chile’s commitment with fiscal prudence. Aware of spending needs and the limited fiscal space, since 2022 the government has been promoting tax reforms. Following the rejection of the 2022 government wide-ranging tax reform proposal by Congress in March 2023 that aimed at raising 3.8% of GDP in additional revenues, the Pact for Growth envisages measures to raise revenues by 2.1% while an updated tax reform proposal is under discussion in Congress which foresees additional revenues coming from higher tax revenues from personal income taxes and on dividends, and lower revenues from reducing the corporate tax rate while offering incentives to investments. The reform would benefit from a broad consensus to ensure continuity and limit uncertainty for businesses and households.
The Pact for Growth and the tax reform would bring Chile’s tax-to-GDP ratio to 23.3% by 2028 from 20.9% today, leaving Chile among the countries with the lowest tax intake in the OECD, such as Mexico and Colombia, and well below the OECD average. Additional transitory tax revenues to finance needed spending could come from increased environmental taxes, lower diesel exemptions and tobacco taxes as discussed below. There might be scope to increase taxes on property, which accounted for 1.3% of GDP in Chile in 2023 as opposed to 1.7% on average in the OECD. Implementing measures to strengthen public spending efficiency, including government plans to lower spending on IT, operational, real estate and personnel expenditures, could help to address spending needs.
Distribution of total tax revenue, % of GDP, 2023
Source: OECD, Global Revenue Statistics database.
Reforming the Personal Income Tax can increase progressivity in the tax system
There is room to make the income tax system more progressive while raising more revenues by broadening tax bases, currently very narrow in Chile. Some changes to income taxes were implemented in recent years, for instance the number of tax brackets increased from seven to eight in 2021 and the maximum marginal tax rate was raised from 35% to 40% (OECD, 2022[34]). The proposed tax reform includes raising rates in the higher tax brackets for taxpayers whose income exceeds USD 6 300 per month. Marginal tax rates for affected taxpayers will increase by 3-5 percentage points. The current top marginal rate of 40% will raise to 43%, closer to current OECD of 42.5% (OECD, 2023[35]). Some exemptions and deductions that mostly benefit the most affluent taxpayers should be lowered. For example, families with young children can deduce childcare costs up to USD 550 per month, with likely regressive effects, as those who do not pay personal income taxes cannot benefit from this deduction. It would be advisable to gradually lower these deductions and replace them with more targeted measures, particularly for vulnerable families with children, as explained below. Similarly, taxpayers are allowed to deduct interests on unlimited number of mortgages with a deduction cap of approximately USD 5 500 per year, if certain income caps and requirements are met. Restraining deductions to only one mortgage, as the government envisages is desirable, as well as gradually eliminating income tax exemptions from leasing properties and corporate tax exemptions for investment funds.
In Chile, 74% of the eligible population is below the personal income tax exemption threshold, with only 20% of formal workers paying personal income tax in 2022 (Acosta Ormaechea, Pienknagura and Pizzinelli, 2022[36]). The top personal income tax rate in Chile is not remarkably high but it only takes effect at very high-income levels, while the basic deduction in Chile is very elevated relative to the average wage (Figure 1.16), and only about 2% of the eligible population is subject to a PIT rate above 20% (SII, 2024[37]).
Income threshold where single taxpayers start paying income tax, multiple of the average wage, 2022
Note: LAC is a simple average of Colombia, Costa Rica, and Mexico.
Source: Acosta Omaechea, Pienknagura and Pizzinelli, 2022; OECD, Taxing Wages 2023.
As in the 2022 proposal, the updated income tax reform plans to modify Chile’s partially integrated income tax system into a semi-dual income tax, responding to the perception in Chile that the system has led to a low effective tax burden on capital incomes (OECD, 2022[3]). The current system grants a partial shareholder-level dividend tax credit for corporate taxes paid at the company level. The plan is to modify it into a semi-dual income tax, where capital income and capital gains are taxed at a flat rate of 16%. The total tax burden on dividends, including the corporate tax paid at the company level, would be reduced from 45% to 39% with this new arrangement, close to the OECD average and the top marginal personal income tax rate.
There is room to reduce the tax burden on businesses
To foster investment, the tax reform proposes lowering the statutory corporate tax rate from 27% to 25%. This is a welcome change that is likely to spur productive investment, which remains subdued, as discussed above. Moreover, Chile’s statutory rate is high relative to the OECD average of 24% (Figure 1.17) and in 2023, the effective average tax rate in Chile at 23.4%, was above the OECD average of 21% (OECD, 2024[38]). Empirical evidence suggests that to foster investment, lowering the corporate tax rate might not be enough (Hanappi, Millot and Turban, 2023[39]), it should be accompanied by other measures such as lowering administrative burdens and permit time processing, as envisaged by the government, and discussed in section 1.1.1.
.
Corporation income tax rate, %, 2024
Source: OECD Tax database.
Efforts to enhance tax compliance should continue
The Pact for Growth envisages an additional 1.5% of GDP in revenue from the recently approved tax compliance law which is set to combat tax evasion and avoidance, lower informality, modernise the tax administration, increase transparency, and implement measures against tax evasion and prevention of the use of legal loopholes (Box 1.2). These efforts are welcome given that Chile’s tax authorities estimate the loss from evasion at 18% of VAT revenues and 51% for corporate tax revenues from 2018 to 2020 (Ministerio de Hacienda, 2024[21]). Moreover, they complement Chile’s consistent efforts to improve and modernise its tax administration processes (see Chapter 3). Nonetheless, caution is warranted as the expected additional revenues are large, and the scope for reducing tax evasion is hard to assess. Relying too heavily on the expected yields from combating evasion could result in short-term fiscal pressures. Moreover, these estimations should consider that taxpayers typically adjust their behaviour and that it takes time to strengthen government capacities to effectively yield higher revenues, as the fiscal council warned (CFA, 2024[27]). To cushion against potential deviations from expected gains, the reduction of tax evasion should be complemented with other measures to increase revenues and improve government spending, such as implementing recurrent spending reviews to make it more efficient, increasing income taxes, reducing exemptions and subsidies, and increasing property taxes.
Environmental taxes are low in Chile
Plans to raise environmental taxes are not part of the current tax reform proposal, but the government is investigating this avenue and plans to propose a draft law in 2025. In 2022, the environmentally related tax revenue in Chile was 0.81% GDP, below the OECD average of 1.31% and the Latin American average of 0.99%. Raising environmental taxes are meant to induce behaviour changes among consumers to ultimately reduce GHG emissions and reach climate targets. In addition, these taxes would temporarily increase revenues which could be used to mitigate climate change effects (see Chapter 4). Chile has low carbon taxes, the design of excise taxes on fossil fuels has multiple distortions, including a tax rate for diesel much lower than for gasoline. For example, the potential revenue of aligning diesel and gasoline excise tax has been estimated as 0.5% of GDP (Brys et al., 2020[40]).
Increasing tobacco taxes could reduce tobacco consumption
Tobacco prevalence in Chile remains the highest in the Latin American region and one of the highest worldwide, at 30.1% in 2020, as compared to 12.8% in Latin America. Chile has made progress in rising the tax burden on tobacco over time, but the purchase of tobacco remains very affordable. Since the 2014 reform, tobacco tax design in Chile is aligned with WHO best practices, with a mixed system with a predominance of a specific component (indexed for inflation) accompanied by an ad-valorem uniform rate on retail price. The tax burden expressed as a share of the retail price exceeds the 75% threshold, aligned with the WHO recommendations. However, cigarettes are still very affordable. The effective tax burden on cigarettes has declined since 2014 because of the unchanged tobacco tax rates, other than the inflation adjustment, while the tobacco industry has continued to increase pre-tax retail prices at a larger pace than inflation. To induce a significant drop in tobacco prevalence, a significant tobacco tax increase would be needed. Additionally, this reform would yield transitory additional tax revenues, by around 0.1% of GDP, considering previous reforms’ impact.
1.4.3. Making government spending more efficient and targeted
Chile’s general government spending, at 25% of GDP in 2023 is lower than the average across OECD countries at 40% of GDP. However, spending has increased as a share of GDP over time (Figure 1.12) and spending pressures are rising due the green and digital transitions and population ageing, making the need to improve spending efficiency. Since 2019, Chile has a spending review unit in the budget directorate (DIPRES) in charge of spending reviews and improving efficiency and effectiveness of spending over the medium term, that has carried out two pilot spending reviews. The government commissioned a spending review to the OECD to identify areas where short term spending savings or reallocations could be made (OECD, 2023[41]). The review identified several areas (operational spending, IT, real estate, and personnel expenditures) where spending could become more efficient, amounting to savings of around 0.1% of GDP. These steps are welcome, however, continuous efforts to strengthen spending efficiency and to regularly use spending reviews would help generate efficiency gains in the medium term (See Box 1.4).
Chile has taken welcome steps to better target social benefit programmes and facilitate delivery. For instance, the Electronic Family Wallet (Bolsillo Familiar Electrónico), launched in May 2023, is an innovative electronic payment system designed to provide financial support to vulnerable households, facilitating the delivery and use of a monthly monetary contribution specifically for food purchases. Also, the household social registry improved with the introduction of more frequent updates, integrating tax records and allowing for self-declaration of income to better identify beneficiaries (Ministerio de Desarrollo Social y Familia, 2023[42]). At the same time, a guide with information about eligibility criteria and available benefits was recently published by the Ministry of Social Development, with the aim of raising the benefit take-up among low-income families. Additional plans include the creation of a one-stop window to access these programmes. The government’s efforts to consolidate the social programmes and expand the take-up are welcome.
Efforts should continue to enhance the efficiency and effectiveness of social assistance programmes to better target the most vulnerable households by regularly revising the list of benefits and beneficiaries and adjusting subsidies when needed. After the increase of solidarity pensions, households including persons 65 years or older experience relatively lower poverty rates compared to vulnerable households with young children (IMF, 2024[17]) which calls for revisiting household subsidies targeted to this group.
Spending reviews are widely used in OECD countries. They offer a comprehensive analysis of government expenditure and identify opportunities for savings and reallocations to high priority spending areas. The OECD Best Practices for Spending Reviews identify the following key success factors based on OECD countries experiences:
Formulate clear objectives and specify the scope of spending reviews.
Identify distinct political and public service roles in the review process.
Set up clear governance arrangements throughout the review process.
Ensure integration with the budget process.
Implement recommendations in an accountable and transparent manner.
Ensure full transparency of spending review reports and the review framework.
Update the spending review framework periodically.
Source: Tryggvadottir, Á. (2022), "OECD Best Practices for Spending Reviews".
Chile, has consistently shown a strong position in corruption indicators in several dimensions compared to OECD countries, including perceptions of corruption, anticorruption strategies, corruption risk management and audit, and several integrity efforts (Figure 1.18, Panels A, B and C). Chile surpasses the OECD average, both in regulatory and practical compliance standards on anticorruption strategy, risk management, lobbying, and conflict of interests (Figure 1.18, Panel D). However, challenges persist in electoral finance and transparency in public information, given that not all political parties comply with information requirements within the timelines defined by national legislation, and government data in Chile is not open by default. Also, tracking post-employment activities of public office holders remains a challenge in Chile, as in many OECD countries, making it difficult to ensure compliance with revolving-door rules (OECD, 2024[43]).
In December 2023, Chile adopted the National Strategy on Public Integrity 2023-2033 (Estrategia Nacional de Integridad Pública), the first strategy at the central government level. The strategy aims at enhancing transparency, integrity, and the fight against corruption through 200 measures comprising anti-corruption measures, protection of public resources, and conflict of interest prevention. The strategy, if adequately implemented, can reduce corruption at the local level, as corruption cases in municipalities have been increasing in the last years, with open investigations for corruption in 52% of all municipalities as of 2022 (Lubbert Alvarez, 2023[44]). Such increase can be attributed to lack of transparency and poor checks and balances along with limited areas of action of Chile’s supreme audit institution, Contraloría General de la República, to pursue these cases (Lubbert Alvarez, 2023[44]).
Regarding public procurement, past evidence from the Competition Authority revealed that direct purchases were widely used in Chile (Fiscalía Nacional Económica, 2020[45]). Aware of these challenges, Congress approved a public procurement reform in 2023, which seeks to improve public spending quality, enhance probity standards and transparency, and promote small companies and local suppliers in the State purchases. Compliance with the new law has the potential to allow for some cost savings and increase resource-management transparency at all government levels. Efforts should be targeted to ensure the implementation of the law by clarifying institutional responsibilities, monitoring compliance, building civil servants’ understanding and buy-in, and enforcing appropriate penalties (OECD, 2024[43]).
Note: Panel B shows the point estimate and the margin of error. Panel C: LAC is a simple average of Colombia, Costa Rica, Mexico, Argentina, Brazil, and Peru.
Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: OECD Anti-Corruption and Integrity Outlook 2024.
References
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