Chile runs a record budget surplus of 4.8% of GDP in 2005

Chile’s Government budget surplus for 2005 amounted to 4.8% of GDP (about US$5.6 bn) according to figures released today by the Budget Office – the highest on record. This surplus is more than double the fiscal surplus recorded in 2004 (2.2% of GDP), and reflects strict adherence to the 1% structural surplus rule which ties spending to long term revenues, saving any extra revenue due to cyclical factors.

Over the five years that the structural surplus rule has been in place fiscal deficits (in 2001-2003) have been exactly matched by surpluses (2004-5), resulting in a net fiscal surplus over the 2001-5 cycle of exactly 1% of GDP.

This disciplined counter-cyclical policy has contributed to sterilizing the large external inflows due to favorable terms of trade, contributing to the stability of the real exchange rate. Moreover, by saving rather than spending these revenues the policy has allowed the Central Bank to raise interest rates at a more measured pace, and has boosted confidence in the medium term economic outlook.

Causes of the Fiscal Surplus: High copper and molybdenum prices boosted both tax revenue from mining companies (up 154%) and direct revenues from the state mining company Codelco (up 34.5%). Strong economic performance (6.3% growth in 2005) coupled with buoyant internal demand (which grew at 11%) also increased overall tax income by 19.1%, while spending was contained by the surplus rule, increasing by only 6.5% in real terms.

Uses of the Fiscal Surplus: About CLP$1.5 trillion of the CLP$ 3 trillion surplus was used to prepay Government debt, with gross Government debt standing at a low 7.6% of GDP as of December 30, 2005. The remainder has been invested in financial assets to provide for future minimum state pension liabilities (CLP$770 bn), and the Copper Stabilization Fund (CLP$413 bn).

Source: Ministry of Finance