CHILE'S ECONOMIC STIMULUS PACKAGE

UNCLAS SANTIAGO 000023 STATE PLEASE PASS TO USTR KATE DUCKWORTH STATE PLEASE PASS TO FEDERAL RESERVE TOM CONNORS TREASURY FOR SSENICH COMMERCE FOR KMANN SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI SUBJECT: CHILE'S ECONOMIC STIMULUS PACKAGE ¶1. (SBU) SUMMARY: On January 5, President Bachelet announced a $4 billion economic stimulus plan designed to create 100,000 jobs and maintain a GDP growth rate of 2-3% in 2009. The plan calls for increased public infrastructure spending, temporary tax cuts for businesses, direct payments to low-income families, and other incentives. The stimulus package, which represents 2.8% of GDP, will be financed from one of Chile's sovereign wealth funds (the Economic and Social Stabilization Fund) as well as from new public debt. It will likely result in a fiscal deficit of 2.9% of GDP in ¶2009. The plan comes in response to weakening economic conditions in Chile, where growth slowed to 0.1% in November 2008. Finance Minister Velasco told the Ambassador the stimulus package was designed as a broad package to draw in all sectors of Chilean society. President Bachelet has publicly promoted the plan, which was likely unveiled to coincide with her attendance at the World Economic Forum in Davos. END SUMMARY Jobs and Growth Through Spending and Tax Cuts -------------- ¶2. (U) President Bachelet launched a $4 billion economic stimulus plan equivalent to 2.8% of GDP on January 5. This countercyclical fiscal strategy aims to stimulate growth and prevent reduced levels of employment during 2009. The GOC projects the plan could create over 100,000 jobs and preserve a GDP growth rate of 2-3% for 2009. The GOC will send the proposed package to Congress by January 9. The stimulus plan comes on the heels of recent economic reports that show problems in the Chilean economy. Industrial output fell 5.7% and GDP growth slowed to 0.1% in November 2008, while copper prices hit a four-year low in December. ¶3. (U) The stimulus plan contains an assortment of fiscal policies designed to increase business investment and consumption, provide access to credit for Small- and Medium-Size Enterprises (SMEs), support low-income families, and assist vulnerable workers. The GOC will increase spending by 1% of GDP ($1.5 billion),including $750 million for public infrastructure projects and a one-time payment of $64 per person for low-income families. There will be a temporary reduction of monthly corporate tax payments. The GOC also plans to allocate $1 billion to capitalize CODELCO (the state-owned copper company) and provide extra funds to CORFO (the Development Promotion Agency) for financing new business initiatives. Stimulus Will Likely Produce Deficit -------------- ¶4. (U) The stimulus plan will be financed with resources from the Economic and Social Stabilization Fund (one of Chile's three sovereign wealth funds created under the 2006 Fiscal Responsibility Law) and the issuance of bonds authorized by the 2008 Budget Law. The proposal implies a government deficit of 2.9% of GDP in 2009. The GOC is normally required to operate a 0.5% budget surplus, but this rule will be suspended in 2009 to accommodate deficit spending under the stimulus package. The plan takes into consideration a temporary reduction in tax revenues of $1.5 billion (1% of 2009's projected GDP). Because these tax reductions are temporary, they are not expected to impact structural, long-term fiscal revenue. Main Measures Under the Plan -------------- ¶5. (U) Incentives for Investment and Consumption: -- $750 million increase in public infrastructure investment. -- Temporary elimination of the stamp tax for all credit operations in 2009 and a reduction of the tax rate by half during the first semester of 2010 (0.6%). This measure implies a fiscal cost of $628 million in 2009. -- Capitalization of CODELCO - $ 1 billion to allow the company to maintain and strengthen its investment plans. This capital injection is currently under discussion in Congress in a separate bill. -- New subsidies for reforestation to mitigate employment effects in the timber industry. ¶6. (U) Financing of Companies: -- Temporary reduction of monthly corporate tax payments. In 2009 the amount required by companies to pre-pay corporate taxes will be reduced by 15 percent for SMEs and by 7 percent for larger firms. -- Increase in CORFO's financing programs for banks and non-bank factoring companies. -- New CORFO guarantees to facilitate reprogramming of SME loans. ¶7. (U) Support for Low Income Families: -- A one-time payment of $64 per dependent for beneficiaries of the "Chile Solidario" program. This bonus will be disbursed in March 2009 and will reach over 3.5 million people. -- Early reimbursement of 2010 income tax returns for individuals. ¶8. (U) Employment and Labor Training: -- A subsidy to promote formal employment for low income young workers (ages 18-24). -- Labor training initiatives that will increase the tax deduction for training programs provided by authorized technical centers. These initiatives will allow company expenditures on training to be deducted from their monthly corporate tax pre-payments. GOC Aims for Comprehensive Package -------------- ¶9. (SBU) During a dinner, January 6, Finance Minister Velasco told Ambassador the stimulus package was designed to be comprehensive, bringing all sectors of Chilean society together to avoid the negative impacts of the global financial crisis. Velasco noted the plan involved a fairly even mix of tax benefits for business and public infrastructure projects aimed at boosting employment. Members of the GOC had been travelling around the country and receiving positive feedback on the proposed package. ¶10. (SBU) President Bachelet in a speech to the dinner spent a few moments supporting the stimulus plan as well. She noted her Administration had been heavily criticized for not spending record copper revenues in previous years (saved instead in the sovereign wealth funds). However, those funds were now available for use in countercyclical spending. ¶11. (SBU) COMMENT: The stimulus package was unveiled just in time for President Bachelet and Finance Minister Velasco's attendance at the World Economic Forum in January 28 - February 1 in Davos. The Bachelet Administration wants to present the plan internationally, hoping it will positively impact economic conditions and expectations in Chile. The GOC has recently stressed the wisdom of its choice to save copper revenues rather than spend them in years past, which now allows for increased spending when it is most needed. This may also become a Concertacion campaign piece lauding fiscal responsibility with a social conscience. SIMONS