## 1chlea2021005 ## Source details **Canonical URL:** [1chlea2021005](https://www.imf.org/-/media/files/publications/cr/2021/english/1chlea2021005.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1chlea2021005.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1chlea2021005.pdf.json) --- ### Executive summary — overall assessment - Chile meets the standard of good or advanced practice for 21 out of the 36 principles of the Fiscal Transparency Code (FTC). - Comparison benchmark: average for Latin American Countries and Emerging Market Economies is 15 out of 36. - On a further nine principles, Chile meets the basic standard of practice. - Pillar performance ranking: - Fiscal forecasting and budgeting (Pillar II): very strong. - Fiscal reporting (Pillar I): strong. - Fiscal risk analysis and management (Pillar III): more mixed results. - The IMF’s Fiscal Affairs Department (FAD) conducted a Fiscal Transparency Evaluation (FTE) mission remotely during June 3–24, 2021; report finalized in October 2021. ### Key strengths (by pillar) - Pillar I — Fiscal reporting: - Advanced level for the frequency of in‑year fiscal reporting. - Timeliness of annual financial statements: published within four months of the end of the financial year. - Good practice for institutional coverage of fiscal reports and coverage of flows and tax expenditures (included in a separate report). - Integrity‑supporting practices (statistical integrity and comparability) at a good level. - Pillar II — Fiscal forecasting and budgeting: - Advanced level for fiscal legislation: clear and broadly comprehensive. - Presentation of macroeconomic forecasts in budget documents: advanced. - Budget documents presented to Congress and approved in a timely manner: good practice. - Fiscal policy objectives guided by the cyclically‑adjusted balance (CAB) rule. - Robust performance information system and regular publication of forecast reconciliations. - Pillar III — Fiscal risks: - Advanced practices for management and disclosure of risks from government guarantees. - Advanced practices for management and disclosure of financial sector exposure. - Regular monitoring, disclosure, and management of budget contingencies and risks from subnational governments. ### Recommendations and follow‑up (overview) - The evaluation provides 12 recommendations to further enhance fiscal transparency in Chile. - Annex II contains a detailed action plan; post‑mission work with the government refined the action plan and implementation advice. --- ### Pillar I — Fiscal reporting: institutional coverage, stocks, flows, and integrity - Institutional coverage and consolidation - IGFE financial statements provide the most comprehensive single report of entities covered (close to 100% of public sector entities) but do not consolidate subsectors; chapters are independent. - EFP consolidates central government and municipalities into general government (GG) but omits EBU (mainly universities, ~2 percent of total central government expenditure). - No single report consolidates the non‑financial public sector (NFPS) and the public sector; DIPRES could perform consolidation of NFPS with minor methodological adjustments. - Public sector composition and 2020 aggregates (selected exact figures, percent of GDP or as presented) - Public sector comprised 664 institutional units; total expenditure accounted for 39.3 percent of GDP. - Selected table lines preserved verbatim: - Revenue20.00.720.44.222.58.01.30.4-0.831.4 - Expenditure27.20.627.64.029.68.71.20.0.6-0.839.3 - Expense24.00.624.33.826.28.51.20.6-0.835.8 - Investment in NFA3.20.03.20.23.30.20.00.00.03.5 - Net operating balance-3.90.0-3.90.3-3.7-0.50.0-0.20.0-4.4 - Net lending/borrowing-7.20.0-7.20.1-7.0-0.70.0-0.20.0-7.9 - Total Assets77.31.678.93.882.723.126.529.6-0.4161.5 - Non‑Financial Assets47.90.948.92.050.917.50.20.0...68.6 - o/w: Unreported Subsoil Assets24.9...24.9...24.9............24.9 - Financial Assets29.30.730.01.831.85.626.329.6-0.492.9 - Total Liabilities (a)+(b)61.50.461.90.662.516.625.530.5-0.4134.7 - Reported Liabilities (a)43.60.444.10.644.716.625.530.5-0.4116.9 - Debt Securities - market value38.30.238.50.138.610.94.510.5-0.264.3 - Loans0.00.10.10.30.50.21.80.00.02.5 - Accounts Payable5.30.15.40.35.73.61.40.50.011.5 - Pensions0.00.00.00.00.01.80.00.00.01.8 - Other (mainly deposits)0.00.00.00.00.00.017.819.5-0.236.8 - Unreported Liabilities (b)17.8...17.8...17.8.........0.017.8 - Pension Liabilities17.5...17.5...17.5............17.5 - Bonos de Reconocimiento0.4...0.4...0.4............0.4 - Net Financial Worth-32.10.3-31.81.1-30.7-11.00.8-0.90.0-41.8 - Net Worth15.81.217.03.120.26.51.0-0.90.026.8 - Coverage of stocks and valuation issues - Subsoil assets (copper reserves) unreported: staff estimate monetary value at 24.9 percent of GDP. - Public employment‑related pension liabilities (CAPREDENA and DIPRECA) unreported: staff estimate actuarial liability around 17.5 percent of GDP in 2020. - Recording of debt securities at market value increases the stock by 5.7 percent of GDP relative to face value; securities and loans at face value stand at 32.5 percent of GDP in 2020 while at market value they stand at 38.2 percent of GDP in 2020 (CG Gross Debt report). - Total net worth including main unreported items and debt securities at market value would reach 26.8 percent of GDP, 1.3 percentage points more than reported net worth. - Flows, accounting basis, and missing other economic flows - Financial statements: accrual basis for revenues and expenditures; fiscal statistics: accrual basis for expenditure only. - Statement of Other Economic Flows is not included in fiscal reports. - Classification and statistical treatment issues - Capital transfers from central government to private sector entities, SOEs and local governments are reported as acquisition of non‑financial assets in central government statement of operations rather than as spending, overestimating central government investment and averaging 2 percent of GDP over 2017–20 (representing more than 50 percent of reported net acquisition of non‑financial assets in the period). - Tax expenditure reporting - 2019 Tax Expenditure report estimated revenue losses for 2020 at around USD 9.3 billion (3.0 percent of GDP). - Table I.3 distribution (2020, million USD and % of GDP): - Savings and Investment: 4,723; 1.50 - Education: 1,055; 0.33 - Health: 787; 0.25 - Real Estate / Housing: 754; 0.24 - Transportation: 535; 0.17 - Support to Small and Medium‑sized Enterprises: 514; 0.16 - Other sectors and objectives: 965; 0.31 - Total: 9,333; 2.96 ### Assessment judgement (coverage) - Coverage of Institutions — Good. - Practical implications: - Consolidation of NFPS and broader public sector could be achieved by DIPRES using existing subsector data; minor methodological adjustments required. - Ensuring external scrutiny (audit) reflects consolidated positions would improve transparency and reliability. --- ### Pillar II — Fiscal forecasting and budgeting: comprehensiveness, orderliness, policy orientation, credibility - Budget documents and timing (selected) - Public Finance Report (IFP): quarterly (March 2021); contains macroeconomic and fiscal forecasts and a 4‑year MTFF. - Draft Budget Law: annual (September 2020). - Adopted Budget: annual (December 2020). - Budget Priorities Booklet (Citizens’ budget): annual (September 2020). - Report on Fiscal Rule Implementation: annual (June 2020). - Report by the CFA: twice a year in April and September (April 2021). - Comprehensiveness and unity - Budget documentation includes budgetary central government entities; estimated expenditure and revenue of main extra‑budgetary entities are not included in the budget documentation (universities account for 2 percent of central government expenditure). - Recommendation: include estimated revenues and expenditures of main extra‑budgetary entities in budget package; classify public universities under extra‑budgetary subsector and consolidate. - Macroeconomic forecasting (Advanced) - Budget documentation includes forecasts of key macroeconomic aggregates for current year, next budget year and next four years; macroeconomic scenarios updated quarterly in the IFP. - Forecast errors and bias: - Between 2015 and 2020, 1‑year forward real GDP growth forecasts have been higher than realized real GDP growth with only one occurrence of forecast below realized growth (2018). - Excluding 2020, standard deviation of forecast errors is close to 1.1 percentage point of GDP. - 1‑year forward inflation forecasts have been above realized inflation in recent years. - Medium‑Term Budget Framework (MTBF) — current status (Basic) - MTFF extends over three or more years beyond the next fiscal year; since the 2019 budget the MTFF covers four years beyond the next budget year. - Aggregate out‑year expenditure ceilings set but not systematically complied with; no breakdown of expenditure ceilings at ministry or program level publicly available. - Aggregate ceiling and fiscal space figures (selected exact values from Tables II.2 and II.3, billion pesos): - Out‑Year Ceiling (Year 3): 36,823 (2017), 42,746 (2018), 45,881 (2019), 45,958 (2020), 48.988 (2021) - Actual Outturn: 42,643 (2017), 45,185 (2018), 48,153 (2019), 54,793 (2020), N/A (2021) - Fiscal Space (Out‑Year 3): 2,413 (2017), 1,776 (2018), 494 (2019), -502 (2020), 607 (2021) - Fiscal Space (Out‑Year 2): 599 (2017), -138 (2018), -414 (2019), 309 (2020), 701 (2021) - Fiscal Space (Out‑Year 1): -206 (2017), -260 (2018), 386 (2019), 1,032 (2020), 84 (2021) - Investment projects and procurement (Good) - Major projects subject to published cost‑benefit analysis; National Investment System (SNI) requires pre‑feasibility studies and CBAs. - Integrated Project Bank (BIP) publishes CBAs and actual expenditures, but not planned expenditure or total anticipated project cost for each project. - Recommendation: publish total expected cost of multi‑annual investment projects and updated total costs when seeking legislative appropriations. - Timeliness and orderliness - Fiscal year starts January 1. - Budget proposal transmitted to Congress towards end of September; Congress obliged to approve within 60 days (before November 30); budget promulgated in December. - Key dates for 2021 budget: - Budget proposal transmission to the legislature 30 Sept 2020; Approval by the legislature 28 Nov 2020; Promulgation by the President 4 Dec 2020; Publication in the Gazette 16 Dec 2020. - Fiscal policy objectives and CAB (Good) - Cyclically‑Adjusted Balance (CAB) rule in place since 2001; structural balance targets set by incoming administration within 90 days and can be modified by Presidential Decree. - CAB target vintages (preserve values): - Decreto Supremo 743 (adopted June 5th, 2018; published July 9th, 2018): 2018 -1.8; 2019 -1.6; 2020 -1.4; 2021 -1.2; 2022 -1.0 - Decreto Supremo 253 (adopted February 24th, 2020; published March 30th, 2020): 2020 -3.2; 2021 -2.5; 2022 -2.0 - Decreto Supremo 1 579 (adopted September 28th, 2020; published October 29th, 2020): 2020 -3.2; 2021 -4.7; 2022 -3.9 - Actual CAB outturn: 2018 -1.5; 2019 -1.5 - Issues: high degree of discretion to change targets within a mandate; proposed changes under discussion include setting a debt anchor and an escape clause; bill submitted by executive in late September 2021 inspired by these proposals. - Performance information and public participation - Robust management control and evaluation system (MC&E) produces monitoring cards and publishes results (2020 monitoring results published June 2021). - Program classification not fully aligned with policy programs; outcome indicators limited. - Public participation rated below OECD average (Open Budget Survey 2019); legal framework (Law 20500) exists but formal voice limited. - Recommendations include leveraging legal framework for participation, improving dissemination of Budget Priorities Booklet and Open Budget Portal, and publishing feedback on public inputs. --- ### Pillar III — Fiscal risks: disclosure, analysis, and management - General arrangements and reporting - Multiple reports published: IFP (quarterly), IPC (annual Contingent Liabilities Report), SWF and FEES reports (quarterly or monthly), SEP report on public corporations (annual), debt statistics (monthly/quarterly). - Assessment headings: 3.1.1 Macroeconomic Risks — Not Met; 3.1.2 Specific Fiscal Risks — Not Met. - Macroeconomic risks (Not Met) - Macroeconomic risks have limited coverage in budget documentation; occasional scenario analysis (e.g., IFP Q1 2020) presented alternative scenarios during COVID‑19 but not systematically maintained. - Suggested simple illustration: present impact of a 1 percent change in each macro aggregate on government borrowing for the year ahead; more sophisticated methods based on historical volatility or forecast error recommended. - Contingent liabilities and IPC (coverage and limits) - IPC published annually since 2007; covers PPP minimum revenue guarantees, guarantees for public corporations’ debt, student loan guarantees, deposit insurance, legal risks, obligations to multilateral organizations, and some pension system commitments. - Gaps: natural resources risks, environmental (disaster) risks, financial performance risks of public corporations, and subnational government risks not fully covered in IPC. - Recommendation: publish an annual Fiscal Risk Statement with broader scope including macroeconomic sensitivity, debt sustainability, contingent liabilities, PPPs, natural resources, environmental risks, financial sector support, and public corporations’ financial performance. - Quantitative scope and selected statistics (preserve exact figures where given) - Guarantees comprise 69 percent of total estimated contingent liabilities. - 2020 IPC estimates: - Maximum exposure of guarantees: 9.1 per cent of GDP. - Expected exposure of guarantees: 6.7 percent of GDP. - Selected contingent liabilities and risk statistics (2020 unless noted): - Minimum Income Guarantee Concession System: 0.15% 2020 (IPC). - State Guarantee for the Debt of Public Enterprises: 0.99% 2020 (IPC). - Higher Education Credit Guarantee: 1.53% 2020 (IPC). - State Deposit Guarantee: 3.34% 2020 (IPC). - Guarantee Fund for Small Entrepreneurs (FOGAPE): 0.38% 2020 (IPC). - CORFO Hedge Funds: 0.31% 2020 (IPC). - Legal costs: 0.22% 2020 (IPC). - Cumulative actuarial liabilities of DIPRECA and CAPREDENA: 17.50% 2020 (Staff estimate). - Long‑term debt projections (DIPRES 2019 DSA): 24.20% 2050. - Estimated costs related to the minimum pension guarantee: 1.35% 2020 (IPC). - Estimated costs related to the solidarity pension scheme: 2.98% 2050 (IPC). - Monetary value of copper reserves estimated at 25% of GDP (IMF staff estimate NPV noted as x elsewhere; staff estimate also cited as 24.9 percent of GDP in section 1.1.2). - Guarantees, PPPs and quantification methods - Minimum revenue guarantees for transport concessions: present value maximum exposure estimated at 1.43 percent of projected GDP; present value of expected payments approximately 0.15 percent of GDP; actual 2019 payments were 69.410 million pesos (0.04% of GDP). - PPP disclosure gaps: Directorate of Concessions publishes project details but not estimated annual receipts and payments over life of contracts nor consolidated total rights and obligations; recommendation to disclose expected receipts/payments and total obligations. - Natural resources, valuation and reporting - Chile does not officially publish annual estimates of volume and value of mineral reserves; IMF staff estimate current value of copper reserves at 24.9 percent of GDP. - DIPRES long‑term projections (2020–2060, January 2021) produced three scenarios for mining revenue (2051–2060): - Pessimistic scenario: 0.1 percent of GDP. - Optimistic scenario: 1.6 percent of GDP. - Example sensitivity: assuming average copper price US$3.99 per pound in 2021 versus US$3.35 in January 2021 scenario would boost growth from 5 percent to 6 percent and generate extra revenue ~US$4 billion (~1.5 percent of GDP); every one cent increase in copper price increases taxes and royalties by US$60 million. - Environmental risks and natural disasters - 2010 earthquake fiscal cost estimated at 12–15 percent of GDP; average of other disasters over 7 yrs estimated at 0.11% 2020 (IMF estimate). - Recommendation: DIPRES should systematically publish quantitative assessment of fiscal risks of natural disasters and disaster mitigation financing strategies. - Asset and liability management (Basic) - FEES and FRP SWFs reported regularly; FEES size fluctuated between 3 and 5 percent of GDP from 2017 to 2021. - TSA not fully functional; some subsidiary accounts at Banco del Estado and BCCh not zero‑balance; recommendation to improve TSA so daily transfers and fungibility are in place. - Recommendation: publish medium‑term debt strategy (MTDS) and a balance sheet strategy (SALM) considering all assets and liabilities. - Subnational governments and public corporations - SNG sector in 2020: revenue 4.2 percent of GDP; expenditure 4.0 percent of GDP; municipalities: revenues 2.1 percent of GDP and expenditure 1.9 percent of GDP (municipal surplus 0.2 percent of GDP). - Municipal gross liabilities at end‑December 2020: 0.03 percent of GDP. - Public corporations: liabilities presented in OECD statistics communicated by DIPRES amounted to about 42.1 percent of GDP as of December 2020; state guarantees for public corporations’ debt represent 1 percent of GDP. - Transfers between government and public corporations: transfers to government 0.53% 2020; transfers from government 0.42% 2020. - No comprehensive annual report on overall financial performance of public corporation sector; recommendation to produce consolidated performance report with profitability and risk indicators. ### Pillar III assessment summary (selected) - Risk Disclosure and Analysis: - Macroeconomic Risks: Not met. Importance: High. Rec: 3.1. - Specific Fiscal Risks: Not met. Importance: Medium. Rec: 3.2. - Long‑Term Fiscal Sustainability Analysis: Not met. Importance: High. Rec: 3.4. - Risk Management: - Budget Contingencies: Advanced. - Asset and Liability Management: Basic. Importance: Medium. Rec: 3.3. - Guarantees: Advanced. - PPPs: Not met. Importance: Low. Rec: 3.2. - Financial Sector Exposure: Advanced. - Natural Resources: Not met. Importance: Low. Rec: 3.2. - Environmental Risks: Basic. Importance: Medium. Rec: 3.2. - Fiscal Coordination: - Subnational Governments: Advanced. Importance: Low. Rec: 3.2. - Public Corporations: Basic. Importance: Medium. Recs: 3.2 and 3.3. --- ### High‑priority recommendations (selected and preserved) - 1.1 Expand institutional coverage of fiscal reports and consolidate the general government, the non‑financial public sector, and the public sector in accordance with international standards. - DIPRES working with CGR should establish a working plan at the start of 2022 targeting the inclusion of all adjustments by the May 2024 IGFE or before. (1.1.1) - Introduce fiscal data on public universities in the Statistical Yearbook and gradually incorporate these institutions in the quarterly fiscal statistics report; classify public universities under the extra‑budgetary subsector and consolidate. (1.1.2) - Implement consolidation practices in IGFE: consolidate Chapters 1, 2, and 4 as a first step for consolidated general government, and gradually consolidate Chapters 3 and 6 to reach the entire public sector. (1.1.3) - 1.2 Improve coverage of stocks and flows by including missing assets, liabilities and fiscal flows in accordance with international standards. - IGFE should include identified missing items (CAPREDENA and DIPRECA pension liabilities; monetary value of copper reserves at present value; recognition pension bonds; complete PPP liabilities in accordance with IPSAS 32; total liabilities at subnational level), account for debt securities at market value and accrued interest, and record other economic flows. (1.2.1) - Statistical Yearbook and quarterly fiscal statistics should harmonize “net debt” concepts, revise statistical treatments (disaggregate “subsidies and grants”), calculate net lending/net borrowing for SOEs net of depreciation, record capital transfers correctly, and introduce a statement of other economic flows. (1.2.2) - 1.3 Improve fiscal data quality by ensuring internal consistency and explaining revisions. - Introduce reconciliation between financing and change in debt stock in 1Q IFP and debt reports; compare SIAP‑SP financing with BCCh monetary survey; establish debt back‑office to collect holdings by counterparties. (1.3.1) - Publish functional classification in quarterly IFPs and a bridge table/methodology; complement Decree 854 CoA with functional and programmatic classifications. (1.3.2) - Introduce a dedicated section (Revisión de cifras) in annual and quarterly reports to explain revisions with quantitative comparisons. (1.3.3) - 1.4 Strengthen external scrutiny of annual financial statements. - Perform financial audits on individual public entities based on CGR manuals and publish an audit opinion; establish protocols for separation between Accounting and Audit Divisions of the CGR. (1.4.1) - Produce an audit report on annual financial statements and issue an opinion on true and fair view. (1.4.2) - Achieve this by transferring preparation of financial statements to MoF or ensuring clear separation of functions within CGR. (1.4.3) - Establish Working Group on statistics consistency (DIPRES, INE, BCCh) and consider transferring compilation responsibility to an independent agency; interim measures to strengthen autonomy of DIPRES Fiscal Statistics Department. (1.4.4) - Introduce bridge tables in IGFE to reconcile main aggregates with budget outturns and fiscal statistics. (1.4.5) - 2.1 Strengthen medium‑term orientation through a fully‑fledged MTBF. - Gradually complement fiscal rule with aggregate sectoral expenditure ceilings in MTBF. (2.1.1) - Publish total expected cost of multi‑annual investment projects regularly alongside annual budget documentation. (2.1.2) - Expand details of underlying assumptions in macro forecasts (e.g., interest rates, external sector, labor market). (2.1.3) - Standardize reconciliation tables and target reconciliation in IFP Q1 and Q3 for medium term, Q2 and Q4 for in‑year projections. (2.1.4) - 2.2 Reinforce fiscal rule with an escape clause and increased CFA role. - Establish clearly defined escape clause; activation should receive a positive CFA opinion; predefine timeframe and return procedures. (2.2.1) - Clarify CFA mandate to evaluate credibility of economic and fiscal forecasts; expand CFA staff and formalize arrangements. (2.2.2) - 3.1–3.4 Improve fiscal risk disclosure, management, and long‑term sustainability analysis. - Systematically publish macroeconomic risk analysis within the IFP (3.1.1). - Publish comprehensive Fiscal Risk Statement (target 2023 budget) expanding IPC scope to include natural resources, environmental risks, PPP obligations, financial performance of public corporations, subnational risks (3.2.1–3.2.6). - Strengthen asset & liability disclosure, publish quantitative debt risk analysis and MTDS, improve TSA and cash management, publish SOE financial performance report and ownership policy (3.3.1–3.3.3). - Regularly publish debt sustainability analysis and long‑term projections (10 years as first step, extendable to 30–50 years), and generalize long‑term actuarial analyses for all pension schemes including DIPRECA and CAPREDENA (3.4.1–3.4.3). --- ### Annex II — Action plan highlights and timelines (selected activities) - Timeline headings shown in source: 2021, 2022, 2023, 2024 with quarter markers. - 1.1 Coverage and consolidation: - DIPRES with CGR to establish working plan start of 2022 targeting inclusion of all adjustments by May 2024 IGFE or before. - Introduce public universities into Statistical Yearbook and quarterly fiscal statistics; classify under extra‑budgetary subsector and consolidate. - Prepare consolidated financial statements of GG by consolidating IGFE Chapters 1, 2, and 4; then consolidate Chapters 3 and 5 to reach entire public sector and include additional IGFE chapters. - 1.2 Stocks and flows: - Record and disclose CAPREDENA and DIPRECA pension liabilities; monetary value of copper reserves at present value; recognition pension bonds as liabilities; PPP liabilities per IPSAS 32; total subnational liabilities; account debt securities at market value and accrued interest; harmonize net debt concepts; introduce statement of other economic flows. - 1.3 Data quality and consistency: - Introduce reconciliation between financing and change in debt stock in 1Q IFP and debt reports; compare SIAP‑SP financing with BCCh monetary survey; establish debt back‑office database for holdings by counterparties. - Publish functional classification in quarterly IFPs and a bridge/methodology; complement CoA with functional and programmatic perspectives. - Introduce Revisión de cifras section in annual and quarterly reports. - 1.4 External scrutiny: - Perform financial audits on individual entities per CGR manuals and publish audit opinions; produce audit report on annual financial statements. - Transfer preparation of financial statements to MoF or establish protocols separating CGR Accounting and Audit. - Establish Working Group on statistics consistency (DIPRES, INE, BCCh); consider transferring compilation responsibility to independent agency; interim autonomy measures for DIPRES Fiscal Statistics Department. - 2.1 MTBF improvements: - Advance towards sectoral expenditure ceilings; publish total expected cost of multi‑annual investment projects; complete publication of macroeconomic forecast assumptions; standardize reconciliation tables and schedule. --- *Report finalized October 2021 — Fiscal Transparency Evaluation conducted by the IMF’s Fiscal Affairs Department (FAD).* ### PREFACE____________________________________________________________________________________________________7 ### PREFACE ### Mission and scope - The IMF’s Fiscal Affairs Department (FAD) conducted remotely a Fiscal Transparency Evaluation (FTE) mission covering three pillars of the IMF’s Fiscal Transparency Code (FTC) during the period June 3-24, 2021. - The IMF team was led by Ms. Teresa Curristine and comprised of Mses. Virginia Alonso Albarran, Lorena Rivero del Paso, and Gemma Preston and Messrs. Felipe Bardella and Claude Wendling (all FAD) and Mr. Adrien Tenne (FAD expert). - The mission met with the Minister of Finance, Mr. Rodrigo Cerda; the Budget Director (DIPRES), Ms. Cristina Torres; senior DIPRES officials; heads of relevant MoF units (International Finance, Macroeconomic Policy, Public Debt Office); and representatives from the Comptroller General of the Republic (CGR), the Central Bank of Chile (BCCh), the Autonomous Fiscal Council (CFA), the Ministry of Public Works, ChileCompra, SUBDERE, Cochilco, Congressional Budget Office staff, the Commission on Public Spending, the Fiscal Spending Observatory of Chile, and the IADB office in Chile. - The findings and recommendations represent the views and advice of the IMF mission team and do not necessarily reflect those of the Chilean authorities. Unless otherwise specified, the data included in the text, figures, and tables are estimates made by the IMF mission team and not official estimates of the Chilean government. - The report was finalized in October 2021. Post-mission, the team continued to work with the government on refining the action plan and provided advice on implementing the recommendations. ### Executive summary — overall assessment - Chile meets the standard of good or advanced practice for 21 out of the 36 principles of the FTC. - Comparison benchmark: average for Latin American Countries and Emerging Market Economies is 15 out of 36. - On a further nine principles, Chile meets the basic standard of practice. - Pillar performance ranking: - Fiscal forecasting and budgeting (Pillar II): very strong. - Fiscal reporting (Pillar I): strong. - Fiscal risk analysis and management (Pillar III): more mixed results. ### Key strengths (by pillar) - Pillar I — Fiscal reporting: - Advanced level for the frequency of in-year fiscal reporting. - Timeliness of annual financial statements: published within four months of the end of the financial year. - Good practice for institutional coverage of fiscal reports and coverage of flows and tax expenditures (included in a separate report). - Integrity-supporting practices (statistical integrity and comparability) at a good level. - Pillar II — Fiscal forecasting and budgeting: - Advanced level for fiscal legislation: clear and broadly comprehensive. - Presentation of macroeconomic forecasts in budget documents: advanced. - Budget documents presented to Congress and approved in a timely manner: good practice. - Fiscal policy objectives guided by the cyclically-adjusted balance (CAB) rule. - Robust performance information system. - Fiscal reports regularly publish forecast reconciliations for several budget aggregates. - Pillar III — Fiscal risks: - Advanced practices for management and disclosure of risks from government guarantees. - Advanced practices for management and disclosure of financial sector exposure. - Regular monitoring, disclosure, and management of budget contingencies and risks from subnational governments. ### Main areas for improvement (selected findings with numeric details preserved) - Coverage of stocks in fiscal reports omits key financial assets and liabilities; missing items positively impact net worth by around 1.3 percentage points of GDP in 2020. - Missing items mainly include copper reserves (24.9 percent of GDP) which increase net worth, but are mostly offset by pension liabilities (17.5 percent of GDP) and the increase in the stock of debt securities when recorded at market value relative to face value (5.7 percent of GDP), both of which decrease net worth. - The Comptroller General of the Republic (CGR) should issue an opinion on the reliability of the government’s annual financial statements; legally CGR is responsible for producing the annual financial statements, but performing both accounting and auditing functions would need clear separation to avoid conflict of interest. - Internal consistency: the estimated reconciliation of financing and change in the debt stock shows a discrepancy around 0.3 percent of GDP in 2020 and should be explained. - Medium-term budgeting: the medium-term approach is underdeveloped; despite having aggregate multiyear projections, the budget process is largely limited to an annual vision. - Investment projects: investment project assessment and procurement processes are adequate but total project costs cannot be clearly identified in published documents. - Fiscal risk reporting: information on fiscal risks is reported in different documents; no single report provides a comprehensive picture of the government’s aggregate fiscal risk exposure. - Macroeconomic risks are not regularly discussed in budget documentation. - Long-term projections: the government does not regularly publish long-term projections of debt sustainability and other main fiscal aggregates. - Asset and liability risks are not comprehensively disclosed; the lack of full fungibility of Treasury accounts may be a risk for liquidity management. - Performance-linking: links between policy outcomes and objectives and budget allocations are weak despite a robust performance information system. - Public engagement and clarity: abundant public information exists but there are few formal spaces for public voice in budget deliberations, monitoring, and auditing; the quantity of information is extensive but not always easy for the public to find the most relevant facts, key messages, or reconciliations. ### Recommendations and follow-up - The evaluation provides 12 recommendations to further enhance fiscal transparency in Chile. - Annex II contains a detailed action plan for implementing these recommendations (post-mission work with the government refined the action plan and implementation advice). *Report finalized October 2021 — Fiscal Transparency Evaluation conducted by the IMF’s Fiscal Affairs Department (FAD).* ### 1.1 Expand the institutional coverage of fiscal reports and consolidate the general government, the ### 1.1 Expand the institutional coverage of fiscal reports and consolidate the general government, the non-financial public sector, and the public sector in accordance with international standards. ### High-priority recommendations (excerpt) - *1.1 Expand the institutional coverage of fiscal reports and consolidate the general government, the non-financial public sector, and the public sector in accordance with international standards. - *1.2 Improve the coverage of stocks and flows in fiscal reports, by including missing assets, liabilities, and fiscal flows in accordance with international standards. - *1.3 Improve fiscal data quality by ensuring internal consistency in fiscal reports and providing detailed explanations on revisions to fiscal statistics. - *1.4 Strengthen external scrutiny of annual financial statements to ensure they represent a true and fair view of the government’s financial position. - *3.1 Improve transparency and reporting of macroeconomic risks and publish systematically within the Public Finance Report an analysis of the impact of macroeconomic risks on the fiscal position. - *3.4 Strengthen long-term fiscal sustainability analysis by regularly publishing debt sustainability analysis and projections of the main fiscal aggregates, including multiple scenarios on sustainability. (Note: The asterisk indicates high priority recommendations.) ### Pillar II: Fiscal Forecasting and Budgeting — selected recommendations - *2.1 Strengthen medium-term orientation of the budget through more detailed forecasts both on the revenue and on the expenditure side, underpinned by a fully-fledged medium-term budget framework (MTBF). - 2.2 Reinforce the existing fiscal rule through the addition of a well-defined escape clause in legislation and an increased role for the independent fiscal council. - 2.3 Increase the emphasis on public participation, facilitated by further progress in the budget’s performance focus and an enhanced stress on policy objectives and outcomes. - 2.4 Support and sustain the overall transparency of budgeting by including in the budget documentation package the estimated revenues and expenditures of the main extrabudgetary entities and specifying formally in more detail the contents that should be included in the executive’s budget proposal. ### Pillar III: Fiscal Risks — selected recommendations - *3.1 Improve transparency and reporting of macroeconomic risks and publish systematically within the Public Finance Report an analysis of the impact of macroeconomic risks on the fiscal position. - 3.2 Publish a comprehensive fiscal risk statement and expand disclosure of specific fiscal risks to cover environmental, natural resources risks, debt sustainability risks, total financial obligations associated with PPPs, and financial performance and risks associated with public corporations. - 3.3 Strengthen disclosure and risk management of asset and liabilities, including increasing disclosure of risks associated with debt dynamics, improving risk management of cash balances, and increasing disclosure and monitoring of the performance of public corporations. - 3.4 Strengthen long-term fiscal sustainability analysis by regularly publishing debt sustainability analysis and projections of the main fiscal aggregates, including multiple scenarios on sustainability. ### Summary of assessment structure and reports - The report evaluates Chile’s fiscal transparency practices against the Fiscal Transparency Code (FTC) across three chapters: - Chapter I: coverage, timeliness, quality, and integrity of fiscal reporting. - Chapter II: comprehensiveness, orderliness, policy orientation, and credibility of fiscal forecasting and budgeting. - Chapter III: arrangements for disclosure and management of fiscal risks. - Main fiscal reports and producers: - Monthly and Quarterly Budget Execution Reports (DIPRES): monthly (30 days lag) and quarterly (30 days lag); covers budgetary central government (BCG) on a cash basis; quarterly includes sovereign wealth funds’ balances and central government’s public debt (stock). - Quarterly General Government Fiscal Statistics Report (DIPRES): quarterly (90 days lag); accrual basis; covers general government (GG) but omits public universities. - Statistical Yearbook (EFP, DIPRES): annual (published by end of May); broadly aligned with GFSM2001/2014 and COFOG; covers central government and municipalities; excludes BCCh, Banco del Estado, and public universities. - Annual Financial Statements (IGFE, CGR): annual (published by end of April); accrual basis; balance sheet, statement of operations, cash flow, and budget execution; covers CG, EBU, LG, SOE, BCCh, BancoEstado but chapters are independent (no consolidation). - Quarterly Public Finance Report (IFP, DIPRES): quarterly (30 days lag); macroeconomic context and four-year forecasts for central government (CG). - Debt statistics and SWF reports: produced quarterly or monthly by DIPRES and Undersecretary of Finance; varying lags and coverage. ### Findings on institutional coverage and consolidation - Public sector composition and expenditure: - In 2020 the public sector in Chile comprised 664 institutional units; the total expenditure of these units accounted for 39.3 percent of GDP (Table I.2). - Subsector groupings (international standards): - Budgetary central government (BCG): comprises 254 entities, including executive, legislative, judicial bodies, and two PAYG social security funds CAPREDENA and DIPRECA. - Extra-budgetary central government (EBU): comprises 18 Public Universities, 12 technical training centers, Solidarity Fund for student loans, the infrastructure fund (2019), technological institutes, museums, energy efficiency agency, Constitutional and Special purpose Courts, family allowance compensation fund, and non-profit institutions. - Local governments: comprises 345 municipalities (excludes entities providing health and education services considered private in Chile). - Public corporations: comprises 32 public non-financial corporations and one financial (Banco del Estado). It also includes the BCCh. - Coverage and consolidation gaps: - IGFE is most comprehensive but does not consolidate subsectors; chapters are independent financial statements (Chapter I: BCG; Chapter II: local governments; Chapter III: SOEs; Chapter IV: universities; Chapter V: Treasury; Chapter VI: BCCh). - EFP consolidates central government and municipalities into the general government subsector; EBU (mainly universities) are not included and represent 2 percent of total central government expenditure. - Central Bank of Chile (BCCh) and Banco del Estado are not covered in EFP; public universities are omitted from some reports. - No single report consolidates the non-financial public sector (NFPS) and the public sector; however subsector information is present and consolidation of NFPS could be performed by DIPRES with minor methodological adjustments. - Staff estimates indicate the EFP would cover around 95 percent of gross public sector expenditures based on available information. - Reporting systems and data sources: - Financial management information system (SIGFE) used for central government entities. - SICOGEN I and II used for municipalities, universities, training centers, and public corporations; SIREF used in some cases. - IGFE financial statements cover close to 100% of public sector entities in terms of entity inclusion, but lack consolidated subsector aggregation. ### Key public sector fiscal aggregates (Table 0.2 excerpt) - Public Sector Financial Overview, 2020 (in percent of GDP). Note: table presents estimates in accordance with the GFSM 2014 and adopts the accrual basis of recording for transactions to the extent possible. It does not cover transactions related to the accrual of public employees’ pension entitlements and incurrence of liabilities related to PPP contracts. Data on Assets and Liabilities for SOEs in the yearbook are up to September 2020. - Selected table lines (preserved verbatim as presented): - Total Transactions - Revenue20.00.720.44.222.58.01.30.4-0.831.4 - Expenditure27.20.627.64.029.68.71.20.0.6-0.839.3 - Expense24.00.624.33.826.28.51.20.6-0.835.8 - Investment in NFA3.20.03.20.23.30.20.00.00.03.5 - Net operating balance-3.90.0-3.90.3-3.7-0.50.0-0.20.0-4.4 - Net lending/borrowing-7.20.0-7.20.1-7.0-0.70.0-0.20.0-7.9 - Total Assets77.31.678.93.882.723.126.529.6-0.4161.5 - Non-Financial Assets47.90.948.92.050.917.50.20.0...68.6 - o/w: Unreported Subsoil Assets24.9...24.9...24.9............24.9 - Financial Assets29.30.730.01.831.85.626.329.6-0.492.9 - Total Liabilities (a)+(b)61.50.461.90.662.516.625.530.5-0.4134.7 - Reported Liabilities (a)43.60.444.10.644.716.625.530.5-0.4116.9 - Debt Securities - market value38.30.238.50.138.610.94.510.5-0.264.3 - Loans0.00.10.10.30.50.21.80.00.02.5 - Accounts Payable5.30.15.40.35.73.61.40.50.011.5 - Pensions0.00.00.00.00.01.80.00.00.01.8 - Other (mainly deposits)0.00.00.00.00.00.017.819.5-0.236.8 - Unreported Liabilities (b)17.8...17.8...17.8.........0.017.8 - Pension Liabilities17.5...17.5...17.5............17.5 - Bonos de Reconocimiento0.4...0.4...0.4............0.4 - Net Financial Worth-32.10.3-31.81.1-30.7-11.00.8-0.90.0-41.8 - Net Worth15.81.217.03.120.26.51.0-0.90.026.8 ### Assessment judgement (coverage) - 1.1.1 Coverage of Institutions — Good. - The IGFE provides the most comprehensive single report of entities covered (close to 100% of public sector entities), but the lack of consolidation across subsectors limits the usability of the IGFE for consolidated public sector analysis. - The EFP provides consolidated general government statistics (CG + municipalities) but omits EBU (notably universities) and certain financial sector entities (BCCh and Banco del Estado). ### Practical implications and operational points - Consolidation of NFPS and broader public sector could be achieved by DIPRES using existing subsector data; minor methodological adjustments may be required. - Improved coverage of stocks and flows, and systematic consolidation, would support the implementation of other recommendations: better fiscal risk reporting (including debt dynamics and PPP obligations), long-term fiscal sustainability analysis, and strengthened fiscal rules supported by clearer fiscal statistics. - Ensuring external scrutiny (audit) reflects consolidated positions would improve the transparency and reliability of fiscal decision-making. *Source: 1chlea2021005 - 1.1 Expand the institutional coverage of fiscal reports and consolidate the general government, the non-financial public sector, and the public sector in accordance with international standards. (IMF staff report content as provided).* ### 7. The fiscal statistics and the financial statements are reported under international ### 1chlea2021005 - 7. The fiscal statistics and the financial statements are reported under international ### Reporting standards and institutional coverage - Fiscal statistics use GFSM 2001 and partially GFSM 2014 and international public sector accounting standards (IPSAS). The public corporations are reported under international financial reporting standards (IFRS). - Some adaptations to the national context are explained on a more qualitative basis. - Public universities are excluded from the consolidated central government in fiscal statistics but are reported separately in IGFE. The explanation provided in the EFP is that they are autonomous and DIPRES has no legal mandate to require information from them, but the public universities still report to CGR. - Figure I.1 caption: Coverage of Public Sector Institutions in Fiscal Statistics (in percent of expenditure). Note: “Not Reported” refers to expenditures of units not consolidated in fiscal reports. The major gaps in fiscal statistics are universities (CG) and the BCCh and Banco de Estado (PS) while the financial statements have wider coverage. ### Coverage of entities and headline fiscal aggregates (table excerpt) - Public Sector: Number of entities 66; Revenue 431.4; Expenditure 39.3; Balance -7.9; Intra-PS expenditure 0.0; Net expenditure 39.3; percent net expenditure 100.0 - General government: Number of entities 63; Revenue 022.5; Expenditure 29.6; Balance -7.0; Intra-PS expenditure 0.3; Net expenditure 29.3; percent net expenditure 74.6 - Central government: Number of entities 28; Revenue 520.4; Expenditure 27.6; Balance -7.2; Intra-PS expenditure 2.3; Net expenditure 25.3; percent net expenditure 64.3 - Local governments: Number of entities 34; Revenue 54.2; Expenditure 4.0; Balance 0.1; Intra-PS expenditure 0.0; Net expenditure 4.0; percent net expenditure 10.3 - Central Bank: Number of entities 1; Revenue 0.4; Expenditure 0.6; Balance -0.2; Intra-PS expenditure 0.0; Net expenditure 0.6; percent net expenditure 1.5 - Nonfinancial public corporations: Number of entities 32; Revenue 8.0; Expenditure 8.7; Balance -0.7; Intra-PS expenditure 0.5; Net expenditure 8.2; percent net expenditure 20.8 - Other financial public corporations: Number of entities 1; Revenue 1.3; Expenditure 1.2; Balance 0.0; Intra-PS expenditure 0.0; Net expenditure 1.2; percent net expenditure 3.1 ### Pension schemes: structure, reporting, and liabilities (Box I.1) - Chile replaced a PAYG system with a fully funded pension system based on individual capital accounts managed by private fund managers (AFPs) in the 1980’s; this defined contribution (DC) scheme covers civil servants and the general population under the same rules. - Two categories of public employees remain in PAYG regimes: - CAPREDENA (Caja de Previsión de la Defensa Nacional): covers military personnel, civil servants working for the armed forces, and students enrolled in military schools. Created in 1915 (Law n. 3.029), currently primarily governed by ruled Law n. 18.948 from 1990. Workers and pensioners contribute with 6% of the worker’s wage/pension benefit – but there are no contributions from the employer. Workers and pensioners contribute an additional 5.5% to cover health insurance, matched by an additional 6.5% paid by the employer. Beneficiaries eligible after 20 years of contribution; benefit can reach 100% of the last salary level if contributing for 30 years. - DIPRECA (Departamento de Previsión de Carabineros): covers police officers and related civil servants and students. Created in 1975 (Decree Law n. 844), currently primarily ruled by Laws n. 18.458/1985 and n. 19.195/1993. Workers and pensioners contribute with 6% of the worker’s wage/pension benefit to cover pensions; no contribution for health insurance. There are no employer contributions to pensions, but the employer bears all costs associated with health insurance. Beneficiaries eligible after 20 years of contributions; benefit can reach 100 percent of the last salary level if contributing for 30 years. - The actuarial pension liability related to CAPREDENA and DIPRECA pension schemes is currently not reported in Chile. A stand-alone long-term projection study by DIPRES (2012, reproduced by the National Congress in 2018) shows deterioration: DIPRECA would reach a deficit of 0.7 percent of GDP and CAPREDENA 0.4 percent of GDP by 2050. - Based on these parameters, staff estimated the actuarial liability around 17.5 percent of GDP in 2020. - GFSM 2014 statistical treatment: defined-benefit schemes are treated based on beneficiary type; employment-related schemes are recorded as liabilities, social security schemes are not recorded as liabilities but net implicit obligations should be presented as a memorandum item. Under this criterion, CAPREDENA and DIPRECA actuarial liabilities would be recognized as firm liabilities in the public sector financial statements, while liabilities related to the general DC scheme introduced in the 1980’s would be considered contingent liabilities and are already included in the Contingent Liabilities Report (IPC). ### Coverage of stocks: assets and liabilities omissions and valuation issues - Financial statements and fiscal statistics cover debt and cash positions but do not include all financial assets and liabilities. The financial statements have broader coverage on assets and liabilities but there are relevant unreported items at the general government level. - Subsoil assets are not reported (estimated at 24.9 percent of GDP). Copper reserves are not reported by the government nor by public corporations. - The government’s subsoil assets estimate is described as the net present value (NPV) of future fiscal revenues arising from extraction of copper reserves using aggregate assumptions; an exhaustive commercial valuation should ideally be undertaken. - Public employment-related pension liabilities are not reported (estimated at 17.5 percent of GDP). International standards require these liabilities to be fully reflected in the public sector balance sheet. - “Recognition” pension bonds are reported as additional information: remaining debt in 2020 is 0.4 percent of GDP and is reported only as a memorandum item in the IGFE and fiscal statistics. - Financial liabilities related to PPPs are partially reported (0.2 percent of GDP). IPSAS 32 requires recognition of assets and corresponding liabilities as assets are under construction, but entities are still implementing it and not all information is reported. - Liabilities at the subnational level are partially reported. Major omission: internal loans of the central government to local governments are not part of reported liabilities in the financial statements; cash advances of the Municipal Common Fund (Fondo Común Municipal (FCM)) to municipalities are registered in accounts payable in local government balance sheets in IGFE. - Debt securities are mainly registered at face value rather than market value or nominal value. Recording at market value increases the stock of debt securities by 5.7 percent of GDP relative to face value. Securities and loans at face value stand at 32.5 percent of GDP in 2020 according to debt reports; at market value they stand at 38.2 percent of GDP in 2020 according to CG Gross Debt report (Deuda Bruta del Gobierno Central). - Debt instruments recorded at face value in financial statements include BTPs, BTUs and Chilean Global bonds. A complementary CG Gross Debt report provides valuation at market value but is not integrated into a full set of debt tables and statistics. - The classification of CG liabilities in fiscal statistics could more closely reflect the GFSM 2014 classification framework: categories of accounts payable and other liabilities are less clearly classified; the concept of “net debt” has different definitions in the MoF debt unit and DIPRES (e.g., permanent investment considered an asset by MoF but only more liquid assets considered by DIPRES). - Total net worth considering main unreported items and debt securities at market value would reach 26.8 percent of GDP, 1.3 p.p. more than the reported net worth. The comprehensive balance sheet increases net worth mainly due to non-financial assets including copper reserves; this is mostly offset by employment-related pension liabilities, recognition pension bonds, and the difference in stock of debt securities when recorded at market value relative to face value. ### Coverage of flows, accounting basis, and missing other economic flows - Fiscal reports cover cash flows, accrued revenues and expenditures and financing. - Financial statements are reported on an accrual basis for both revenues and expenditures, while the fiscal statistics do so only for expenditure. - The process of adopting IPSAS started in 2010 and Chile is shown as accrual compliant in the latest 2021 International Federation of Accountants (IFAC) report. - Fiscal reports are missing information on other economic flows (price changes and other events affecting holdings of assets and liabilities, e.g., debt write-offs and catastrophic losses). The Statement of Other Economic Flows is not included in fiscal reports in Chile nor compiled for internal government use. ### Classification and statistical treatment issues in fiscal statistics - Fiscal statistics record main spending items, but gaps and classification issues remain. Positive: consumption of fixed capital (depreciation) is included and accrued flows (interests) over recognition pension bonds are included. - Recommended revisions to statistical treatments and classifications: - Disaggregate “subsidies and grants” in central and general government statistics into two line items to distinguish subsidies and grants. - Disaggregate “compensation of employees and use of goods and services” in SOE statistics into two line items to report payroll separately from use of goods and services. - Calculate “net lending / net borrowing” in SOE statistics by deducting net acquisition of non-financial assets from the net operating balance (not gross) to account for depreciation. - Statistical treatment of capital transfers from central government is not in line with international standards: capital transfers to private sector entities, SOEs and local governments are reported as acquisition of non-financial assets in central government statement of operations rather than as spending (transfers/subsidies/grants). This misclassification overestimates central government investment and has averaged 2 percent of GDP over 2017-20, representing more than 50 percent of reported net acquisition of non-financial assets in the period. Municipal level records capital transfers correctly as spending. ### Tax expenditure reporting - Estimates of central government revenue loss from tax expenditures are published yearly and broken down by policy area. A yearly tax expenditure report is incorporated into the executive’s budget proposal and published every year in September. - The 2019 Tax Expenditure report (published September 2019) estimated revenue losses for 2020 at around USD 9.3 billion (3.0 percent of GDP), with tax expenditures promoting savings and investment making around half of the total. - Table I.3. Distribution of Tax Expenditure by Economic Sector, 2020 (in million USD and as a % of GDP): - Savings and Investment: 4,723; 1.50 - Education: 1,055; 0.33 - Health: 787; 0.25 - Real Estate / Housing: 754; 0.24 - Transportation: 535; 0.17 - Support to Small and Medium-sized Enterprises: 514; 0.16 - Other sectors and objectives: 965; 0.31 - Total: 9,333; 2.96 - The annual tax expenditure report is being improved following IMF/OECD technical assistance delivered in 2020. The November 2020 joint IMF-OECD assessment highlighted the need to produce a list of all tax expenditures with legal base, a clearly defined and documented benchmark, and a description of methodology for estimates. - The authorities committed to implementing IMF/OECD recommendations, which led to a delay in the production of the 2019-2021 report; the revised report was published in June 2021 instead of September 2020. Parliament had been apprised of this “one-off” delay and did not object. *Source: IGFE, EFP, DIPRES, staff estimates, and IMF/OECD technical assistance documents as presented in the chapter.* ### 23. The authorities have no plan to introduce a budgetary ceiling or some other ### The authorities have no plan to introduce a budgetary ceiling or some other mechanism to constrain tax expenditures ### Tax expenditures: policy stance and recent developments - The authorities have no plan to introduce a budgetary ceiling or some other mechanism to constrain the growth of tax expenditures. - Other OECD countries have introduced mechanisms capping the amount of tax expenditures as a percentage of GDP (or of overall tax revenue) or setting some other form of rule to steer the evolution of tax expenditures; Chilean authorities do not plan to adopt such mechanisms. - Constitutional provisions (article 65 of the Constitution) restrict the initiative on tax law changes to the executive branch and are traditionally regarded as a sufficient safeguard against excessive development of tax expenditures. - The Chilean government is increasing emphasis on tax expenditures as a tool to achieve fiscal goals and has asked a committee of experts to evaluate and recommend possible changes or elimination of tax expenditures. - This initiative led to a report, published in January 2021, which argues for the elimination of tax expenditures benefiting notably the transport sector (exemption of VAT on diesel fuel). - Recommendation: Increasing awareness of tax expenditures when discussing resources allocated to a given public policy would generate better decision making and help avoid undermining public spending controls by extensions of tax expenditures serving similar public policy objectives. ### Frequency and timeliness of fiscal reporting - Chile reports budget execution information on a monthly basis in a timely manner. - DIPRES publishes within thirty days after the end of each month a budget execution report covering revenues and expenditures of the central government over the previous month, broken down by economic classification, as well as the consolidated assets of the Treasury, including a focus on the two sovereign wealth funds (FEES and FRP). - Since November 2019, the traditional monthly Informe de Ejecución Presupuestaria Mensual (15-20 pages) is complemented by a four-page Boletín de Ejecución Presupuestaria Mensual summarizing main tables and analysis. - Authorities have adapted reporting when necessary, for example by introducing specific reporting on COVID-19 related expenditures in the monthly budget execution report. - A quarterly budget execution report provides additional details, covering notably the internal and external gross debt of central government as well as more detailed explanations on revenue and expenditure. - Final annual financial statements consolidated for central government are published four months after the end of the financial year. - The legal framework compels CGR to publish the government accounts for a given fiscal year by the end of April of the following year; this deadline has been respected for the last four years. Key publication dates (Date of publication of the annual financial statements) - 2020: 29 April 2021 - 2019: 27 April 2020 - 2018: 30 April 2019 - 2017: 25 April 2018 - The annual financial statements for central government produced by CGR follow IPSAS standards but are not audited; CGR aggregates data received from central government services and eliminates reciprocal transactions. - Financial statements from entities outside central government (SOEs, universities) are audited by private sector auditors. ### Quality and classification of fiscal data - Fiscal reports include administrative and economic classifications; the economic classification is broadly aligned to GFSM 2001/2014. - Chile aligned its budget classifiers/CoA with the GFSM 2001 framework in 2004 by Decree No. 854. - The economic classification of fiscal flows is based on a three-tier codification system (subtítulo, item, asignación); additional classifications include institutional (administrative), by currency, by investment initiatives, and by stage of the transaction. - Gap: The decree does not provide for a functional codification within the budget classifier structure, which constitutes a major gap. - A functional classification of expenditures consistent with COFOG has been included retrospectively in the first quarter IFP and the Statistical Yearbook; a complementary functional classification table was added to the third quarter IFP for 2021. - The institutional classification (partida, capítulo, programa) program codes do not fulfil the purpose of a proper programmatic classification used in performance-based management; there is no one-to-one correspondence between program disaggregation of the institutional classification and programs monitored for performance. ### Internal consistency and reconciliations - The reconciliation between fiscal balance and financing is presented in the Statistical Yearbook, but not in the quarterly reports. - The reconciliation in the Statistical Yearbook between the above-the-line balance and the below-the-line financing figures for the budgetary central government comes from the budget execution system (SIAP-SP) and from CGR for municipalities’ data. - Recommendation: Reconciliation could be strengthened by introducing information from the banking system (monetary and financial data compiled by BCCh) to compare banks’ records with the government general ledger and to compile financing for the SOE sector. - The other two internal consistency checks called for under the FTC – debt issued with debt holdings and financing with the change in the debt stock – are not provided and cannot be easily derived. - Debt reports present stocks by currency, maturity, and instrument, but lack sufficient information on debt issuance, redemption, and valuation changes to reconcile financing with change in the debt stock. - Information on the stock of debt held by counterparties (foreign governments, banks, pension funds, investors) is not available in the debt management back-office database, preventing publication of debt data classified by residency counterpart. - Third-party information on private sector debt holdings aligns with fiscal reports’ debt position. - Staff calculations indicate the unexplained discrepancy between fiscal balance and financing reached only 0.3 percent of GDP in 2020. - Recommendation: Authorities should revise and investigate the unexplained discrepancy and assess remedial approaches. ### Historical revisions - Major revisions to fiscal data are included in the Statistical Yearbook, but visibility and explanations of these revisions could be strengthened. - Current practice: methodological changes and corrections are intermittently provided in the methodological annex; old and new figures are not explicitly disclosed or explained. - Recommendation: Introduce a dedicated section in annual and quarterly reports to explain differences between previous and revised statistics (quantitative comparison), similar to the practice used in quarterly general government reports (Revisión de cifras). - Revisions have been triggered by methodological changes and reclassification of transactions; in 2006-2008 changes in fiscal balance due to revisions surpassed 1 percentage point of GDP, while more recently annual revisions have been contained. Selected historical revision impacts on net lending/net borrowing - 2006: - 0.4 p.p. of GDP - 2007: - 1.0 p.p. of GDP - 2008: - 1.4 p.p. of GDP - 2009+: 0.1 p.p. of GDP - 2010: - 0.1 p.p. of GDP - 2018: - 0.1 p.p. of GDP - 2019: - 0.1 p.p. of GDP - 2020: n.a. Events underlying revisions include: - Methodological change in the calculation of accrued interest revenues for FEES and FRP - Change in institutional coverage of FEPCO and FEPP - Corrections on recording of quasi-fiscal operations from Enap - Corrections on expenditures related to the Copper Reserved Law - Reclassification of expenditures related to the Copper Reserved Law in accordance with GFSM 2014 methodology (use of goods and services moved to acquisition of non-financial assets; no impact on the fiscal balance) - Other adjustments ### Statistical integrity and institutional arrangements - Fiscal statistics are disseminated in accordance with international standards and Chile completed requirements for adherence to IMF’s SDDS Plus in March 2020. - A statement of operations consistent with the GFSM framework and a breakdown of government gross debt by maturity, instrument, and currency are available; however, residency breakdown of counterparty holdings is not yet provided. - Extensive metadata follow the IMF’s Data Quality Assessment Framework template. - In accordance with legislation, DIPRES has responsibility for compiling fiscal statistics; DLFA provides legal authority and the Statistics Department performs compilation and dissemination. - DIPRES is a separate technical agency from the MoF; the Head is appointed and removed by the President. - Some operational independence features: quarterly data presented to Congress as required, published calendar in advance of planned data releases, and no access to fiscal data prior to official release by officials outside DIPRES. - BCCh does not independently compile fiscal statistics but publishes a fiscal statistics database and monitors fiscal outcomes; INE does not have a role in production of fiscal statistics. - Recommendation: Consider transferring responsibility for compilation of fiscal statistics to a professionally independent body (e.g., strengthen independence of INE and reassign compilation) to increase separation between users and compilers and mitigate perceived political interference. - Interim recommendations to enhance operational independence of DIPRES Statistics Department: - Publish terms and conditions under which statistics are collected, processed, and disseminated. - Publish a roadmap of future statistical improvements against international standards and report progress. - Strengthen, clarify, and disclose internal processes ensuring separation of the Statistics Department from budget compilation and execution functions. - Create an inter-institutional working group with MOF, BCCh, and INE to ensure macroeconomic statistical consistency; immediate task: compare below-the-line financing figures from SIAP-SP with BCCh monetary survey changes in net credit to government. ### External audit - External audit: Not met. *Source: IMF staff report content provided in the source PDF chapter.* ### 41. The CGR’s independence is enshrined in Article 98 of the Constitution, which ### 1chlea2021005 - 41. The CGR’s independence is enshrined in Article 98 of the Constitution, which ### Independence, mandate, and organization of the CGR - The CGR’s independence is enshrined in Article 98 of the Constitution, establishing it as an autonomous branch independent from the executive and the legislature. - Law 10.336 (and Decree 2421 that consolidates laws 10.336 and 14.832) regulates the CGR’s detailed mandate, functions and organization, including: - auditing the revenue and investment of the funds of the Treasury; - verifying the examination of accounts rendered by the persons or entities in charge of public funds or assets; - keeping the general accounts of the government; - ruling on the constitutionality and legality of supreme decrees; and - monitoring compliance with administrative provisions. - The CGR’s budget is integrated into the general budget and is subject to review by DIPRES and Congress. - The CGR’s mandate to conduct the government’s accounting is established in Article 98 of the Constitution; it produces the annual financial statements for the central government and presents them in the IGFE. - The CGR receives the monthly accounting reports of public entities and uses them to prepare the IGFE. Financial reports from public corporations and universities are audited by private firms and sent to the CGR for inclusion in the IGFE. - Currently information is received physically through e-storage (CDs and web folders), leading to occasional delays. The CGR expects to receive resources in 2022 to develop a new system to receive information automatically. ### Audit practice, scope, and conflict of interest concerns - The CGR has a pilot program for conducting audits of the financial statements of central government entities based on a random sample. - A 2002 reform to Law 10.336 specified the CGR’s audit mandate; Resolution No. 20 defined audit types, including financial audits. - In 2017 the CGR created an Audit Division, which includes a Special Audits Unit. - Current audit tasks focus primarily on compliance with legal standards, processes and completeness of financial records and supporting documentation, with a heavy focus on ex-ante compliance. - Consequently, the CGR does not currently issue an opinion on the financial position of the central government. - The Audit Division is finalizing financial audit manuals based on International Standards of Supreme Audit Institutions (ISSAI). - Auditing the central government annual financial statements would: - better align with international best practice; - pave the way towards consolidation of financial statements at general government level; - require (i) adjusting the IGFE production timeline to ensure sufficient time for proper audit and (ii) ensuring CGR services producing the IGFE report and auditing the annual financial statements have clear and distinct lines of accountability. - The CGR’s combined mandate for producing financial statements and auditing them could create a conflict of interest: - Consolidating financial accounts in the IGFE may obligate the CGR to correct original information from multiple public entities to reflect a true and fair view. - A government option: relocate accounting responsibilities to the MoF (globally most common), which would require constitutional and legal/organizational reforms and qualified personnel. - An alternative: establish protocols for clear separation on exchange of information between CGR Accounting and Audit Divisions. ### Comparability of fiscal data and reconciliation - A singular classification framework is consistently applied across fiscal forecasts, budget documents and outturns/budget execution reports; it can be bridged with fiscal statistics. This includes economic and administrative classifications. - The budget classification was revamped in 2005 to better align with the GFSM 2001/2014 framework, used in Chile to compile and disseminate fiscal statistics. There is a one-to-one correspondence between most fiscal statistics categories and the three-tier budget economic codification. - A detailed bridging table between the budget’s national economic codes and the GFSM codes is provided in the annexes of the fiscal statistics yearbook. - The main fiscal table (Table I.7) is broadly used for fiscal policy analyses and is presented in the IFP’s fiscal forecasts, monthly and quarterly budget execution reports, and quarterly and annual fiscal statistics. - Final accounts are prepared by the CGR under a distinct classification framework and there is no reconciliation of main aggregates: - Financial statements include a Statement of Financial Performance (accrual basis) and a Cash Flow Statement; revenue and expenditure aggregates cannot be immediately reconciled with budget outturns or fiscal statistics given the information available. - Notes with the statements are silent on comparisons between accounts and budget. - Improving reconciliation between accounts and budget/statistics would enhance usefulness for decision making. - Country examples noted for reconciliation practices: - United Kingdom: Whole of Government Accounts (WGA) reconciles fiscal statistics and WGA indicators, published annually four months after year-end with bridging tables and narrative. - Australia: Final Budget Outcome (FBO) report (no later than three months after year-end) based on GFSM and Consolidated Financial Statements (CFS) in accordance with Australian Accounting Standards (AAS); differences between GFSM and AAS are fully disclosed. ### Key fiscal figures presented (Table I.7, Main Fiscal Table for Policy Analysis, 2020 — Million pesos) - Revenue (Ingresos): 40,135,428 - Taxes (Ingresos tributarios netos): 32,302,484 - Copper revenue (Cobre bruto): 1,019,268 - Social contributions (Imposiciones previsionales): 3,104,866 - Grants (Donaciones): 113,795 - Property income (Rentas de la propriedad): 862,363 - Sales of goods and services (Ingresos de operación): 778,959 - Other revenue (Otros ingresos): 1,953,692 - Expense (Gastos): 47,945,994 - Compensation of employees (Personal): 10,615,825 - Use of goods and services (Bienes y servicios de consumo y producción): 4,369,687 - Interest (Interesses): 1,902,914 - Subsidies and Grants (Subsídios u donaciones): 22,110,795 - Social benefits (Prestaciones previsionales): 8,831,823 - Other expense (Otros gastos): 114,949 - Investment in NFA (Adquisición neta de activos no financieros): 6,798,135 - Net lending/borrowing (Préstamo neto/ endeudamiento neto): -14,608,701 - Financing (Financiamiento): 14,608,701 - Net acquisition of financial asstes (Adquisición neta de activos financieros): -6,395,308 - Net incurrence of liabilities (Incurrimiento neto de pasivos): 8,213,393 ### Summary assessment highlights (Table I.8) — selected items with numeric magnitudes - Public universities were not included in fiscal statistics; their expenditure level amounted to 0.6% of GDP in 2020 (2% of the total central gov). - Missing items impacting net worth positively by around 1.3% of GDP, mainly: - copper reserves: 24.9% of GDP; - pension liabilities: 17.5% of GDP; - debt securities at market value: 5.7% of GDP. - Timeliness: Final Annual Financial Statements are produced and published within four months after the end of the fiscal year, but annual financial statements remain incomplete and are not subject to audit before finalization. - External audit: Not met — CGR does not audit nor issue an opinion on the reliability of the annual financial statements; this is assessed as High importance due to potential conflict of interest. ### Recommendations (selected, from 1.5) - Recommendation 1.1: Expand institutional coverage of fiscal reports and consolidate general government, the non-financial public sector and the public sector in accordance with international standards. - DIPRES working with CGR should establish a working plan at the start of 2022 targeting the inclusion of all adjustments by the May 2024 IGFE or before. (1.1.1) - Introduce fiscal data on public universities in the Statistical Yearbook and gradually incorporate these institutions in the quarterly fiscal statistics report; classify public universities under the extra-budgetary subsector and consolidate into central and general government statistical tables. (1.1.2) - Implement consolidation practices in IGFE: consolidate Chapters 1, 2, and 4 as a first step for consolidated general government, and gradually consolidate Chapters 3 and 6 to reach the entire public sector by adding two additional Chapters in IGFE. (1.1.3) - Recommendation 1.2: Improve coverage of stocks and flows by including missing assets, liabilities and fiscal flows in accordance with international standards. - IGFE should include missing items identified in the report (for example, pension liabilities related to CAPREDENA and DIPRECA, monetary value of copper reserves at present value, ‘recognition’ pension bonds, complete PPP liabilities in accordance with IPSAS 32, total liabilities at the subnational level), account for debt securities (BTPs, BTUs and Global) at market value and accrued interest, and record corresponding other economic flows. (1.2.1) - Annual Statistical Yearbook and quarterly fiscal statistics should improve classification of CG liabilities, harmonize “net debt” concepts, account for debt securities at market value and accrued interest, revise statistical treatments (including disaggregation of “subsidies and grants”), calculate “net lending / net borrowing” in SOE statistics net of depreciation, record capital transfers from central government to private sector/SOEs/local government as spending (not acquisition of non-financial assets), and introduce a statement of other economic flows. (1.2.2) - Recommendation 1.3: Improve fiscal data quality by ensuring internal consistency and explaining revisions. - Strengthen internal consistency by: introducing reconciliation table between financing and change in debt stock in first quarter IFP and debt reports; comparing below-the-line financing figures from SIAP-SP with BCCh’s monetary survey assessments; establishing procedures and databases within the debt management back-office to collect information on debt holdings by counterparties. (1.3.1) - Continue to use and publish functional classification in quarterly IFPs and publish a bridge table/methodology to replicate the functional classification to part of the budget. (1.3.2) - Complement the CoA in Decree 854 with alternative classifications including functional and programmatic perspectives. (1.3.2) - Introduce a dedicated section (Revisión de cifras) in annual and quarterly fiscal reports to explain differences between previous and revised statistics with quantitative comparisons. (1.3.3) - Recommendation 1.4: Strengthen external scrutiny of annual financial statements. - Perform financial audits on individual public entities based on CGR manuals and publish an audit opinion; establish protocols for clear separation between Accounting and Audit Divisions of the CGR. (1.4.1) - Produce an audit report on annual financial statements and issue an opinion on the true and fair view of the statements. (1.4.2) - Achieve this either by transferring preparation of financial statements to the MoF or by ensuring clear separation of Accounting and Audit functions within CGR and of information exchange. (1.4.3) - Establish a working group on statistics consistency with DIPRES, INE and BCCh; consider transferring responsibility for compilation to a professionally independent agency (possible role for INE) and consider interim measures to strengthen autonomy of the Fiscal Statistics Department within DIPRES. (1.4.4) - Introduce bridge tables in the IGFE to reconcile main aggregates (revenue, expenditure, financing) with corresponding budget outturns and fiscal statistics figures. (1.4.5) *Source: IMF staff, chapter content provided in the supplied PDF excerpt.* ### 50. This chapter assesses the quality of Chile’s fiscal forecasting and budgeting practices ### 50. This chapter assesses the quality of Chile’s fiscal forecasting and budgeting practices ### Overview - The chapter assesses Chile’s fiscal forecasting and budgeting practices against the standards set by the FTC, considering four key dimensions: - i. The comprehensiveness of the budget and associated documentation; - ii. The orderliness and timeliness of the budget process; - iii. Policy orientation; and - iv. The credibility of the fiscal forecasts and budget proposals. - Fiscal Forecasting and Budget Documents (timing, last publication): - Public Finance Report (Informe de Finanzas Públicas-IFP): Contains macroeconomic and fiscal forecasts for the upcoming year and a 4-year period (MTFF). Quarterly (March 2021). - Draft Budget Law: Proposed budget. Annual (September 2020). - Adopted Budget: Approved budget. Annual (December 2020). - Budget Priorities Booklet (Citizens’ budget): Content of the proposed budget presented in a summary and accessible format. Annual (September 2020). - Report on Fiscal Rule Implementation: Report produced by DIPRES containing elements to assess the implementation of the structural balance rule. Annual (June 2020). - Report by the CFA: Report produced by CFA on compliance with fiscal rules and on the sustainability of public finances. Twice a year in April and September (April 2021). - Source: IMF Staff. ### Comprehensiveness of Budget Documentation - Unity and Universality (Basic) - The documentation submitted with the budget includes budgetary central government entities. The budget documentation submitted for authorization to Congress incorporates all gross revenues, expenditures, and financing by central government budgetary entities. Transfers from budgetary central government to other central government extra-budgetary entities are also included in the budget. - Legislative change in 2019: - The 1958 law requiring the National Copper Corporation (Codelco) to turn over 10 percent of its copper export sales to the military was repealed. - The 10 percent of revenues received by the military from Codelco will be gradually reduced over a nine-year period and is now included in the budget. - Two dedicated funds are being introduced: a multi-year fund for investment in the Armed Forces’ strategic capacities and a strategic contingency fund to finance material for the Armed Forces during emergencies. The BCCh administers both funds. - The Armed Forces’ budget is now considered like that of any other central government entity and its reserved expenditure and minimum expenditure floor have been eliminated. - Extra-budgetary entities: - The estimated expenditure and revenue of the main extra-budgetary entities are not included in budget documentation. - Information on the use of the central government transfers by these entities can be requested by Congressional Deputies at any time. - Most extra-budgetary entities (with the exception of Universities) do not raise their own revenue or it is not material. - In the financial statements (IGFE), the universities, training centers and the university loans solidarity fund report annual execution information which accounts for 2 percent of central government expenditure. - Recommendation: The budget documentation package could include the estimated revenues and expenditures of the main extra-budgetary entities (priority: entities raising their own revenue); each entity could disclose their budgets and execution on their own websites (some universities already do so). ### Macroeconomic Forecasting - Macroeconomic Forecasting (Advanced) - Budget documentation includes forecasts of key macroeconomic aggregates (e.g., nominal GDP, internal demand, inflation, exchange rate, price of copper) for the current year, the next budget year, and the next four years. Macroeconomic scenarios are updated quarterly in the IFP. - Basic assumptions underlying forecasts are discussed, including analyses of the international macroeconomic situation and financial markets, exchange rate, inflation rate, and more detailed approaches on high-impact issues (e.g., commodities and copper markets). - Limitations: - Some details are limited (e.g., no or very limited discussion regarding unemployment rate, employment growth, or interest rates), weakening external readers’ ability to understand macroeconomic and fiscal forecasts and assumptions. - BCCh produces more detailed forecasts in the Informe de Política Monetaria, but those forecasts are not mentioned in budget documentation. - The CFA compares government forecasts against other national and international sources and publishes this comparison bi-annually but does not evaluate or assess the forecasts. - Forecast production process: - The Macroeconomic Coordination Division in the MoF produces outputs required by DIPRES and establishes forecasts quarterly to support IFP publication. Ad hoc forecasts can be run in times of high uncertainty or to analyze new laws. - The Division can leverage different economic and econometric models and perform consistency checks against other forecasters. There is no coordination with the BCCh (consistent with BCCh independence), though forecasts can be discussed during monetary policy meetings. - The models and information exist to support more comprehensive macroeconomic forecasts within the IFP, provided DIPRES requests such input from the Division. - Bias and forecast errors: - Although usually in line with international institutions, macroeconomic forecasts tend to exhibit an optimistic bias. - Between 2015 and 2020, 1-year forward real GDP growth forecasts have been higher than realized real GDP growth, with only one occurrence of the forecast being below the realized growth (in 2018). - Excluding 2020 forecasts, the standard deviation of the forecast errors is close to 1.1 percentage point of GDP. - Forecasts from major international organizations are close to Chilean administration forecasts and also tend to exhibit the same optimistic characteristic. - The optimistic bias is also present for 3-year forward macroeconomic forecasts. - In recent years, 1-year forward inflation forecasts have been above realized inflation. ### Medium-Term Budget Framework (MTBF) - MTBF (Basic) - The medium-term perspective is captured through a Medium-Term Fiscal Framework (MTFF), also known as medium-term financial program (programa financiero de mediano plazo), which extends over three or more years beyond the next fiscal year and covers central government. - Footnote: Since the budget law for 2019 (the first submitted by the present administration), the MTFF covers four years beyond the next budget year (e.g., MTFF associated with the 2019 budget covered the years 2020-2023). - An aggregate ceiling for maximum expenditure compatible with the Cyclically-Adjusted Balance (CAB) rule is calculated based on the structural balance objective and projections for total cyclically-adjusted revenue. - The MTFF is updated every three months as part of the quarterly IFP; most updates take place at the time of the 3rd quarter IFP, submitted in late September along with the draft budget for next year. - Compliance and performance - The aggregate expenditure ceilings set for out-years (year 1 to 3 beyond the next year’s budget) are not systematically complied with. - Table II.2 (aggregate spending ceilings, figures in billion pesos) — Out-Year Ceiling and actual outturns: - Out-Year Ceiling (Year 3): 36,823 (2017), 42,746 (2018), 45,881 (2019), 45,958 (2020), 48.988 (2021) - Year 2: 40,394 (2017), 44,055 (2018), 45,160 (2019), 47,878 (2020), 51,113 (2021) - Year 1: 42,165 (2017), 44,282 (2018), 46,733 (2019), 50,218 (2020), 51,805 (2021) - Budget Year Budget Law: 42,213 (2017), 45,199 (2018), 47,743 (2019), 50,439 (2020), 56,076 (2021) - Actual Outturn: 42,643 (2017), 45,185 (2018), 48,153 (2019), 54,793 (2020), N/A (2021) - Difference between Out-Year 3 and Actual Outturn: - In nominal terms: +15.8 (2017), +5.8 (2018), +5.0 (2019), +19.2 (2020), N/A (2021) - In real terms: +5.2 (2017), -3.6 (2018), -3.6 (2019), +10.0 (2020), N/A (2021) - Example: The 3rd quarter IFP published in September 2013 presented aggregate expenditure ceilings covering 2015–2017; the year 3 (2017) outturn was significantly higher in real terms (+5.2 percent) than anticipated in September 2013 (reasons: change in government March 2014 and tax reform enacted in 2014). - 2020 deviations linked to COVID-19. - Expenditure baselines: - DIPRES prepares and maintains expenditure baselines for central government, presented over the same timeframe as the MTFF in quarterly IFPs and correspond to spending necessary to continue public services based on present commitments. - Baselines are updated quarterly to reflect impact of new bills and changes in assumptions on significant budget items (e.g., debt service). A more thorough revision occurs for the 3rd quarter IFP and presents baselines broken down by economic classification. - Fiscal space assessment: - The combination of MTFF ceilings and committed expenditures enables assessment of fiscal space. Table II.3 (figures in billion pesos) shows evolution of fiscal space across vintages: - Out-Year 3: - Expenditure Ceiling: 36,823 (2017), 42,746 (2018), 45,881 (2019), 45,958 (2020), 48,988 (2021) - Committed Expenditure: 34,410 (2017), 40,970 (2018), 45,387 (2019), 46,460 (2020), 48,281 (2021) - Fiscal Space: 2,413 (2017), 1,776 (2018), 494 (2019), -502 (2020), 607 (2021) - Out-Year 2: - Expenditure Ceiling: 40,394 (2017), 44,055 (2018), 45,160 (2019), 47,878 (2020), 51,113 (2021) - Committed Expenditure: 39,795 (2017), 44,193 (2018), 45,574 (2019), 47,569 (2020), 50,412 (2021) - Fiscal Space: 599 (2017), -138 (2018), -414 (2019), 309 (2020), 701 (2021) - Out-Year 1: - Expenditure Ceiling: 42,165 (2017), 44,282 (2018), 46,733 (2019), 50,218 (2020), 51,805 (2021) - Committed Expenditure: 42,371 (2017), 44,542 (2018), 46,347 (2019), 49,186 (2020), 51,721 (2021) - Fiscal Space: -206 (2017), -260 (2018), 386 (2019), 1,032 (2020), 84 (2021) - Observation: For fiscal years 2017 and 2018, fiscal space identified when they were Out-Year 3 functions as a provision and is gradually depleted before budgets are prepared and implemented. For 2019–2021 no clear pattern is detected. For fiscal year 2020, committed expenditure exceeded the expenditure ceiling in Out-Year 3, which, together with emergency fiscal package for the pandemic, helps explain the choice to relax the structural objective. - Limitations of MTFF relative to MTBF: - No breakdown of expenditure ceilings nor baselines at the level of individual ministries or programs; distribution between ministries and programs is internal to DIPRES and not made public. - The Chilean medium-term financial program does not fully satisfy objectives of a MTBF (predictability for program managers, medium-term resource allocations, visibility of allocation changes across public policies). - DIPRES expressed concern that communicating baselines at program or ministry level may create a sense of entitlement among line ministries and diminish DIPRES leverage during budget negotiations. - Comparison (Table II.4) — key differences between Chilean Medium-Term Financial Program and Advanced MTBF Model: - 4 or 5 year framework: Yes (Chile), Yes (Advanced) - Indicative ceilings for out-years at the aggregate level: Yes (Chile), Yes (Advanced) - Indicative ceilings for out-years broken down at the level of policy areas / programs / line ministries: No (Chile), Yes (Advanced) - Full alignment with government’s fiscal policy objectives and macroeconomic forecasts: Yes (Chile), Yes (Advanced) - Indicative ceilings or spending estimates for out-years are rolled over from one MTBF to the next: No (Chile), Yes (Advanced) - Budget preparation process for capital and recurrent spending fully integrated: Yes (Chile), Yes (Advanced) - Definition of capital and recurrent spending aligned with international standards: Yes (Chile), Yes (Advanced) - A single process for preparing MTBF and annual budget, and fully integrated documentation: No (Chile), Yes (Advanced) - Reliable forward estimates of spending in out-years: Partly (Chile), Yes (Advanced) - Planning margins or planning reserves: Partly (Chile), Yes (Advanced) - Carry forward of spending from one year to the next, with well-defined restrictions: Partly (Chile), Yes (Advanced) ### Investment Projects - Investment Projects (Good) - All major projects are subject to a published cost-benefit analysis. - The National Investment System (SNI) regulates and governs public investment; ex-ante assessment is key. DLFA, Article 19, requires pre-feasibility studies for all project proposals based on technical economic evaluation of profitability. - Roles and systems: - Line ministries prepare and deliver project proposals. - The Ministry of Social Development reviews and approves social cost-benefit analysis (CBA) in accordance with published methodologies and issues an opinion on the ‘Technical-Economic Analysis Result’ (RATE). - The Integrated Project Bank (BIP) contains investment initiatives that have received a satisfactory CBA and can apply for government financing. The CBA is published in the BIP and the platform is publicly accessible. - Procurement and transparency: - Major projects are contracted via open and competitive tender. Budget Law, Article 6, mandates open tender for all public works (exceptions: emergencies only). - Tender documents, procurement plans and contracts are published on ChileCompra and comprehensively for concessions on the Ministry of Public Works website. - A formalized complaints procedure exists including an independent review body and court; if legal proceedings commence because of an award dispute, project implementation is paused. - Recommendation: To further enhance transparency, procurement statistics similar to those provided in the chapter’s tables should be regularly published. *Source: IMF staff (content as presented in the chapter).* ### 66. To improve the transparency of decision making on public investment, the ### To improve the transparency of decision making on public investment, the government should disclose the total financial obligations related to investment projects on a regular basis. ### Transparency of public investment decision making - Disclosure of actual investment spending in Chile is very comprehensive, but planned spending on public investment and the total costs of these investments is more difficult to identify. - The IFP supporting the Budget Law sets out the total planned investment spending for the four years following the budget year. - The 2021 Budget Law sets out major investment projects expected under the various Directorates of the Ministry of Public Works, but the focus is only on the expenditure planned in the budget year. - Neither planned expenditure in future years nor the total planned project expenditure can be identified from the 2021 Budget Law. - Each project contained in the Budget Law is assigned a BIP code that allows interested parties to review the project within the BIP system, but data stored on each project only shows actual expenditure over time, not planned expenditure or the total anticipated cost. - The Ministry of Public Works publishes an ‘Annual Investment Program’ that shows at a granular level actual expenditure for the previous year and planned expenditure for the budget year and two future years, but users cannot identify the total cost of an investment project from it. ### Legislative approval and disclosure for multi-annual investment projects - When approval is sought from the legislature for the first year’s appropriation for a multi-annual investment project, the legislature should be informed of the anticipated full total cost of the project over the years to its completion. - Regular updates and disclosure are necessary because the total financial obligations for a multiyear investment project may vary substantially due to delays, cost variances, and design changes. - At a minimum, the legislature should be informed every year of the updated total cost of a multi-annual project when appropriations for the next year are being sought for that project. ### Orderliness and timeliness of the budget process - The Constitution (Article 67) establishes deadlines for the presentation of the executive’s budget proposal to Congress and the approval of the budget; if Congress does not approve the budget by the established deadline, the executive’s budget proposal will become law (this has never occurred in practice). - DLFA Article 13 requires the MoF to set out a budget formulation calendar, which DIPRES does every year. - The legislature may not increase or decrease the estimate of revenue; it may only reduce the expenditures contained in the budget proposal, except for those established by permanent law (Constitution Article 67). - Negotiations between Congressional Deputies and DIPRES can result in government-proposed budget modifications. - Article 2-22 of DFL 106 indicates that DIPRES should send to Congress an IFP, which should include a synthesis of the medium-term financial program as part of the annual budget documentation; the content that should be sent to Congress within the year is defined annually in the Budget Law. - To ensure stability and comparability over time, the financial administration law or DFL 106 should further specify the contents to be submitted in the reports that accompany the budget proposal and in-year reports. ### Timeliness of budget documents (Good) - Fiscal year starts on January 1st. - The proposed budget for the next year is sent to Congress towards the end of September, in accordance with Article 65 of the Constitution (minimum three months before the beginning of the fiscal year). - Congress is legally obliged to approve the budget within 60 days, i.e. before November 30. - The budget is then promulgated by the President and published in the Gazette, usually in the second half of December. - The deadlines for submission and approval have been regularly met over the last five years. Key dates: - 2021: Budget proposal transmission to the legislature 30 Sept 2020; Approval by the legislature 28 Nov 2020; Promulgation by the President 4 Dec 2020; Publication in the Gazette 16 Dec 2020 - 2020: Transmission 27 Sept 2019; Approval 26 Nov 2019; Promulgation 4 Dec 2019; Publication 19 Dec 2019 - 2019: Transmission 29 Sept 2018; Approval 28 Nov 2018; Promulgation 7 Dec 2018; Publication 28 Dec 2018 - 2018: Transmission 30 Sept 2017; Approval 30 Nov 2017; Promulgation 21 Dec 2017; Publication 27 Dec 2017 - 2017: Transmission 30 Sept 2016; Approval 29 Nov 2016; Promulgation 6 Dec 2016; Publication 15 Dec 2016 - The Constitutional Court may review the budget law after approval but cannot cancel the budget as a whole; it can delete specific provisions. ### Fiscal policy objectives and the CAB (Good) - Chile has been implementing since 2001 a Cyclically-Adjusted Balance (CAB) rule (also known as the “structural balance rule”) monitoring the total central government structural balance. - A fiscal path with annual structural balance targets is set by the incoming administration within 90 days of each new presidential mandate for the whole duration of its mandate (four years) but can be modified anytime by Presidential Decree. - Surpluses registered against the structural balance target are saved in two sovereign wealth funds – FEES and FRP. - The fiscal rule was enshrined in legislation in 2006 with the FRL; modifications occurred notably in 2011 and 2015 with methodological changes and the addition of an independent Fiscal Advisory Council, which became the CFA in 2019. - The CAB rule is underpinned by two expert committees providing independent technical estimates for trend GDP growth (to calculate the output gap) and forecasts for the long-term copper price (10 years ahead) to calculate structural revenue. - Calculations on the CAB are presented by DIPRES in each quarterly IFP for the current year and the period covered by the MTFF; an annual report published in June, subject to ex ante review by the CFA, captures detailed information on implementation of the CAB rule. ### Evolution of CAB targets and outturns (preserve table values) - CAB target set by Decreto Supremo 743 (adopted June 5th, 2018; published July 9th, 2018): 2018 -1.8; 2019 -1.6; 2020 -1.4; 2021 -1.2; 2022 -1.0 - CAB target set by Decreto Supremo 253 (adopted February 24th, 2020; published March 30th, 2020): 2020 -3.2; 2021 -2.5; 2022 -2.0 - CAB target set by Decreto Supremo 1 579 (adopted September 28th, 2020; published October 29th, 2020): 2020 -3.2; 2021 -4.7; 2022 -3.9 - Actual CAB outturn: 2018 -1.5; 2019 -1.5 ### Issues with discretion and recent changes - The fiscal rule leaves the executive complete discretion as to changes in fiscal targets within a presidential mandate, which risks undermining credibility if there are no precise criteria to justify changes. - There have been changes of fiscal objectives during prior presidential mandates (2010 and 2014) even without major economic perturbations. - For the 2018 mandate, two revisions took place within one year (2020): first related to the aftermath of the late 2019 social crisis and then to the fight against the COVID-19 pandemic; these illustrate the high degree of discretion to change the fiscal path. - Changes in targets are not subject to ex ante analysis by, and discussion with, the CFA. ### Proposed changes to strengthen the CAB rule (under discussion) - Setting a debt anchor (in percentage of GDP) to integrate a high-level objective compatible with long-term sustainability concerns. - Enhancing transparency on achievement or non-achievement of fiscal targets, compelling the authorities to clearly indicate under which time-frame they plan to return to the pre-set fiscal target or to explain why they would adopt another fiscal path. - Allowing for an escape clause, defining clearly the circumstances under which a deviation from existing fiscal targets could be acceptable instead of adjusting fiscal targets in a largely discretionary manner. - These proposals have inspired a bill submitted by the executive to Congress in late September 2021. ### Performance information (Good) - Chile has a robust management control and evaluation system (MC&E) in place for almost 30 years that provides extensive performance information for budget documentation and annual reports. - Since 2012, DIPRES has monitored management and performance of policy programs executed during the previous fiscal year, with tasks to: i) systematize information on the performance of programs and initiatives; ii) provide information on performance for budgetary decision making; and iii) improve transparency, management and performance of programs. - DIPRES produces and publishes monitoring cards that consolidate a program’s objectives, indicators, targets and budget execution; results of the 2020 monitoring process were published in June 2021 and included policy programs’ contributions to the Sustainable Development Goals (SDGs). - Some objectives and performance indicators are well defined and relevant; however input or management-oriented indicators and outputs remain predominant, and outcome-level indicators are not presented in the monitoring cards. - The program budget classification is not fully aligned with “policy programs,” complicating identification of links between policy objectives and budget allocations; MC&E also monitors “initiatives,” adding complexity. - Recent methodological and procedural changes starting in 2020 for the 2021 budget process include: - Implementation of an adjusted zero-based budgeting methodology, with budget cuts scenarios and performance data analysis; - Stronger coordination between the Ministry of Social Development and Family and DIPRES; - Adaptations of the budget calendar to analyze evaluation results before the budget formulation process; - Mapping of budget programs to policy programs (currently only for internal use); - Publication of programs’ performance data and analysis of results, including in open data. - The current structure of analysis by individual programs limits assessing contribution to strategic goals; the Government Plan (2018-2022) includes priorities reflected in ministries’ strategic objectives and indicators but lacks a systematic integration between national planning and MC&E. - Ongoing changes for the 2022 budget formulation process require line ministries to inform DIPRES how their proposed budget incorporates citizens’ needs and priorities; further strengthening could include identification of medium and longer term priorities with indicators and targets attached and alignment with SDGs. *Source: Chilean Authorities, IMF staff.* ### 82. Together with the budget proposal DIPRES presents the Budget Priorities Booklet. This ### 1chlea2021005 - 82. Together with the budget proposal DIPRES presents the Budget Priorities Booklet. This ### Budget Priorities Booklet, Open Budget Portal, and dissemination - The Budget Priorities Booklet: - Provides a summary of recent fiscal outturns with explanations, includes implications of the budget proposal and identifies major budget changes from the previous year. - For 2018 and 2019, an additional publication covered the approved budget. - The 2021 booklet presented information in a more concise form, potentially appealing to a broader audience. - In 2020, an additional publication covered the newly created Transitory Emergency Fund and Special Funds in the Public Treasury due to the COVID crisis. - Open Budget Portal (Portal de Presupuesto Abierto): - Created in 2018 to provide detailed data on allocation of central government resources and their monthly execution. - Data is obtained directly from SIGFE and required extensive harmonization of different reporting platforms before publication. - The portal includes a roadmap that provides clarity on scope and an iterative approach to increasing data availability, but it lacks specific objectives to measure initiative success. - Dissemination shortfalls: - The booklet is presented together with the budget proposal to Congress without additional dissemination measures. - The Open Budget Portal could be more actively disseminated and used to create spaces for public participation. ### Public participation in the budget process - Current practice and legal framework: - The government provides few spaces for public engagement in annual budget formulation and Congressional discussions. - Limited public engagement with respect to the CGR. - The Open Budget Survey 2019 rated public participation in the budget cycle in Chile below the OECD average and below most regional peers. - Law 20500 on Associations and Citizen Participation in Public Management establishes a legal framework that could be leveraged to enable meaningful public participation. - The law requires public entities to develop a Participative Public Account, but in practice interactions remain largely informative without providing a formal voice to citizens. - Recent initiatives and recommendations: - An initial effort to capture public participation in budget formulation by LMs started through an additional requirement in the 2022 budget formulation instructions to LMs. - In 2020, the MoF created by decree the Ministerial Advisory Commission to Improve Transparency, Quality and the Impact of Public Spending, led by civil society representatives; the final report was delivered to the MoF in January of 2021. - Recommendation: MoF should provide timely and specific feedback on public inputs and how they have been incorporated or not in official policy or advice. ### Independent Fiscal Council (CFA): mandate, capacity, and recommendations - Establishment and resourcing: - Established by law in February 2019 (Law No. 21.148 of February 16th, 2019). - Composed of five council members appointed by merit; nominated by the President and approved by the Senate; appointments do not coincide with the government’s term. - The President of the CFA is appointed by the President of the Republic from among the five members, with a term of three years in office or the shortest remaining time of their term and may be appointed for a new term. - Resources comprise four staff (three technical) and a budget of around US $556,000 in 2020. - Mandate and functions: - Focused on monitoring compliance with the fiscal rule and evaluating medium and long-term sustainability of public finances. - Must present a report to the Budget Committee of both Chambers of Congress twice a year, in April and September. - Required to make observations and propose methodological and procedural changes for the calculation of the structural balance, express opinions on deviations from structural balance targets and propose mitigation measures. - Has issued work on effectiveness of the fiscal rule, suggested a debt anchor, and the government introduced a bill in September 2021 to anchor the fiscal position using a debt target and to formalize escape clause activation within the fiscal framework. - Scope relative to forecasts and credibility: - No explicit mandate to assess macroeconomic or fiscal forecasts, but evaluates credibility of two underlying assumptions (trend GDP and copper prices) prepared by expert technical committees. - Compares government macroeconomic and fiscal forecasts with independent forecasters in bi-annual reports to Congress. - Could strengthen its role by formalizing evaluation of forecasts’ credibility beyond GDP and copper prices and by expanding staff. - OECD principles suggest the Head of an IFI should preferably be full time and resources commensurate with mandate; current three technical staff may be insufficient given CFA’s broad mandate. - Capacity-building and forward actions: - CFA constructed an economic model for fiscal revenues, assets and debt and is constructing models on pensions and health. - Suggested actions: - CFA could issue an opinion on each new government’s proposed structural balance target set at the start of administration or when changes occur. - Amend the CFA mandate to clarify and formalize its role evaluating credibility of economic and fiscal forecasts. - CFA and DIPRES should formalize arrangements for consistent data provision (forecast parameters and models) following each forecast update and specify timeframes. - Box II.3 — Functions and Powers of the CFA (as listed): - To evaluate and monitor the calculation of the cyclical adjustment of effective revenues made by DIPRES. - To participate as an observer in the procedures established to garner the opinion of independent experts on the factors that determine the trend level of the Central Government's revenues and expenditures, and to review said calculations and express its opinion on them. - To make observations and propose to the MoF methodological and procedural changes for the calculation of the Structural Balance. - To express its opinion on possible deviations from the fulfillment of Structural Balance targets and propose mitigation measures. - To evaluate the medium and long-term sustainability of public finances and make the results of its evaluations available to the public. - To advise the MoF on fiscal matters expressly entrusted to it and that are related to its purpose. (For example, the Government’s Spending Efficiency, Strengthening the Fiscal Rule, Automatic Reversal Transitory Tax Measures). - To carry out reports in relation to the studies, analyzes and other issues that are incumbent on it in accordance with this law. ### Supplementary budgets, budget execution flexibility, and transparency - Legal and practical framework: - The DLFA stipulates that expenditure exceeding the overall approved budget total can only be authorized by law requiring Congressional approval. - Amendments to annual budget laws are not common: none in 2018 and 2019, one in 2020 related to financing the process to draft a new Constitution; in 2021, three amendments were passed as of June (considering exceptional circumstances). - With these amendments, the overall approved budget ceiling has been maintained (with some minor variations), except for 2020. - Underspending appears predominant in the past ten years. - Executive flexibility and adjustment mechanisms: - The DLFA gives the executive flexibility to determine rules on transfers, increases or reductions and other budgetary modifications through an annual decree with instructions for budget adjustments, within limits specified in the annual budget law (including transfers from capital to current spending, and those that increase the payroll). - Adjustments within ministries are frequent and made through decrees from DIPRES; such decrees are consistently published on the official website next to approved allocations. - Budget overruns are usually offset against the fund for budget reserves and reserves from accumulation of unspent appropriations (saldo de caja). - The “Public Treasury” Item (Partida) 50 collects various expenses not specifically related to ministries and reallocates resources or covers unforeseen expenses; these mechanisms provide flexibility so supplementary budget approval is not required. - Transparency of in-year laws and impacts: - All new budget laws, including those during the budget year, should be accompanied by a budget impact estimation; enactment implies approval of the expenditure needed for the program. - Tracing related laws that created fiscal impact can be complex. - DIPRES publishes the supplementary financial report that estimates the potential fiscal impact of bills introduced to Congress. - The virtual Congress Budget Library includes all enacted laws. - The government has begun publishing, as part of budget documentation (3Q IFP), a compendium of last year’s draft laws identifying their fiscal impact over the next five years and whether they have already been approved. - Recommendation: Continue the new practice and further clarify if in-year budget modifications will impact the overall budget ceiling or will be addressed through reallocations. ### Forecast reconciliation and fiscal reporting (IFP) - IFP improvements from 2019: - The revamped IFP started providing forecast reconciliations for several budget aggregates, began quarterly dissemination, and added a new section in first, second and fourth quarter IFPs describing changes in fiscal forecasts; the third quarter report includes a complete new set of projections in the context of the upcoming budget cycle. - Classification of changes to expenditure projections: - Impact of new policy measures (e.g., measures taken to support vulnerable households in the context of the COVID-19 pandemic). - Expansion in existing government programs leading to upward revisions to expenditure forecasts. - Changes related to updates of macroeconomic parameters, mainly inflation and exchange rate. - Revenue forecasts and COVID-related measures: - A similar approach is taken to revenue forecasts with extensive narrative and details of updated underlying assumptions (e.g., copper prices). - Reports provide detailed information on transitory tax measures (tax deferrals, tax credits, amongst others) implemented to support economic recovery; the impact of this package is being estimated at 4% of GDP for 2021. - The IFP updates macroeconomic parameters (GDP, inflation, exchange rate, copper price), provides comparisons with prior assumptions, and presents forecasts of cyclically adjusted revenues, fiscal balance, and estimated public debt trajectory. *Source: IMF staff.* ### 99. However, there is still room for improvement, particularly on standardizing the ### 99. However, there is still room for improvement, particularly on standardizing the ### Reconciliation tables and IFP quarterly schedule - Enhanced practices under the quarterly IFP have entered the third year of operation and remain a work-in-progress. - Explicit breakdown tables (new policies, macroeconomic developments) have been consistently applied to reconcile successive vintages of short-term forecasts (i.e. for the ongoing fiscal year). - Explanations on differences to medium-term forecasts are focused on the revenue side, breaking them down into: - overall effect of changes in tax policies; and - macroeconomic determinants. - Recommendations: - Standardize the reconciliation tables for revenue, expenditure, and financing forecasts, for the short and medium-term, to qualify Chile for more advanced ratings under the FT Code. - Update and reconcile medium-term fiscal forecasts twice a year, in the IFP IQ and IIIQ, and target the IFP IIQ and IVQ to communicate on the in-year projections. ### Recent changes in forecasts and drivers (paragraph 100) - Changes in revenue and expenditure forecasts have been notably significant in the last two years, broadly reflecting higher uncertainties due to the pandemic. - Drivers of revenue forecast changes: - sharp downward revisions to economic parameters in 2020; and - implementation of tax measures to support economic activity. - Evolution through 2020–Q1 2021: - projected revenues deteriorated throughout 2020 and were partially reverted in the first quarter of 2021 due to higher copper prices in international markets, gradual withdrawal of some tax measures, and recovery of economic activity. - Expenditure forecasts: - continue an upward trend, reflecting policy measures to support vulnerable households extended through 2021. - Source data noted: IFPs 2013 to IQ 2021. ### Conclusions on fiscal forecasting and budgeting (paragraphs 101–103) - Fiscal forecasting and budgeting in Chile meet good practices in most areas. - Budget legal framework: clear and comprehensive; budget largely unified; provides a good sense of government activities through budgetary central government operations. - Performance orientation: available and can enable public interest. - Medium-term budgeting: - Chile remains largely limited to an annual vision of budgeting despite building blocks for medium-term budgeting existing. - DIPRES has extensive experience with baselines; the fiscal rule provides a medium-term horizon for fiscal targets. - Chile has not transitioned to an advanced MTBF. - Fiscal rule: - existing fiscal rule has served Chile well, but 2020 demonstrated changing fiscal targets within a presidential mandate can be done very easily. - Recommendation to regulate discretion through a well-designed escape clause and an increased role for CFA. - Government recently introduced a bill to amend the fiscal rule. ### Recommendations (excerpted and preserved) - Recommendation 2.1: Strengthen the medium-term orientation of the budget through more detailed and credible forecasts both on the revenue and on the expenditure side, underpinned by a fully-fledged MTBF. - Gradually advance towards complementing the fiscal rule and the corresponding compatible expenditure levels with aggregate sectoral level expenditure ceilings in the context of a MTBF. (2.1.1) - Publish the total expected cost of multi-annual investment projects on a regular basis alongside the annual budget documentation, and any changes to total estimated project costs over time. (2.1.2) - Complete the publication of macroeconomic forecasts by expanding the details of the underlying assumptions (e.g., interest rates, external sector, labor market variables). (2.1.3) - Standardize the reconciliation tables for the short and medium-term forecasts and target the reconciliation exercise on medium-term forecasts in the IFP for the 1st and 3rd quarters, and on in-year projections only in the IFP for the 2nd and 4th quarters. (2.1.4) - Recommendation 2.2: Reinforce the existing fiscal rule through the addition of a well-defined escape clause and an increased role for CFA. - Establish a clearly defined escape clause to temporarily suspend the fiscal policy objectives in response to exceptional shocks (severe economic downturns, large natural disasters and states of emergency). The activation of the escape clause should receive a positive opinion from the CFA, and should predefine the timeframe and procedures for returning to compliance with the rule, commensurate with the size of the shock. (2.2.1) - Clarify the mandate of the CFA to provide a role to evaluate the credibility of the economic and fiscal forecasts. While the CFA is moving in this direction, formalizing this responsibility would clarify expectations and bring the CFA more in line with the functions and responsibilities of the majority of global IFIs. (2.2.2) - Recommendation 2.3: Increase the emphasis on public participation, facilitated by further progress in the budget’s performance focus and an enhanced stress on policy objectives and outcomes. - Leverage the existing legal framework for public participation throughout the budget cycle and publish timely and specific feedback on how public inputs have been incorporated or not in official policy or advice. (2.3.1) - Improve the dissemination of the Budget Priorities Booklet and define specific objectives for the Open Budget Portal. (2.3.1) - Adjust the program classification to capture the policy programs and initiatives, making them consistent for implementing performance budgeting. (2.3.2) - Publish clear strategic objectives related to development and well-being and align them to programs. (2.3.2) - Establish formal linkages and feedback mechanism between public participation and performance budgeting. (2.3.2) - Recommendation 2.4: Support and sustain the overall transparency of budgeting by adopting additional specific measures: - Include in the budget documentation package the estimated revenue and expenditure of the main extra-budgetary entities, notably Universities. (2.4.1) - Further specify the detail contents that should be included in executive’s budget proposal. (2.4.2) - Continue to publish the compendium of last year’s draft laws as part of budget documentation, further clarify if in-year budget modifications will impact the overall budget ceiling or will be done through reallocations. (2.4.3) ### Summary Assessment (Table II.9 highlights) - Budget Unity: Basic. Details on extra-budgetary entities are not included in the budget documentation. Low. The main extra-budgetary entities with own revenues are the universities (2% of total central government expenditure). Recs: 2.4 - Macroeconomic Forecasts: Advanced. Budget documents included forecast and explanations of key macroeconomic variables and some underpinning assumptions. Low. More details could be provided on the underlying assumptions of macro projections. Recs: 2.1 - Medium-term Budget Framework: Basic. Chile currently has an aggregate MTFF rather than a MTBF, with several elements of good practices in MTBF missing. High. Introducing a fully-fledged MTBF is important. Recs: 2.1 - Investment Projects: Good. Project assessment and procurement processes are adequate but total lifetime project costs cannot be clearly identified. High. Recs: 2.1 - Fiscal Legislation: Advanced. Timetable and content of the draft budget as well as powers of the Congress are defined in fiscal legislation. Low. More specifics on content should be provided. Recs: 2.4 - Timeliness of budget documents: Good. The approved budget is published a few weeks before the start of the fiscal year. Low. Only a change in constitutional deadlines would enable the approved budget to be published before the end of November. - Fiscal Policy Objectives: Good. A fiscal rule exists since 2001 but the structural balance objective has been changed during presidential terms. Medium. Introduction of a formal escape clause would make the fiscal rule more resilient to shocks. Recs: 2.2 - Performance Information: Good. Robust performance information system but the link to policy outcomes remains weak. Medium. Recs: 2.3 - Public Participation: Basic. Information is abundant, few spaces for a formal voice for the public in budget deliberations, monitoring and audit. Medium. Recs: 2.3 - Independent Evaluation: Good. An Autonomous Fiscal Council has been established. Medium. A broader mandate of the CFA would help strengthen credibility. Recs: 2.2 - Supplementary Budget: Good. Additional spending is authorized ex ante by Congress but the approval is scattered across many legal texts. Medium. A user-friendly vision of all changes to the approved budget should be provided by DIPRES on their website. Recs: 2.4 - Forecast Reconciliation: Good. Elements on forecast reconciliation are already present in the IFP. Low. Reconciliation tables could be standardized and the reconciliation process streamlined. Recs: 2.1 ### Fiscal risks: scope and reporting (start of Pillar III) - Pillar III focus: disclosure, analysis, and management of fiscal risks including: - general macroeconomic shocks; and - specific risks from contingent liabilities (explicit and implicit). - Risks assessed on three dimensions: - i. General arrangements for the disclosure and analysis of fiscal risks; - ii. Reporting and management of risks from specific sources (government guarantees, PPPs, natural disasters, financial sector); - iii. Coordination of fiscal decision-making between central government, local governments, and public corporations. - Table III.1 (selected published reports examined) lists multiple reports and frequencies, including: - Macroeconomic Forecasts (Informe de Finanzas Públicas IFP) — DIPRES — Quarterly - Report on Monetary Policy (Informe de Politica Monetaria) — BCCh — Quarterly - Reports on the Pension systems (FRP) — DIPRES — 3 to 4 years - Contingent Liabilities Report (Informe de Pasivos Contingentes, IPC) — DIPRES — Annually - Quarterly Copper Forecasts — DIPRES — Quarterly - Quarterly Fiscal Statistics Report (Informe del Estado de Operaciones del Gobierno General Trimestral) — DIPRES — Quarterly - SEP Report on Public Corporations — SEP — Annual - (Table lists additional sector reports and frequencies as compiled by IMF staff.) - Assessment status headings introduced: - 3.1.1 Macroeconomic Risks — Not Met - 3.1.2 Specific Fiscal Risks — Not met ### Disclosure and analysis of macroeconomic risks (3.1.1) - Current practice: - Macroeconomic risks have limited coverage in budget documentation; occasionally discussed in the IFP. - Reports usually focus on the central macroeconomic and fiscal scenario while noting assumptions could fail to materialize. - COVID-19 period practice: - In times of high uncertainty alternative macroeconomic and fiscal scenarios were presented and discussed using qualitative and quantitative approaches (e.g., IFP First Quarter 2020). - A range of macroeconomic scenarios was discussed in IFP Q1 2020 covering 2020 economic growth, price of copper, exchange rate, internal demand, exports and imports; impacts on the fiscal scenario were presented with the central scenario positioned within a range of alternative forecasts. - This scenario analysis developed during the COVID-19 crisis has not been included in subsequent IFPs, although 2021 third quarter displays a qualitative discussion on macroeconomic risks. - DIPRES indicated this analysis should be maintained and developed in subsequent IFP publications. - Importance and suggested improvements: - Chile’s openness and dependency on copper price increase sensitivity to macroeconomic risks. - The simplest illustration: present impact of a 1 percent change in each macroeconomic aggregate on government borrowing for the year ahead. - More sophisticated approach: base changes on historical volatility or forecast error and show impacts on government expenditure, revenue, and debt over the medium term. - Sensitivity analyses and alternative scenarios are conducted internally within DIPRES and could support public publications. ### Disclosure of specific fiscal risks (3.1.2) - Specific fiscal risks definition: risks from identified uncertainties including explicit and implicit contingent liabilities across public debt management, guarantees, disasters, financial sector, subnational governments, and public corporations. - Indicator 3.1.2 assesses overall transparency regarding the broad range of specific fiscal risks. - Subsequent sections of Pillar III examine transparency and risk management practices for individual sources such as government guarantees. *Italicized source: Content compiled from the supplied IMF chapter text.* ### 110. Since 2007, Chile annually publishes detailed information on a range of explicit ### 1chlea2021005 - 110. ### Contingent liabilities reporting and coverage - Since 2007, Chile annually publishes detailed information on a range of explicit contingent liabilities in the Informe de Pasivos Contingentes (IPC). - The IPC covers risks defined by law, including: - Risks related to PPPs (minimum revenue guarantee) - Risks related to the guaranteed debt of the public corporations - Risks related to the guarantee for student loans - Risks related to the deposit insurance scheme - Legal risks (claims against the government) - Risks related to specific funds and mechanisms - Risks related to obligations towards multilateral organizations - Risks related to the Pension system (future commitments) - For the risks it covers, the IPC presents: - Magnitude and likelihood for each risk - A described methodology and potential impact on the budget - Evolution of contingent liabilities versus the previous year and explanations of main changes - A methodological chapter that sets out contingent obligations (including legal ones), the evaluation framework, and discusses management of those risks ### Gaps in coverage and analysis - The IPC falls short of analyzing and summarizing the main specific risks to which the fiscal position is exposed; important risks are not published, including: - Natural resources risks (including quantity, price and reserve effects) - Environmental risks including from natural disasters - Risks related to the financial performance of public corporations, public assets and liabilities (particularly debt liabilities) - Risks related to subnational governments - The IPC’s legal mandate focuses on contingent liabilities and is not part of a wider fiscal-risk framework that: - Explicitly identifies and prioritizes main fiscal risks (e.g., natural resources risks, environmental risks, pension system risks) - Validates main fiscal risks, provides qualitative and/or quantitative analyses, management and mitigation measures - Provides a comprehensive picture of the totality of fiscal risks and interconnections between risk crystallizations ### Recommendation: Annual Fiscal Risk Statement (broader scope) - Summary reporting of fiscal risks should be supported by improved fiscal oversight and management. - Examples of published annual Fiscal Risk Statements: Brazil, the United Kingdom, Finland, New Zealand, Kenya, Indonesia, and the Philippines. - Suggested scope for a Chilean Fiscal Risk Statement (Box III.1 highlights): - Government’s fiscal risk management strategy in the context of the medium-term fiscal strategy - Recent progress in mitigating risks and priority areas for further mitigation - Macroeconomic risks and budget sensitivity, including alternative macro-fiscal scenarios and probabilistic forecasts - Public debt sensitivity, debt management strategy, and debt sustainability analysis - Other short- to medium-term fiscal risks (e.g., civil service pension exposures, uncertainty from reforms) - Long-term risks (pensions, health, social schemes) and actuarial conclusions if available - Contingent liabilities: gross exposure, expected costs, rationale, criteria, and beneficiaries - Financial sector: past/current explicit support, deposit insurance details, assessment of financial sector risks - Legal action: past claims/settlements and gross value of current claims (with disclaimer) - PPPs: summary of program, rights/obligations, exposure from guarantees, expected annual receipts/payments - Natural resources: fiscal risks related to natural resources (e.g., price of copper), sensitivity analysis, long-term value of reserves - Environmental risks: fiscal impacts of disasters, disaster risk reduction and financing strategies - Public corporations: ownership policy, financial position and performance, quasi-fiscal activities - Subnational governments: legal framework, aggregate financial performance and position ### Specific fiscal risks and key statistics (Figure III.1 selection) - Debt - Long-term debt projections: 24.20% 2050 (DIPRES (2019 report on debt sustainability analysis)) - Pensions - Estimated costs related to the guarantee on minimum pensions: 1.35% 2020 (Report on contingent liabilities (IPC)) - Estimated costs related to the solidarity pension scheme: 2.98% 2050 (Report on contingent liabilities (IPC)) - Cumulative actuarial liabilities of DIPRECA and CAPREDENA: 17.50% 2020 (Staff estimate based on 2012 actuarial report on DIPRECA and CAPREDENA) - Contingent liabilities (selected items, 2020 unless noted) - Minimum Income Guarantee Concession System: 0.15% 2020 (Report on contingent liabilities (IPC)) - State Guarantee for the Debt of Public Enterprises: 0.99% 2020 (Report on contingent liabilities (IPC)) - Higher Education Credit Guarantee: 1.53% 2020 (Report on contingent liabilities (IPC)) - State Deposit Guarantee: 3.34% 2020 (Report on contingent liabilities (IPC)) - Guarantee Fund for Small Entrepreneurs (FOGAPE): 0.38% 2020 (Report on contingent liabilities (IPC)) - CORFO Hedge Funds: 0.31% 2020 (Report on contingent liabilities (IPC)) - Legal costs: 0.22% 2020 (Report on contingent liabilities (IPC)) - PPP: Total PPP rights and obligations: x - Natural resources: Fiscal revenues from copper: x; Long-term risks related the natural resources reserves: x - Remark: Monetary value of copper reserves estimated at 25% of GDP (IMF Staff estimate NPV) - Environmental risks - 2010 Earthquake: 12% - 15% 2010 (OECD, 2019) - Average of other disasters over 7 yrs: 0.11% 2020 (IMF estimate) - Subnational governments - Debt liabilities: 0.03% 2020 (Informe de Estadísticas de la Deuda del Gobierno General Trimestral, 2020 December, Quarter Debt Report of April 2021) - Public corporations - Transfers to the government: 0.53% 2020 (DIPRES (report on transfers)) - Transfers from the government: 0.42% 2020 (DIPRES (report on transfers)) - Potential liabilities risks: 0.5% - 1.5% 2020 (IMF staff calculation) ### Long-term sustainability of public finances and pensions - The IPC covers contingent liabilities related to the pension system, assessing future commitments for the minimum pension guarantee and the solidarity pension scheme over a 30-year horizon. - Projected resources needed for the minimum pension guarantee and solidarity pension system in 2020: 1.35 percent of GDP, with a projected gradual increase to about 3 percent of GDP by 2050. - A Pension Reserve Fund (FRP) was created to support financing obligations from the pension guarantee scheme. - Article 7 of the FRL requires the government to publish long-term analyses on the FRP every three years; recent studies were published in 2013, 2016 and 2020. - Some pension schemes (e.g., police and Armed Forces: DIPRECA and CAPREDENA) are not covered by regular studies; latest actuarial study on those schemes was published in 2012 (more than 5 years ago at time of report). - Government published studies on health system evolution in 2014, 2016, 2017 and 2018 focusing on sustainability and reimbursements. - Projections of sustainability of main fiscal aggregates are not regularly published; no regular long-term projections (e.g., 10-year debt projections). IFP forecasts cover a 4-year horizon; longer-term projections exist only in ad hoc reports (e.g., DSA model presentation in 2019, CFA report in 2020). ### Risk management: budgetary contingencies and assets/liabilities - Budgetary contingencies: Advanced - Economic and Social Stabilization Fund (FEES) established 2007 to finance fiscal deficits and support the economy during downturns. - FEES receives the fiscal surplus each year, provided contribution to the FRP has been made. - FEES resources can be used to supplement revenues for authorized budget deficits, amortize public debt, or cover contributions to the FRP. - Size of FEES fluctuated from 2017 to 2021 between 3 and 5 percent of GDP. - Regular reporting on FEES to Congress: monthly and annual reports on financial evolution, and quarterly IFP reports that include reasons for any withdrawals. - Constitutional provision (Article 32-20) allows emergency funding up to two percent of the total budget annually under specified circumstances; invoked 28 times since 1970 and three times this century (including one in 2020 for COVID-19). - For 2020, Decree 333 authorized the use of up to 1,185 billion pesos to deal with the COVID pandemic based on this Constitutional provision. - Management of assets and liabilities: Basic - All borrowing is authorized by law; public entities need MoF authorization for borrowing (FRL); asset management requires DIPRES authorization. - Undersecretary of Finance handles debt disclosure and issues monthly and quarterly reports. - Debt risk analysis reports progress toward objectives (increase average bond maturity, currency composition) and provides disclosure of debt components (currency composition, maturities, interest rate developments). - Scope for improvement: include impact of changes in macroeconomic variables (interest rate, exchange rate, copper price); disclose information on creditors’ residency; publish a medium-term debt strategy (MTDS). - Other liabilities (e.g., pensions for special regimes, municipal lease-back reliance) are not publicly monitored regularly. - 2019 Law 21.217 establishes bills should be paid within 30 days or interest accrues; applied mid-2019 for central government and in 2021 for municipalities. New invoice-status portal started operating in 2020. - On assets: Chile publishes quarterly reports on the SWF, the FRP and FEES; FRL requires quarterly reports submitted to Congress (90 days after quarter end). - Since 2013, FRP sustainability reports present complete analysis on long-term pension impact. - Regular reporting on SWF includes disclosure on accumulation, investment and use, with Treasury holding assets in special accounts; Financial Committee in MoF advises on SWF investments. - Risk assessment of SWF not regularly disclosed. Regular reporting on mineral asset risks is missing; a 2015 study on long-term copper revenue exists. - Cash management: DIPRES provides cash management but the Treasury Single Account (TSA) is not fully functional. Some subsidiary accounts in Banco del Estado and BCCh are not zero-balance and do not transfer daily to the main account. - Treasury reports daily to MoF on cash situation (“Estado diario”) and registers movements in government accounts at month-end. Better TSA integration would improve fungibility and efficiency. - An integrated Assets and Liabilities strategy and a balance-sheet approach to risk management and disclosure are missing; Box III.2 outlines components of a Sovereign Asset and Liability Management (SALM) framework. *Source: IMF staff calculation and report content.* ### 125. Government guarantees, their beneficiaries, the gross exposure created by them and ### Government guarantees, their beneficiaries, the gross exposure created by them and ### Publication, coverage and measurement of guarantees - The IPC (Chile’s contingent liabilities report) has been published by DIPRES since 2007 as required by the FRL. Information is collected from line ministries in September and published annually in December. - The 2020 IPC: - Identifies the nature of guarantees in operation, the maximum exposure, estimated exposure (where feasible), and movement of the estimated value of guarantees types between years. - Explains reasons for major movements and describes the policy purpose and operation of each guarantee scheme. - Discloses actual payments made under some guarantee arrangements (e.g., minimum income guarantees for transport concessions and costs of the Higher education scheme). - Guarantees are approved by the Minister of Finance and authorized by law. Examples: - Minimum income guarantees are authorized under Decree 900, the Law on Public Works, 3.2.3. Guarantees Advanced and PPPs Regulation. - Guarantees for public enterprises’ debt are authorized by individual laws with reported limits on quantum and outstanding debt balances. - New higher education guarantees are subject to a per annum limit under the budget law. - The State Deposit Guarantee Scheme has a limit per person and per bank, per annum. - Guarantee funds to support small business are pre-funded, limiting government exposure without express approval for additional resources through the budget process. - Risk management measures in the FRL include the duty to estimate and publish contingent obligations and guarantees annually and empower the MoF to make provisions, take out insurance, or charge a premium when granting a revenue guarantee. Revenue guarantee fees are charged for concession contracts but are not disclosed separately. ### Quantitative scope and trends of guarantees (key statistics) - Guarantees comprise 69 percent of total estimated contingent liabilities. - 2020 estimates: - Maximum exposure of guarantees: 9.1 per cent of GDP. - Expected exposure of guarantees: 6.7 percent of GDP. - Since 2019, guarantees have increased by almost one percent of GDP, primarily due to: - Increase in the State Deposit Guarantee as a result of the increase in the eligible number of customers. - Legal change to the Guarantee Fund for Small Entrepreneurs which increased the fund's assets to face the Covid-19 crisis. - Estimated annual flows are around 0.12 per cent of GDP. ### Approach to quantifying minimum income guarantees (Box III.3) - Transport concession contracts commonly include a guaranteed minimum income: if annual concession income is less than the guaranteed minimum, the MPW pays the difference in the following calendar year. - DIPRES quantification approaches: - Maximum exposure: estimate amount payable if there were no traffic. Calculations indicate the maximum exposure by minimum income guarantees in present value is 1.43 percent of projected GDP. - Expected commitment: model composed of: - A mathematical representation of contractual conditions determining payment amounts. - A stochastic model of traffic revenue projecting revenues from 2019 levels with assumptions on expected growth rates, revenue volatility, and correlations across roads. - Both elements combined in a Monte-Carlo simulation to estimate the probability distribution and expected value of payments. - Based on this approach, the present value of expected payments associated with the minimum revenue guarantee corresponds to approximately 0.15 percent of GDP. - Actual payments made for 2019 minimum revenue guarantees for concessions were $69. 410 million pesos (0.04% of GDP). ### PPPs: disclosure, approvals, and remaining gaps - Chile has extensive PPP usage since the early 1990s across roads, airports, jails, reservoirs, public buildings, and urban roads. Most road and airport concessions contain revenue guarantees. - Approval and management: - The Ministry of Public Works (MPW) must obtain MoF approval at several stages, including before tender documents are issued and before contracts are signed. - Concession projects are subject to a cost benefit analysis that is published. - Projects must be approved by the Minister of Finance, the Minister of Public Works, the CGR, and the President. - Where the government provides minimum revenue guarantees, it charges a fee for bearing this risk; the MoF insists on natural disaster insurance for concessioned infrastructure. - Disclosure strengths: - Directorate of Concessions publishes detailed information on planned, under construction, in operation, or completed concessions, including project description, procurement history, start date, concession term, and total budget. - Monthly reports on implementation status and fines; quarterly and annual summary reports on concessions. - Disclosure gaps: - The estimated annual receipts and payments over the life of the concession contract are not published (information exists internally within MPW and DIPRES but is not public). - The government’s total rights, obligations and exposures under PPP contracts are not disclosed or easily accessed. Budget documents and year-end financial statements do not provide summary information on total future service payments and receipts (e.g., concessions and operating lease fees). - Recommendation implicit in text: disclose summary information on total future service payments and receipts for each PPP project (or group of similar projects) in budget documents, year-end financial statements, a summary fiscal risk report, and/or MPW website alongside project information. ### Financial sector supports and contingent liabilities - Financial sector size and composition: - Financial assets comprised 300 percent of GDP at end-2020. - Banks dominate the sector; Banco del Estado de Chile is fully state-owned with a total balance sheet representing 26.6 percent of GDP. - Pension funds held assets equal to 74 percent of GDP at end-December 2020 (after 2020 withdrawals). - Four main explicit government supports (disclosed and quantified): - Deposit insurance scheme (State deposit guarantee) administered by BCCh: - Scheme is not industry-funded and is not ex-ante financed; potential costs would be carried by public finances. - Mitigation: commercial banks required to keep additional reserves at the Central Bank when insured deposits are greater than a predetermined threshold (2.5 times the equity). - Contingent liabilities quantified in the IPC via: estimates of insured savings by type and depositor, estimates of maximal exposure with hypotheses on distribution of savings and accounts, and estimates of likely exposure using hypotheses on depositor behavior. Probability of exercise estimated by analyzing bank riskiness leveraging credit rating agency ratings. For 2020, the probability is estimated at zero. - BancoEstado: fully owned by the State, supervised as a private bank, strong rating (e.g., AAA according to Fitch-Chile). To comply with Basel 3 rules, a capital injection should take place in coming years with the State as the only contributor. - FOGAPE (fund to guarantee loans/leasing to small entrepreneurs): administered by BancoEstado and supervised by CMF; contingent liabilities analyzed, quantified, and disclosed in the IPC. FOGAPE strongly increased in 2020 due to COVID mobilization and currently displays a low loss ratio. - Student loans: state guarantee covering student loans represented 3 percent of Chilean GDP in 2020. 60 percent of the amount of the loans are being carried within the commercial bank accounts and stay on their balance sheet; the remaining 40 percent are transferred to the State and carried by the State balance sheet. Contingent liabilities related to student loans are presented within the IPC report. ### Financial stability monitoring and stress testing - Both BCCh and CMF publish regular information on financial stability. - BCCh publishes a Financial stability report each semester including stress-testing exercises based on different macroeconomic and financial market scenarios. - BCCh is contemplating adding fiscal stress-testing to better understand public debt risks (including interest rate shocks) following increases in public and private debt due to COVID. - CMF publishes regular reports and statistics on supervised financial institutions. - Figures and evolution are presented in the IPC 2020 on: - Deposit Insurance: Total Covered Deposits (millions of Pesos). - Deposit insurance: Evolution of Maximum Exposure (millions of Pesos, percent of GDP). - Deposit Insurance: Evolution of Estimated Exposure (millions of Pesos, percent of GDP). - FOGAPE: Total Stock of Guarantees (millions of Pesos) and Evolution of the Loss Ratio (percent). ### Natural resources, mining revenue and fiscal implications - Copper and mining revenues: - Mining revenues (predominantly copper) represented on average 13 percent of overall central government revenue over 2000-2019, with peaks of more than 20 percent over 2005-2008 and 2010. - Mining revenues represented 6.1 percent of total central government revenue in 2019. - Price sensitivity and fiscal impact example (IFP analysis): - A recent IFP report (1st quarter 2021) noted that an assumed average copper price of US$3.99 per pound in 2021 versus US $3.35 in the January 2021 macroeconomic scenario would: - Boost growth in 2021 from 5 percent to 6 percent. - Generate extra revenue for the central government of almost US $4 billion (i.e., around 1.5 percent of GDP). - Note: every one cent increase in the copper price increases taxes and royalties by $US 60 million. - Disclosure: - IFPs prepared by DIPRES present price of copper and volume of copper production by private companies and Codelco for the ongoing and budget year; assumptions underpin MTFF projections and CAB calculation. - Cochilco publishes an Annual Yearbook of Copper and other Mining Statistics with data on production, exports, and sector contribution. *Source: Contingent Liability Report 2020 and related sections as presented in the chapter content.* ### 138. However, Chile does not officially publish annual estimates of the volume and value of ### 1chlea2021005 - 138. ### Mineral reserves, valuation, and reporting - Chile does not officially publish annual estimates of the volume and value of mineral reserves. - Subsoil assets belong to the State according to the Chilean Constitution, but their value is not retraced in the central government’s balance sheet, nor in any document produced by DIPRES. - Reference estimates: - US Geological Survey mentions total reserves of 200 million metric tons. - Codelco publishes annual estimates of their own reserves: 50.1 million metric tons in 2019, broken down almost equally between proven and probable reserves. - Implications and recommendations: - Publishing official information on the value of copper reserves would help establish a balance sheet providing a true and fair view of the net situation of the Chilean State. - On the basis of the methodology in the IMF October 2018 Fiscal Monitor, the IMF Public Sector Balance Sheet database highlights that for a sample of 41 countries, natural resource assets are equal to 39 percent of GDP. - IMF staff estimates the current value of copper reserves in Chile at 24.9 percent of GDP (see section 1.1.2). - IPSAS is consulting on the treatment of natural resources in the public sector, which will add pressure for Chile to improve reporting. - The argument that recognizing copper reserves as a significant asset may increase spending pressures is noted; the text recommends addressing this risk through transparency and by recognizing the cyclical impact of copper on public finances, consistent with the objectives of the current fiscal rule. ### Copper revenue projections and scenario analysis - Chile does not publish estimates of the volume and value of copper reserves under different price and extraction scenarios. - DIPRES long-term projections (2020-2060, January 2021) produced three scenarios (optimistic, central and pessimistic) differentiating in terms of copper price, production level and operating margins. - Projected public revenue from mining at the end of the projection period (2051-2060) varies by scenario: - Pessimistic scenario: 0.1 percent of GDP. - Optimistic scenario: 1.6 percent of GDP. - These projections can be used to assign a monetary value to expected copper revenue over coming decades. ### Extractives transparency - Chile does not belong to the Extractive Industries Transparency Initiative (EITI). - Authorities have previously considered membership but decided not to join; they estimate the national framework provides sufficient transparency and governance safeguards. - Codelco is an EITI supporter through membership in the International Council on Mining and Metals. ### Environmental risks and natural disasters - Chile is highly vulnerable to natural disasters; climate change is expected to impact frequency, intensity, exposure, and magnitude of hazards. - World Risk Index (2020) ranks Chile as the 30th most at risk out of 188 countries. - Frequency and impacts: - Flooding and wildfire events occur with the highest frequency; earthquakes are the third most frequent event but represent a significant percentage of mortality and economic damage. - The 2010 earthquake and associated tsunami are estimated to have had an economic impact of 18 percent of GDP and a fiscal cost of 12–15 percent of GDP. - Chile experienced extensive wildfires in 2017 and drought between 2008-2015 affecting food and agricultural production. - Fiscal implications and disaster risk management: - The 2018 IFP disclosed historical fiscal impact of natural disasters since 2010, showing an average fiscal cost of 167,922 million pesos per annum (abstracting from major catastrophes like the 2010 earthquake). - The Debt Office prepared comprehensive analyses to identify and quantify natural disaster risks and expected loss, informing insurance and mitigation actions (e.g., issuance of a CAT Bond for earthquake risk for 2018-2021). - Government requires natural disaster insurance for concession-awarded infrastructure investments. - Recommendation: - DIPRES should systematically publish a quantitative assessment of the fiscal risks of natural disasters, identifying, discussing, quantifying and publishing possible fiscal implications of environmental risks (including pandemic-like global risks) and actions to mitigate them. - Historical information published in 2018 could be used to inform this analysis. ### Subnational governments (SNG) - Chile is highly centralized relative to OECD peers. - Size and composition: - In 2014, SNG sector expenditure was around 3.0 per cent of GDP, compared with an OECD average of 16.6 percent. - In 2020, the SNG sector reflected revenue of 4.2 percent of GDP and expenditure of 4.0 per cent of GDP. - The SNG sector comprises 345 municipal and 16 regional entities. - Regional entities: - Regional entities that manage health and education services receive 100 percent of their income from the central government and thus do not have a distinct financial existence from the central government. - Municipalities: - Municipal revenues in 2020 were 2.1 percent of GDP and expenditure was 1.9 percent of GDP, leading to an overall surplus of 0.2 percent of GDP. - Chile is the only OECD country where subnational borrowing is prohibited except when explicitly authorized by the MoF. - Gross liabilities of municipalities at end December 2020 totaled 0.03 percent of GDP and have been constant at this level since 2017. - Main component of municipality liabilities is leaseback operations (85 percent at end 2020), governed by the strengthened 2018 leaseback policy. - Other liabilities include accounts payable and, in exceptional cases, loans from the central government (repayments reflected by lower distributions from the Common Fund). - An accumulation of unauthorized liabilities could occur due to temporary delays in pension contributions or arrears to suppliers; month-to-month expenditure movements are monitored. - Reporting and monitoring: - Municipal financial condition and performance is published quarterly by multiple agencies. - Municipalities submit budget execution data monthly; compliance rates average 96.8 percent over a 12-month period. - SUBDERE operates SINIM (Sistema Nacional de Información Municipal) to collect, process and disseminate municipal financial management and service provision information and publishes an annual municipal performance report. ### Public corporations and fiscal risks - Public corporations are a potential source of fiscal risks given their economic weight and government links. - As of December 2020: - Liabilities of public corporations presented in OECD statistics communicated by DIPRES amounted to about 42.1 percent of GDP. - State guarantees for the debt of public corporations represent 1 percent of GDP. - Portfolio and oversight: - DIPRES oversees a portfolio of 29 public corporations; 4 additional public corporations are in winding-up processes. - Mining (notably CODELCO) is the main economic contributor; CODELCO represents 57 percent of the total revenues of public corporations. - The SEP (Sistema de Empresas Públicas) has been created to enhance strategic oversight in specific sectors. - Transfers and fiscal interactions: - DIPRES publishes annual transfers between the government and public corporations at the corporation level, detailed by type of transfer. - Transfers from the government to public corporations represent close to 2 percent of central government expenditure. - Transfers from public corporations to the government represent closer to 3 percent of central government expenditure. - Information on potential on-lending operations involving public corporations is included in the quarterly report on debt statistics. - Governance and quasi-fiscal activities: - There is currently no ownership policy for public corporations; discussions are ongoing to develop a general policy covering shareholder objectives, financial expectations, dividend policy, reporting, social responsibilities, remuneration, and governance frameworks. - Quasi-fiscal activities by public corporations are not systematically identified or evaluated, though they are occasionally mentioned (e.g., social projects in transportation, support to specific populations). *Source: IMF staff summary of chapter content.* ### 157. The financial accounts of individual public corporations are monitored and publicly ### The financial accounts of individual public corporations are monitored and publicly reported, but there is no detailed analysis of the overall performance of the state’s public corporations ### Monitoring and reporting of public corporations - Individual public corporations’ financial accounts are monitored and publicly reported through various publications: financial reports from the public corporations, financial accounts consolidated by the CGR, financial reports from the SEP and from the DIPRES. - A report disclosing information transmitted to the OECD between 2014 and 2020 presents some key financial aggregates (e.g., revenues, expenses, net profits before tax, part of the assets and liabilities) but does not provide a comprehensive report on the overall financial performance of the public corporation sector. - There is no annual performance report covering the overall financial performance of the public corporation sector with detailed and comprehensive key financial aggregates, profitability indicators, and risk metrics. - Suggested content for such a report: indicators on companies profitability (e.g., profit margin, return on equity, return on assets), risks (liquidity risks, leverage, solvency), and consolidated information on transfers with the government. - Several countries have developed such comprehensive reports: Côte d’Ivoire, France, Lithuania, Morocco, Norway, South Africa, Sweden. ### Empirical visuals (as presented) - Chart a. Evolution of Revenues (billions of Pesos) — series and years shown: CODELCO, Consolidated (others, non financial), Consolidated (financial); years 2014, 2015, 2016, 2017, 2018, 2019, 2020; vertical axis values shown at increments including 0,00 5 000,00 10 000,00 15 000,00 20 000,00 25 000,00. - Chart b. Evolution of Results (before taxes, billions of Pesos) — series and years shown: CODELCO, Consolidated (others, non financial), Consolidated (financial), Total; years 2014, 2015, 2016, 2017, 2018, 2019, 2020; vertical axis values shown at increments including -5 000,00 -4 000,00 -3 000,00 -2 000,00 -1 000,00 0,00 1 000,00 2 000,00 3 000,00. - Chart c. Evolution of Liabilities (billions of Pesos) — series and years shown: CODELCO, Consolidated (others, non financial), Consolidated (financial); years 2014–2020; vertical axis values shown at increments including 0,00 10 000,00 20 000,00 30 000,00 40 000,00 50 000,00 60 000,00 70 000,00 80 000,00 90 000,00. - Chart d. Number of Public Corporations with Negative Net Results Before Taxes — years 2014–2020; vertical axis values shown at increments including 0 2 4 6 8 10 12 14. - Figure III.8. Transfers Between the Government and the Public Corporations: - a. Transfers from the Government (billions of Pesos) — series: Capital injection, Investments, Capitalized support, Others; years 2014–2020; vertical axis values shown at increments including 0 200 400 600 800 1000 1200 1400. - b. Transfers to the Government (billions of Pesos) — series: Taxes, Dividends (and equivalent); years 2014–2020; vertical axis values shown at increments including 0 200 400 600 800 1 000 1 200 1 400 1 600 1 800. - Source for charts: DIPRES. ### Key conclusions and priorities (section 3.4) - The evaluation highlights priorities to improve transparency of fiscal risk disclosure and management, organized as Recommendations 3.1–3.4. - Recommendation 3.1: Improve transparency and reporting of macroeconomic risks to the fiscal position: - Systematically publish within the IFP accompanying the budget, an analysis of the impact of macroeconomic risks on the fiscal position (including sensitivity analyses of the macroeconomic and fiscal forecasts to the main macroeconomic variables, as well as alternative macroeconomic scenarios) (3.1.1). - Recommendation 3.2: Expand disclosure of fiscal risks to cover a broader and more comprehensive range of risks: - Develop and publish a comprehensive fiscal risk statement with the budget documentation (for 2023 budget) and gradually expand to include and analyze more risks (building on and expanding the information and analysis presented in the IPC) (3.2.1). - Environmental risks — Routinely and systematically publish analysis that identifies the major sources of natural disaster risk, quantifying the potential fiscal impact and articulating a risk management strategy (3.2.2). - Natural Resource risks — Publish information on natural resources in a comprehensive fiscal risk statement – focusing first on the volume of reserves and progressively deepening the analysis to cover economic value under different scenarios (3.2.3). - Subnational governments — Integrate the results of the existing and comprehensive monitoring of the financial performance of municipalities into the broader fiscal risk discussion, publishing an analysis and assessment of the fiscal risks (3.2.4). - Financial obligations associated with PPPs — Disclose the government’s exposure of total obligations under PPP contracts by publishing expected annual receipts and payments over the life of the PPP contracts and the total rights and obligations of these arrangements, adding to the IPC analysis (3.2.5). - Financial performance and risks associated with Public Sector Corporations — perform and publish analyses of the profitability of SOE and a review of various risks (e.g., liquidity, solvency) drawing main messages from the enhanced monitoring of public corporations (3.2.6). - Recommendation 3.3: Strengthen disclosure and risk management of assets & liabilities: - Increase disclosure of risks associated with debt dynamics — publish quantitative risk analysis on debt on a regular basis and a medium-term debt strategy. In the longer-term, Chile could publish a balance sheet strategy considering all assets and liabilities and associated risks. A summary, or main messages from this analysis should also be included in a more comprehensive fiscal risk statement (3.3.1). - Improve management of cash account balances — Improve the Treasury Single Account (TSA), almost all central government accounts should be maintained in the TSA, with daily transfers to the main account and fungibility on the use of the accounts (3.3.2). - Increase disclosure and monitoring of the performance of Public Sector Corporations — Develop and publish an annual report on the financial performance of SOEs, including analyses of the profitability and various risks (e.g., liquidity, solvency). A summary from this analysis should also be included in a more comprehensive fiscal risk statement. In addition, the authorities should design and publish an ownership policy for public corporations (3.3.3). - Recommendation 3.4: Strengthen long-term fiscal sustainability analysis by regularly publishing debt sustainability analysis and projections of the main fiscal aggregates: - Improve long-term fiscal sustainability analysis — Include within the budget documentation long-term projections (10 years as a first step, which could be increased to a thirty to fifty years horizon) of the main fiscal aggregates (e.g., fiscal balance, debt). This could support the debt sustainability analysis and the medium-term debt strategy proposed in recommendation 3.3 (3.4.1). - Generalize regular long-term analyses of other Pension schemes — Consistently publish long-term analyses for all the pension schemes creating fiscal risks. Beyond the FRP and the report on contingent liabilities, this should also include DIPRECA and CAPREDENA (3.4.2). - Develop scenarios analyses for long-term sustainability analyses — Long-term fiscal sustainability analyses for debt and other main fiscal aggregates, for the pension schemes and for the health system should progressively include multiple scenarios analyses (macroeconomic assumptions, hypotheses on natural resources, demographic assumptions, etc.) (3.4.3). ### Assessment summary (Table III.4 highlights) - Risk Disclosure and Analysis: - Macroeconomic Risks: Not met. Importance: High. Rec: 3.1. - Specific Fiscal Risks: Not met. Importance: Medium. Rec: 3.2. - Long-Term Fiscal Sustainability Analysis: Not met. Importance: High. Rec: 3.4. - Risk Management: - Budget Contingencies: Advanced. - Asset and Liability Management: Basic. Importance: Medium. Rec: 3.3. - Guarantees: Advanced. - PPPs: Not met. Importance: Low. Rec: 3.2. - Financial Sector Exposure: Advanced. - Natural Resources: Not met. Importance: Low. Rec: 3.2. - Environmental Risks: Basic. Importance: Medium. Rec: 3.2. - Fiscal Coordination: - Subnational Governments: Advanced. Importance: Low. Rec: 3.2. - Public Corporations: Basic. Importance: Medium. Recs: 3.2 and 3.3. *Source: IMF staff assessment as presented in the chapter excerpt.* ### 2.2 Orderliness ### 2.2 Orderliness ### 2.2.1 Fiscal Legislation - Legal framework defines one of the following: - (i) the timetable for budget preparation and approval; - (ii) the key content requirements for the executive’s budget proposal; or - (iii) the legislature’s powers of amendment to the executive’s budget proposal. - Legal framework defines two of the following: - (i) the timetable for budget preparation and approval; - (ii) the key content requirements for the executive’s budget proposal; or - (iii) the legislature’s powers to amend the executive’s budget proposal. - Legal framework defines all of: - (i) the timetable for budget preparation and approval; - (ii) the key content requirements for the executive’s budget proposal; and - (iii) the legislature’s powers to amend the executive’s budget proposal. ### 2.2.2 Timeliness of Budget Documents - Basic: The budget is submitted to the legislature and made available to the public at least one month before the start of the financial year and is approved and published up to one month after the beginning of the financial year. - Good: The budget is submitted to the legislature and made available to the public at least two months before the start of the financial year and is approved and published by the start of the financial year. - Advanced: The budget is submitted to the legislature and made available to the public at least three months before the start of the financial year and is approved and published at least one month before the start of the financial year. ### 2.3 Policy Orientation ### 2.3.1 Fiscal Policy Objectives - Basic: The government states and regularly reports on a numerical objective for the main fiscal aggregates which is either precise or time-bound. - Good: The government states and regularly reports on a numerical objective for the main fiscal aggregates which is both precise and time-bound. - Advanced: The government states and regularly reports on a numerical objective for the main fiscal aggregates which is both precise and time-bound and has been in place for 3 or more years. ### 2.3.2 Performance Information - Basic: Budget documentation includes information on the inputs acquired under each major government policy area. - Good: Budget documentation reports targets for, and performance against, the outputs delivered under each major government policy area. - Advanced: Budget documentation reports targets for, and performance against, the outcomes to be achieved under each major government policy area. ### 2.3.3 Public Participation - Basic: Government publishes an accessible description of recent fiscal performance and economic prospects, as well as a summary of the implications of the budget for a typical citizen. - Good: Government publishes an accessible description of recent fiscal performance and economic prospects and a detailed account of the implications of the budget for a typical citizen, and provides citizens with a formal voice in budget deliberations. - Advanced: Government provides an accessible description of recent fiscal performance and economic prospects, a detailed account of the implications of the budget for different demographic groups, and provides citizens with a formal voice in budget deliberations. ### 2.4 Credibility ### 2.4.1 Independent Evaluation - Basic: Budget documentation includes comparisons between the government’s economic and fiscal projections and those of independent forecasters. - Good: An independent entity evaluates the credibility of the government’s economic and fiscal forecasts. - Advanced: An independent entity evaluates the credibility of the government’s economic and fiscal forecasts, and its performance against its fiscal objectives. ### 2.4.2 Supplementary Budget - Basic: A supplementary budget regularizes expenditure exceeding the approved budget. - Good: A supplementary budget is required prior to material changes to total budgeted expenditure. - Advanced: A supplementary budget is required prior to material changes to total budgeted expenditure or substantially altering its composition. ### 2.4.3 Forecast Reconciliation - Basic: Differences between the successive vintages of the government’s revenue, expenditure, and financing forecasts are shown at the aggregate level, with a qualitative discussion of the impact of new policies on the forecasts. - Good: Differences between successive vintages of the government’s revenue, expenditure, and financing forecasts are broken down into the overall effect of new policies and macroeconomic determinants. - Advanced: Differences between successive vintages of the government’s revenue, expenditure, and financing forecasts are broken down into the effects of individual policy changes, macroeconomic determinants, and other factors, such as technical or accounting adjustments. ### 3 Fiscal Risk Analysis and Management ### 3.1 Risk Disclosure and Analysis #### 3.1.1 Macroeconomic Risks - Basic: Budget documentation includes discussion of the sensitivity of fiscal forecasts to major macroeconomic assumptions. - Good: Budget documentation includes sensitivity analysis and alternative macroeconomic and fiscal forecast scenarios. - Advanced: Budget documentation includes sensitivity analysis, alternative scenarios, and probabilistic forecasts of fiscal outcomes. #### 3.1.2 Specific Fiscal Risks - Basic: The main specific risks to the fiscal forecast are disclosed in a summary report and discussed in qualitative terms. - Good: The main specific risks to the fiscal forecast are disclosed in a summary report, along with estimates of their magnitude. - Advanced: The main specific risks to the fiscal forecast are disclosed in a summary report, along with estimates of their magnitude and, where practicable, their likelihood. #### 3.1.3 Long-Term Fiscal Sustainability Analysis - Basic: The government regularly publishes projections of the sustainability of the main fiscal aggregates and any health and social security funds over at least the next 10 years. - Good: The government regularly publishes multiple scenarios for the sustainability of the main fiscal aggregates and any health and social security funds over at least the next 30 years using a range of macroeconomic assumptions. - Advanced: The government regularly publishes multiple scenarios for the sustainability of the main fiscal aggregates and any health and social security funds over at least the next 30 years using a range of macroeconomic, demographic, natural resource, or other assumptions. ### 3.2 Risk Management #### 3.2.1 Budgetary Contingencies - Basic: The budget includes an allocation for contingencies. - Good: The budget includes an allocation for contingencies with transparent access criteria. - Advanced: The budget includes an allocation for contingencies with transparent access criteria and regular in-year reporting on its utilization. #### 3.2.2 Asset and Liability Management - Basic: All borrowing is authorized by law and the risks surrounding the government’s debt holdings are analyzed and disclosed. - Good: All borrowing is authorized by law and the risks surrounding the government’s assets and liabilities are analyzed and disclosed. - Advanced: All liabilities and significant asset acquisitions or disposals are authorized by law, and the risks surrounding the balance sheet are disclosed and managed according to a published strategy. #### 3.2.3 Guarantees - Basic: All government guarantees, their beneficiaries, and the gross exposure created by them, are published at least annually. - Good: All government guarantees, their beneficiaries, and the gross exposure created by them are published at least annually. The maximum value of new guarantees or their stock is authorized by law. - Advanced: All government guarantees, their beneficiaries, the gross exposure created by them, and the probability of their being called are published at least annually. The maximum value of new guarantees or their stock is authorized by law. #### 3.2.4 Public Private Partnerships - Basic: The government at least annually publishes its total rights, obligations, and other exposures under public-private partnership contracts. - Good: The government at least annually publishes its total rights, obligations, and other exposures under public-private partnership contracts and the expected annual receipts and payments over the life of the contracts. - Advanced: The government at least annually publishes its total rights, obligations, and other exposures under public-private partnership contracts and the expected annual receipts and payments over the life of the contracts. A legal limit is also placed on accumulated obligations. #### 3.2.5 Financial Sector Exposure - Basic: The authorities quantify and disclose their explicit support to the financial sector at least annually. - Good: The authorities quantify and disclose their explicit support to the financial sector at least annually, and regularly undertake an assessment of financial sector stability. - Advanced: The authorities quantify and disclose their explicit support to the financial sector at least annually, and regularly undertake an assessment of financial sector stability, based on a plausible range of macroeconomic and financial market scenarios. #### 3.2.6 Natural Resource Stocks and Flows - Basic: The government publishes annual estimates of the volume of major natural resource assets, as well as the volume and value of the previous year’s sales and fiscal revenue, in line with international standards. - Good: The government publishes annual estimates of the volume and value of major natural resource assets, as well as the volume and value of the previous year’s sales and fiscal revenue, in line with international standards. - Advanced: The government publishes annual estimates of the volume and value of major natural resource assets under different price scenarios, as well as the volume and value of the previous year’s sales and fiscal revenue, in line with international standards. #### 3.2.7 Environmental Risks - Basic: The government identifies and discusses the main fiscal risks from natural disasters in qualitative terms. - Good: The government identifies and discusses the main fiscal risks from natural disasters, quantifying them on the basis of historical experiences. - Advanced: The government identifies and discusses the main fiscal risks from natural disasters, quantifying them on the basis of historical experiences, and managing them according to a published strategy. ### 3.3 Fiscal Coordination #### 3.3.1 Subnational Governments - Basic: The financial condition and performance of subnational governments is published annually. - Good: The financial condition and performance of subnational governments is published annually, and there is a limit on their liabilities or borrowing. - Advanced: The financial condition and performance of subnational governments is published quarterly, and there is a limit on their liabilities or borrowing. #### 3.3.2 Public Corporations - Basic: All transfers between the government and public corporations are disclosed on at least an annual basis. - Good: All transfers between the government and public corporations are disclosed, and based on a published ownership policy, a report on the overall financial performance of the public corporations’ sector is published on at least an annual basis. - Advanced: All direct and indirect support between the government and public corporations is disclosed, and based on a published ownership policy, a report on the overall financial performance of public corporations’ sector, including estimates of any quasi-fiscal activities undertaken, is published on at least an annual basis. ### Annex II. Action Plan (selected activities and timelines) - Timeline headings: 2021, 2022, 2023, 2024 with H2/H1 quarter markers shown in the source. - 1.1 Expand the institutional coverage of fiscal reports and consolidate the general government, the non-financial public sector and the public sector in accordance with international standards. - 1.1.1 DIPRES working with CGR should establish a working plan at the start of 2022 targeting the inclusion of all adjustments by the May 2024 IGFE or before as indicated in the recommendations. - 1.1.2 Introduce fiscal data on public universities into the statistical yearbook and gradually incorporate these institutions into the quarterly fiscal statistics report. Classify public universities under the extra-budgetary subsector in the statistics and consolidated into the CG and GG in the statistical tables. - Prepare consolidated financial statements of the GG sector by consolidating chapters 1, 2, and 4 of the IGFE, and present the new consolidated statements in an additional chapter of the IGFE. - Prepare consolidated financial statements of the entire public sector by consolidating chapters 3 (public corporations) and 5 (central bank) with the new general government chapter. Introduce the public sector statements as another additional chapter in the IGFE report. - 1.2 Improve the coverage of stocks and flows in fiscal reports, by including missing assets, liabilities and fiscal flows in accordance with international standards. - Record and disclose the pension liabilities related to the PAYG pension schemes of CAPREDENA and DIPRECA in the annual financial statements (IGFE). - Record and disclose the monetary value of copper reserves at present value. - Intoduce the recognition pension bonds as a liability in the balance sheet. - Complete the recognition of PPP liabilities in the balance sheet in accordance with IPSAS 32 to reflect the total rights and obligations of these arrangements. - Complete the recognition of the total liabilities at the subnational level. - Account for the debt securities (BTPs, BTUs and Global) at market value and accrued interest on those securities accordingly and record the corresponding other economic flows in the balance sheet and fiscal statistics. - Improve the classification of CG liabilities to better report the categories of accounts payable and other liabilities. - Harmonize the concept of “net debt” between MoF debt unit and DIPRES to ensure consistent reporting of key fiscal aggregates. - Revise statistical treatments and classifications including disaggregation of the category “subsidies and grants” in the CG and GG statistics into two separate line items. Also disaggregate of the category “compensation of employees and use of goods and services” in the public corporations statistics into two separate line items. - Calculate the “net lending / net borrowing” in the public corporations statistics by deducting the net acquisition of non-financial assets from the net operating balance (not gross) to take into account the depreciation. - Record capital transfers from the central government to private sector entities, public corporations, and local government as spending (transfers to private sector, subsidies to public corporations or grants to municipalities) and not as acquisition of non financial assets. - Introduce the statement of other economic flows. - 1.3 Improve fiscal data quality by ensuring internal consistency in fiscal reports, introducing functional codes in budget classifiers- CoA, and providing detailed explanations on revisions to fiscal statistics. - Strengthen internal consistency in fiscal reports by: - Introducing in the 1st quarter IFP and in the debt reports the reconciliation between the financing and the change in the debt stock. - Comparing the below-the-line financing figures for the budgetary central government drawn directly from the budget execution system (SIAP-SP) with the information on changes to net credit to government assessed by BCCh’s monetary survey. - Establishing procedures and database within the debt management back-office to collect information on the stock of debt held by counterparties (such as foreign governments banks pension funds and investors) to enable reconciling debt issued and debt holdings. - Continue to use and publish the functional classification in the upcoming quarterly IFPs including as part of the budget (proposal and approved) and in-year fiscal reports. Publish a bridge table or methodology that allows replicating the functional classification to a partial section of the budget. - Complement the CoA incorporated in the Decree 854 with alternative classifications of spending to include functional and programmatic perspectives. - 1.3.3 Introduce a dedicated section in the annual and quarterly fiscal reports to clearly explain the differences between previous and revised statistics, with a quantitative comparison between the old and new figures. - 1.4 Strengthen external scrutiny to annual financial statements to ensure they represent a true and fair view of government’s financial position. - 1.4.1 Perform financial audits on individual entities based on the recently developed manuals by CGR and publish an audit opinion based on the findings. - 1.4.2 Produce an audit report on the annual financial statements and issue a qualified opinion assessing the reliability of the statements. - 1.4.3 Transfer the preparation of financial statements to the MoF or establish protocols for clear separation on the exchange of information between the CGR Accounting and the Audit Divisions. - Establish a Working Group on statistics consistency with DIPRES, INE, BCCh. - Continue to strengthen the independence of fiscal statistics by transferring responsibility to a professionally independent agency, increasing the separation of duties between the users and compilers of fiscal statistics. Interim measures to strengthen the autonomy of the Fiscal Statistics Department within DIPRES should also be considered. - 1.4.5 Introduce bridge tables in IGFE to reconcile main aggregates (revenue, expenditure, financing) with corresponding budget outturns and fiscal statistics figures. - 2.1 Strengthen the medium-term orientation of the budget through more detailed and credible forecasts both on the revenue and on the expenditure side, underpinned by a fully-fledged MTBF. - 2.1.1 Gradually advance towards complementing the fiscal rule and the corresponding compatible expenditure levels with aggregate sectoral level expenditure ceilings in the context of a MTBF. - 2.1.2 Publish the total expected cost of investment projects on a regular basis alongside the annual budget documentation, including the total expected cost of multi-annual investment projects, and any changes to total estimated project costs over time. - 2.1.3 Complete the publication of macroeconomic forecasts by expanding the details of the underlying assumptions (e.g., interest rates, external sector and labor market variables). - 2.1.4 Standardize the reconciliation tables for the short and medium-term forecasts and target the reconciliation exercise on medium-term forecasts in the IFP for the 1st and 3rd quarters, and on in-year projections only in the IFP for the 2nd and 4th quarters. *Source: 1chlea2021005 - 2.2 Orderliness* ### 2. Fiscal Forecasting and Budgeting ### 2. Fiscal Forecasting and Budgeting ### Reinforce the fiscal rule and clarify CFA role - Establish a clearly defined escape clause to temporarily suspend fiscal policy objectives in response to exceptional shocks (severe economic downturns, large natural disasters and states of emergency). - Activation of the escape clause should receive a positive opinion from CFA. - The escape clause should predefine the timeframe and procedures for returning to compliance with the rule, commensurate with the size of the shock. - Clarify and formalize the mandate of the CFA to provide a role in evaluating the credibility of the economic and fiscal forecasts. ### Increase public participation and strengthen performance focus - Leverage the existing legal framework for public participation throughout the budget cycle and publish timely and specific feedback on how public inputs have been incorporated or not in official policy or advice. - Improve dissemination of the Budget Priorities Booklet and define specific objectives for the Open Budget Portal. - Adjust the program classification to capture policy programs and initiatives, and include them as part of the COA. - Publish clear strategic objectives related to development and wellbeing and align them to programs. - Establish formal linkages and feedback mechanisms between public participation and performance budgeting. ### Budget transparency enhancements - Include in the budget documentation package the estimated revenue and expenditure of the main extra-budgetary entities, notably Universities. - Formalize in more detail the contents that should be included in the executive budget proposal. - Continue to publish the compendium of last year’s draft laws as part of budget documentation, and further clarify if in-year budget modifications will impact the overall budget ceiling or will be done through reallocations. ### Fiscal risk analysis and management — disclosure and practices - Systematically publish within the IFP accompanying the budget an analysis of the impact of macroeconomic risks on the fiscal position, including sensitivity analyses of the macroeconomic and fiscal forecasts to the main macroeconomic variables, as well as alternative macroeconomic scenarios. - Develop and publish a comprehensive fiscal risk statement with the budget documentation (for 2023 budget) and gradually expand to include and analyze more risks (building on and expanding the information and analysis presented in the IPC). - Routinely and systematically publish analyses that identify the major sources of natural disaster risk, quantifying the potential fiscal impact. - Articulate a strategy for mitigating and managing the potential fiscal impact of environmental risks. - Publish information on natural resources in the comprehensive fiscal risk statement focusing first on the volume of reserves and progressively deepening the analysis to cover economic value under different scenarios. - Integrate the results of the monitoring of the financial performance of municipalities into the broader fiscal risk discussion, publishing an analysis and assessment of the fiscal risks. - Publish expected annual receipts and payments over the life of PPP contracts. - Publish the total rights and obligations of PPP arrangements. - Integrate into the comprehensive fiscal risk statement the summary results from the report on the financial performance of SOEs, with a specific focus on related fiscal risks. ### Asset and liability risk disclosure and Treasury management - Increase disclosure of risks associated with debt dynamics: publish quantitative risk analysis on debt on a regular basis and a medium-term debt strategy. - In the longer-term Chile could publish a balance sheet strategy taking into account all assets and liabilities and associated risks; a summary from this analysis should also be included in a more comprehensive fiscal risk statement. - Improve the Treasury Single Account (TSA) management, with almost all central government accounts maintained in the TSA and with daily transfers to the main account and fungibility on the use of the accounts. - Develop and publish a report on the financial performance of SOEs, including analyses of the profitability and various risks (e.g., liquidity, solvency). A summary, or main messages from this analysis should also be included in a more comprehensive fiscal risk statement. ### Long-term fiscal sustainability analysis - Include within the budget documentation long-term projections (10 years as a first step, which could be lengthen to a thirty to fifty years horizon in the longer term) of the main fiscal aggregates (e.g., fiscal balance, debt). - Consistently publish regular long-term analyses and actuarial studies for all the pension schemes creating fiscal risks. Beyond the FRP and the report on contingent liabilities related to some pension schemes, this should also include DIPRECA and CAPREDENA. - Progressively and systematically include multiple scenarios analyses (incorporating different macroeconomic assumptions, hypotheses on natural resources, demographic assumptions, etc.) to cater for the high uncertainty of long-term projections. ### Annex III — Improving Medium-Term Budgeting in Chile (key reforms) - Put in place expenditure ceilings disaggregated at the level of ministries, programs or policy areas. - Perimeter of such ceilings should ensure proper accountability (one single responsible person), coherence with the performance strategy and allow internal flexibility. - The nature of ceilings (indicative or binding) could evolve over time. - Ensure expenditure ceilings are rolled over from one year to the next; ceilings or forward estimates elaborated in a given MTBF must serve as starting point for the design of the next year’s budget and MTBF and differences must be systematically accounted for at an adequate level. - Transition to a single process for preparing MTBF and annual budget, including fully integrated documentation. - Currently budget discussions with line ministries focus only on the next year’s budget and forward estimates (baselines) remain an exercise largely internal to DIPRES. - Budget documentation for individual ministries focuses only on the budget year and does not present elements relative to the out-years of the financial program. - Allow for adequate planning margins: - Planning margin should be set at an adequate level — ideally increasing over the time horizon, as uncertainties are bigger in the 3rd out-year than in the 1st out-year. - Chilean MTFF incorporates some reserves (fiscal space), but their level is not calibrated to ensure the strength of the MTFF, especially when reserves in the 3rd out-year are very low or even negative, as was the case for the fiscal years 2019 to 2021. - Authorize limited carry-forward of expenditures: - A well-functioning MTBF may give managers some freedom to reallocate spending over the course of the MTBF, subject to limitations to ensure compatibility with the overall fiscal path. - Options include limiting carry-forwards to a small percentage of initial appropriations and/or actively managing carry-forwards through bilateral discussion (as already the case for investment projects). *Source: 2. Fiscal Forecasting and Budgeting* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1chlea2021005.pdf_