Chile's Bachelet Looks to Ensure Her Legacy as Debt Rises

(Bloomberg) -- Chile's President Michelle Bachelet announced larger than expected spending plans for next year as she looks to ensure a legacy of improved education and health care, even if that comes at the cost of higher debt.

Fiscal expenditure will rise 3.9 percent, Bachelet said late Sunday, more than the 3 percent many had expected. Still, the budget deficit will narrow to 1.9 percent of gross domestic product from 2.7 percent this year as revenue jumps 7.5 percent, Finance Minister Nicolas Eyzaguirre told lawmakers on Monday.

“We can be optimistic because there are already better prospects for the economy,” Bachelet said in a televised address. “More growth, more productivity and greater wellbeing for every family, community and region.”

Echoing Bachelet, Eyzaguirre said growth could double to 3 percent in 2018 from 1.5 percent this year after copper prices rallied, exports rose and consumer and business confidence improved. The extra revenue will enable Bachelet to extend pledges for free higher education to 60 percent of students, raise teachers' pay and step up the construction of hospitals. Still, with S&P Global Ratings and Fitch Ratings both downgrading the country in the past two months because of rising debt levels, many had expected her to keep a tighter rein on expenditure.

“We are going to hand over an economy in a clear state of recovery to the next administration with well ordered fiscal accounts,” Eyzaguirre said today.

The structural fiscal deficit, which excludes cyclical factors, will narrow to 1.5 percent of GDP from 1.7 percent, as previously pledged by the government, the finance minister said.

Changing Emphasis

The comments contrasted with the emphasis on fiscal prudence that the finance minister insisted on during an interview last month. Copper at a three-year high wouldn't lead to a jump in spending ahead of November's presidential election, he said on Sept. 8.

“It has to be an austere budget,” Eyzaguirre said last month. “Being more fiscally conservative in an election year isn't going to be easy, but that is why we are here.” Chile's credibility “is one of the most important assets we have.”

When it cut Chile's credit rating in August, Fitch forecast that outstanding general government debt will rise to 25 percent of GDP this year and to about 30 percent in 2019.

Government Achievements

Bachelet didn't concentrate on fiscal debt in her speech, focusing instead on the achievements of her government. The former doctor cited the completion of 20 hospitals, with another 29 under construction and 18 in the planning and design phase. But pride of place goes to education spending, with 380,000 students set to benefit from free university places next year.

“With their hand on their heart, who can continue to deny families that must get themselves into debt or dedicate the main part of their income to pay university quotas,” Bachelet said.

Some of those funds will come from the metal that was known for many years as “Chile's wage.”

Copper, which accounts for about half of exports, rose as high as $3.18 per pound last month, up 44 percent in the past year. Every one cent increase in the average copper price for the year represents $50 million extra revenue for the government. The metal was trading at almost $3.00 per pound Monday.

To contact the reporter on this story: Javiera Quiroga in Santiago at jquiroga5@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Philip Sanders