Chile’s next president will have a complex economic scenario

Whoever wins Sunday’s ballot in Chile between the far-right José Antonio Kast or the left-wing Gabriel Boric will face a complex economic scenario: after the vigorous recovery in 2021, a slowdown in growth and high public debt are expected next year.

Kast and Boric represent antagonistic projects. While the 35-year-old young left-wing deputy is socially liberal and defends “a European-style welfare state” economically, his adversary Kast, a 55-year-old lawyer, defends the neoliberal economic model and has an ultra-conservative vision. in social matters, expressed in his opposition to abortion and equal marriage.

Kast proposes a tax cut for large companies and maintain the private pension system. Boric proposes a tax reform that includes greater burdens on the super rich and high incomes to collect an additional 5% of GDP, which would be used to expand the State’s participation in the provision of social security.

The leftist deputy is in favor of a new pension system to replace the one inherited from the Augusto Pinochet dictatorship (1973-1990), a central issue in Chilean society and which has been one of the main demands of social demonstrations in the last years due to the very low pensions they provide.

“Kast’s model is more market-friendly,” while Boric has “great distrust of the private sector,” Francisco Castañeda, an economist from the Business School of the Universidad Mayor, told AFP.

Facing the second round, both candidates have moderated their speech, especially in the economic sphere, integrating new advisers to their teams, in search of capturing the voters of the center.

In fact, well-known economists who accompanied the years of governments of the Concertación of center-left parties after the dictatorship, marked by great prosperity, added their support to Boric in this second round, including Ricardo French-Davis.

Initially Boric proposed a tax reform that would collect 8% of GDP and now aspires to 5%, while Kast gradually introduced his tax cut (from 27% to 17% of the tax on large companies).

Complex scenario

After registering a 5.8% drop in 2020 as a result of sanitary restrictions due to the pandemic, Chile will close 2021 with a GDP expansion of around 11.5%.

A large part of this recovery is due to the strong increase in private consumption after the state bonds delivered by the pandemic and the three early withdrawals of private pension funds (of up to 10% each time) approved by Congress in the face of strong popular pressure .

In addition, since the middle of the year, a large part of the economic activities were resumed after a successful anti-COVID vaccination campaign promoted by the government of the conservative Sebastián Piñera, which until today managed to reach more than 90% of the target population.

As the world’s leading copper producer, Chile has also benefited from the international rise in the metal, hand in hand with Chinese demand.

“Today the economy is unbalanced in economic terms (…), overheated from a consumption shock,” explains economist Juan Ortiz, from the Diego Portales University Economic Context Observatory, to AFP.

Only withdrawals from pension funds meant an injection of US $ 50,000 million, while the government allocated US $ 3,000 million a month until December to pay the Emergency Family Income (IFE) bond.

By 2022, the Central Bank is expected to raise interest rates again to contain inflation, which will close this year at around 6%, double its target range. In addition, the delivery of the IFE will be stopped.

Whatever “the candidate who becomes president next year will have to take charge of a complex macroeconomic scenario, in which he will have to calibrate the withdrawal of the fiscal stimulus,” Ortiz added.

Aware of this scenario, Boric and Kast promised to guarantee the consolidation of fiscal accounts, to contain public debt, which as of June 2021 reached 33.1% of GDP.

“There is a clear awareness that without fiscal discipline, the Chilean economy would have more difficult times than those projected for 2022,” says Castañeda.

The market is betting that consumption and copper will drive a growth of the Chilean economy between 2 and 3% next year.

A Kast win would be more valued by the market, but there is fear that his policies will generate protests. If Boric wins – who leads the polls, banned since December 4 – the economic uncertainty could be extended especially by his tax reform project, although there would be relative relief in the streets.