## _wp1117

## Source details

**Canonical URL:** [_wp1117](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp1117.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp1117.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp1117.pdf.json)

---

### Introduction: role and evaluation of Chile’s structural balance rule
- Characterized as the "cornerstone of Chile’s impressive fiscal performance."
- Function: insulate public spending from short-term copper price fluctuations and the business cycle, thereby preserving fiscal discipline.
- High-level commission established in May 2010 to recommend reforms to improve effectiveness.
- Primary assessment objective: evaluate scope for improving design and implementation of the structural balance rule against best practices and OECD country experience with fiscal rules.
- Key options suggested to strengthen the rule:
  - Simplifying the calculation of the structural balance.
  - Enhancing the rule’s flexibility.
  - Enhancing the rule’s transparency.
  - Enhancing the rule’s accountability.
  - Complementing the structural balance rule with a medium-term fiscal framework.

### Background: fiscal vulnerabilities, copper revenues, and contingent liabilities
- Copper revenue evolution:
  - 2000–04: copper revenues accounted for only 5 percent of total revenues (around 1 percent of GDP).
  - Last five years (prior to publication): copper revenues accounted for 24 percent of total government revenues (or almost 6 percent of GDP).
- If fully spent in real time, copper revenues would have pressured absorptive capacity and triggered pressures for a sizable real appreciation.
- Structural balance rule introduced in 2001; defined as central government balance at potential output and the long-term copper price.
- Independent expert committees (since 2002) provide technical estimates of potential output and the long-term copper price.
- Fiscal position by end-2008:
  - central government financial assets = 20 percent of GDP;
  - financial liabilities = 6 percent of GDP;
  - net financial position = 26 percent of GDP.
- Main contingent liabilities and estimated costs:
  - Examples: recognition bonds from pension privatization; minimum pension guarantee (introduced 2008); government guarantees of state-owned enterprises borrowing; PPP guarantees; banking deposit guarantees; judicial lawsuits; loan/mortgage guarantees for students and small business.
  - Estimated costs of contingent liabilities, when adjusted by expected associated risks, amounted to 13 percent of GDP in 2009.
  - Estimation could be higher if liabilities associated to the negative capital of the central bank and commitments under fuel price stabilization funds are included; costs would increase if estimations are at maximum risk level and if minimum pension guarantee liabilities are computed using net present value of expected future flows.

### Assessment framework and legal/institutional features
- Analytical framework: assess (i) de jure design; (ii) de facto operational implementation; (iii) comparison with OECD practices.
- Core components of well-designed fiscal rules: clear numerical target(s); sufficient flexibility (exceptional circumstances clauses, ex-post mechanisms, rolling adjustments); clear institutional arrangements (statutory basis, monitoring, transparency, accountability, enforcement).
- Fiscal Responsibility Law (FRL):
  - Law 20128 of Fiscal Responsibility, approved in September 2006.
  - FRL mandates President must adopt within the 90 days of taking office “a decree defining the fiscal fundamentals of his/her administration and the expected impact on the structural balance.”
  - Constitutional context: President holds primary fiscal initiative power; Congress may only approve/reject; Congress cannot increase or lower revenue estimates in draft budget; may only reduce draft expenditures under constraints; if Congress does not approve annual budget law within 60 days after submission, draft budget automatically comes into force.
- Coverage and definition under FRL Article 16:
  - Structural balance = “the balance that the central government would have achieved if the economy was operating at potential, i.e. excluding the effect that the cyclical fluctuations in economic activity, the copper price, and other factors of similar nature, may have on the government revenues and expenditures.”
  - Excludes central bank and public enterprises but includes central government interest payment and interest receipts.
- FRL gaps and practical issues:
  - FRL directs DIPRES to compute the structural balance by Supreme Decree methodology; that Supreme Decree has not been enacted.
  - FRL does not define ultimate objectives of the rule; focuses on use of fiscal surpluses.
  - FRL authorizes Ministry of Finance to allocate 0.5 percent of GDP per year during 2006–11 for recapitalization of central bank provided central government runs an overall surplus.
  - FRL creates two sovereign funds:
    - Pension Reserve Fund (PRF): minimum annual contribution of 0.2 percent of GDP (can be increased to 0.5 percent of GDP); aimed at covering future (after 2016) minimum pensions and to be funded even in case of overall deficit.
    - Economic and Social Stabilization Fund (ESSF): replaces Copper Stabilization Fund; designed to compensate for drops in revenue and to finance future deficits as alternative to borrowing; ESSF resources come from central government overall surpluses (after PRF contributions and transfers for recapitalization).
  - FRL lacks explicit provision for major shocks and lacks mechanisms to handle temporary ex-post small deviations.
  - FRL requires DIPRES to compute structural balance annually and allows independent experts for non-binding judgments on long-term copper price and inputs for potential output; does not require monitoring or independent verification of compliance.

### Practical computation, sensitivity, and empirical implications
- Initial methodology (Marcel et al. 2001):
  - Expected structural revenues E(SR_t); structural balance SB_t (e.g., 1 percent of GDP originally); expenditures E_t computed as E_t = E(SR_t) – SB_t.
  - E(SR_t) = E(R_t) – E(A_t) = E(R_t) * (Y_p / Y)^ε where Y_p potential output; ε elasticity of revenues to output gap; adjustments for long-term copper price and output gap.
- Sensitivity:
  - Expected fiscal outcomes are very sensitive to estimates of structural revenues; overestimation leads to higher expenditures and more expansionary stance.
- Post-2005 complications:
  - non-linear impact of soaring copper prices, new mining taxes, production of other minerals (molybdenum), and increased returns of sovereign funds (reached almost 4 percent of total revenues in 2008) complicated computation.
  - Budget Directorate added adjustments making methodology difficult to replicate and opening room for discretionary adjustments.
  - Authorities publish ample detailed information on methodology modifications and ex-ante/ex-post calculations, enabling calculation of other fiscal indicators (e.g., primary balance).
- Procyclicality and historical adjustments:
  - Structural balance has sometimes imparted unintended procyclicality to government expenditures.
  - Structural non-mining balance is a more informative indicator of fiscal impact on domestic demand.
  - During 2000–08 the government’s structural balance of 1 percent of GDP was equivalent to non-mining structural deficits around 0.8 and 1.8 percent of non-mining GDP.
  - During boom years (2007–08) non-mining structural deficit and real expenditure growth increased significantly even though output gap was positive; 2008 expenditure increase partly reflected discretionary reduction in structural surplus target from 1 percent of GDP to 0.5 percent of GDP, upward revision in long-term copper price, and increased return of sovereign funds (part of structural revenues until 2009).
  - Absence of well-defined provisions to handle ex-post deviations incentivized end-of-year adjustments to ensure ex-post compliance; this enhanced credibility but sometimes led to procyclical tightening or loosening.
- Historical target changes:
  - 2008: structural balance target reduced from 1 percent of GDP to 0.5 percent of GDP.
  - 2009: target reduced to zero percent of GDP.
  - 2010: rule de facto suspended after earthquake in February; during 2009–10 expenditures were determined by immediate needs and structural balance computed as residual.

### Comparison with OECD practices
- OECD coverage:
  - 27 out of 31 OECD members have rule-based fiscal frameworks; exceptions: Japan, Korea, Turkey, United States.
  - Most OECD fiscal rules are supported by legislation, medium-term frameworks, well-defined escape clauses, transparency requirements, and accountability mechanisms (e.g., non-partisan fiscal councils).
  - OECD rules often combine indicators: debt ceilings and deficit ceilings (overall, structural, primary, non-oil), or ceilings for overall balance and expenditure levels/growth.
  - Only two OECD countries with significant natural resource revenues have special mechanisms comparable to Chile: Mexico and Norway.
  - Some countries (New Zealand, Australia, United Kingdom) emphasize institutional arrangements over specific numerical targets.

### Options to strengthen Chile’s fiscal rule (Section IV recommendations)
- Main areas for improvement:
  - (i) simplifying computation of the structural balance;
  - (ii) avoiding unintended procyclicality;
  - (iii) adding a medium-term fiscal anchor;
  - (iv) incorporating explicit escape clauses;
  - (v) strengthening monitoring and transparency mechanisms;
  - (vi) enhancing enforcement and accountability procedures.
- Specific methodological proposals:
  - Adjust non-mining tax revenues to the output gap of non-mining GDP instead of total GDP to facilitate reasonable elasticities for components of non-mining taxes.
  - Define structural balance target in primary terms (exclude net interest payment and especially sovereign funds’ returns).
  - Simplify mining revenue adjustment to reduce discretion. Illustration for structural mining revenues SR_t^m:
    - SR_t^m = R_t^m * [Long-term Copper Price_t / Actual Copper Price_t]^γ
    - Where Long-term Copper Price_t < Actual Copper Price_t and γ is estimated elasticity of mining revenues to the price ratio.
    - Assuming γ = 1, the profile and level of structural mining revenues and expenditures would have been broadly in line with authorities’ methodology.
- Measures to reduce procyclicality:
  - Cap annual growth rate of government expenditures in real terms.
  - Routinely publish calculation of structural non-mining primary balance (as percent of non-mining GDP).
  - Add provisions to handle ex-post deviations to avoid last-minute end-of-year adjustments. Proposed practical treatment:
    - Treat expenditure level determined by structural balance rule, E_t, as an upper limit.
    - If ex-post deviation arises from larger ex-post structural revenues, save the windfall and keep ex-post expenditure at planned E_t.
    - If deviation arises from lower ex-post structural revenues (higher ex-post structural deficit), maintain ex-post expenditure at E_t and store deviations in a notional account, with obligation to adopt corrective actions within three years after account reaches a certain level.
- Escape clause design recommendations:
  - Limit clauses to a short list of exceptional circumstances (example items: earthquake, the recent global crisis, a major demand imbalance).
  - Precisely describe triggers with very limited discretion; use pre-determined, credible and transparent procedural mechanisms (e.g., debate in congress) for approval of temporary departure.
  - Mandate authorities to revise the government’s medium-term fiscal framework to allow fiscal accounts to return to the rule.

### Medium-term fiscal framework, long-term anchor, transparency, and accountability
- Long-term fiscal anchor proposal:
  - Introduce a target (e.g., defined as a floor within a reasonable range) for the government’s net financial wealth sufficient to cover existing contingent liabilities and provide a buffer to counter unexpected shocks.
  - Monitor the overall balance routinely and the number of consecutive overall deficits allowed before modifying the structural balance target.
- Medium-term fiscal framework (MTFF) components:
  - rolling expenditures ceilings and non-mining revenues targets;
  - long term projections of copper revenues;
  - a full account of existing contingent liabilities.
  - MTFF could be subject to stress tests and sensitivity analysis routinely or under major parameter changes.
- Transparency enhancements:
  - Government provides a large amount of high quality information but presented in many documents difficult to reconcile.
  - Gap: consolidated assessment of government assets and liabilities, and reconciliation with key flows, not provided regularly.
  - Recommended legalization: reflect in a legal document (e.g., a supreme decree) a set of well-defined transparency provisions to make them permanent.
  - Recommended provisions should outline:
    - (i) a clear calendar for fiscal reporting;
    - (ii) the scope and contents of reports;
    - (iii) a clear mandate for fiscal reports to include financial statements and net asset position of public enterprises, the central bank and other public institutions and the consolidated net financial position of the government.
- Accountability: independent fiscal council (FPC)
  - Expand mandate of current panels of experts and transform them into an independent fiscal council.
  - Proposed FPC functions:
    - (i) objective analysis of current fiscal policy;
    - (ii) independent projections and forecasts of key macrofiscal variables;
    - (iii) assessment on the application of the rule, including an opinion when escape clauses are evoked and suggestions for corrective actions.
  - FPC institutional design: advisory role; final decisions remain with government and congress; FPC should be accountable to the legislative branch.

### Switzerland example and cyclicality on the expenditure side
- Switzerland: ex-ante/ex-post expenditure ceilings and compensation account
  - Ex-ante expenditures: predicted revenues adjusted by ratio of trend GDP to expected real GDP.
  - Ex-post expenditure ceiling: actual revenue multiplied by ratio of actual GDP to trend GDP.
  - Deviations of actual spending from calculated ex-post spending ceiling are accumulated in a notional compensation account.
  - Legal requirement: if the negative balance in that account exceeds 6 percent of expenditures (about 0.6 percent of GDP) authorities must take measures to reduce the balance below this level within three years.
- Cyclical adjustment on the expenditure side:
  - Current status: no cyclical adjustment to expenditures because spending programs with cyclical components are limited.
  - Concern: these programs could increase in size, increasing automatic stabilizers.
  - Benefit: larger automatic stabilizers would strengthen the structural balance rule’s capacity to minimize business cycle volatility and reduce need for discretionary fiscal actions.

### Conclusions and policy priorities
- Achievements:
  - Structural balance rule has delivered strong confidence-enhancing signals and helped accumulate sizable net financial assets.
  - Strengths include preserved fiscal discipline, room for countercyclical policies, insulation from copper price cycles, improved government net financial position, and effective communication.
- Main challenges:
  - Complexity of methodology and discretionary adjustments.
  - Potential procyclicality from revisions in long-term copper price and rule implementation.
  - Lack of explicit escape clauses and absence of an explicit medium-term fiscal anchor tied to net financial position.
  - Limited formal verification/enforcement mechanisms.
- Priority improvements:
  - (i) simplify calculation of the structural balance;
  - (ii) adopt well-designed escape clauses;
  - (iii) minimize unintended procyclicality by incorporating provisions to deal with temporary ex-post deviations and capping rate of growth of expenditures, especially with sharp upward revisions in long-term copper price;
  - (iv) introduce an explicit long-term fiscal anchor (e.g., target for government’s net financial position);
  - (v) institutionalize and strengthen transparency practices in a legal document and expand coverage;
  - (vi) extend scope and mandate of panels of experts to provide objective analysis and assess compliance with the rule.
- Broader recommendation: adopt a full-fledged medium-term fiscal framework and publish additional fiscal indicators in the budget, such as the non-mining structural balance, to inform on impact of fiscal policy on domestic demand.

### Appendix highlights: Chile’s copper sector (key figures)
- Annual production: 5.5 millions of metric tons.
- World share: accounts for over 40 percent of world production.
- Within Chilean economy: copper accounts for 45 percent of exports.
- Export destinations: China 35 percent, Europe 20 percent, the U.S. 8½ percent, South Korea 8½ percent.
- CODELCO production share: 30 percent of Chile’s total production.
- Historical copper revenues:
  - 1987–2001 average: 2½ percent of GDP.
  - 2001–09: copper revenues reached almost 5 percent of GDP.
- Sub-soil assets (2007): total sub-soil copper assets = 368 millions of metric tons; estimated to last for 63 years at current annual production of 5.5 millions of metric tons.
- Chile hosts about 30 percent of the world known copper sub-soil assets.

*Source: _wp1117 - References; Section IV; Section E; Appendix highlights.*

### References .............................................................................................................

### _wp1117 - References .............................................................................................................

### Introduction: role and evaluation of Chile’s structural balance rule
- The structural balance rule has been characterized as the "cornerstone of Chile’s impressive fiscal performance."
- Function: insulate public spending from short-term copper price fluctuations and the business cycle, thereby preserving fiscal discipline.
- Recent implementation revealed challenges that prompted policy review.
- Institutional response: a high-level commission was established in May 2010 to recommend reforms to improve effectiveness.

### Assessment conclusions and suggested reforms
- Primary assessment objective: evaluate scope for improving design and implementation of the structural balance rule against best practices and OECD country experience with fiscal rules.
- Key options suggested to strengthen the rule:
  - Simplifying the calculation of the structural balance.
  - Enhancing the rule’s flexibility.
  - Enhancing the rule’s transparency.
  - Enhancing the rule’s accountability.
  - Complementing the structural balance rule with a medium-term fiscal framework.

### Paper structure (as reported)
- Section II: overview of how the structural balance rule helped Chile address main fiscal challenges and risks.
- Section III: assessment of Chile’s structural balance rule from three complementary angles:
  - the rule’s de jure design,
  - the rule’s de facto operational implementation,
  - comparison with OECD practices.

*Source: _wp1117 - References .............................................................................................................*

### Section IV outlines options to strengthen Chile’s structural balance rule. Section E concludes.

### _wp1117 - Section IV outlines options to strengthen Chile’s structural balance rule. Section E concludes.

### Background: Chile’s fiscal vulnerabilities and contingent liabilities
- Chile’s economy is highly vulnerable to external shocks, especially volatility in copper prices.
- Copper revenues evolution:
  - 2000–04: copper revenues accounted for only 5 percent of total revenues (around 1 percent of GDP).
  - Last five years (prior to publication): copper revenues accounted for 24 percent of total government revenues (or almost 6 percent of GDP).
- If fully spent in real time, copper revenues would have pressured absorptive capacity and triggered pressures for a sizable real appreciation of the currency.
- Structural balance rule introduced in 2001, building on late-1980s copper stabilization fund; structural balance defined as central government balance evaluated at potential output and the long-term copper price.
- Independent expert committees (since 2002) provide technical estimates of potential output and the long-term copper price.
- By end-2008 central government financial assets equaled 20 percent of GDP; financial liabilities accounted for 6 percent of GDP; net financial position equivalent to 26 percent of GDP.
- Main contingent liabilities (examples listed): recognition bonds from privatization of pension system; minimum pension guarantee (introduced 2008); government guarantees of borrowing by state-owned enterprises; minimum revenue and exchange rate guarantees under PPPs; banking deposit guarantees; judicial lawsuits; programs guaranteeing loans/mortgages for students, small business, and others.
- Estimated costs of contingent liabilities, when adjusted by expected associated risks, amounted to 13 percent of GDP in 2009.
- Estimation could be higher if liabilities associated to the negative capital of the central bank and commitments under the fuel price stabilization funds are included; expected costs would increase if estimations are conducted at the maximum risk level and if minimum pension guarantee liabilities are computed using net present value of expected future flows.

### Assessment of Chile’s structural balance rule (design and implementation)
- Analytical framework: assessment from (i) best practices on design of fiscal rules; (ii) practical implementation; (iii) comparison with OECD practices.
- Core components of well-designed fiscal rules (literature-based): clear numerical target(s); sufficient flexibility to respond to shocks (exceptional circumstances clauses, ex-post mechanisms, rolling adjustments); clear institutional arrangements (statutory basis, monitoring, transparency, accountability, enforcement).
- Legal and institutional features:
  - Since 2006 the Fiscal Responsibility Law (FRL) supports the rule; Law 20128 of Fiscal Responsibility, approved in September 2006.
  - FRL mandates President must adopt within the 90 days of taking office “a decree defining the fiscal fundamentals of his/her administration and the expected impact on the structural balance.”
  - Constitutional context: President holds primary fiscal initiative power; Congress may only approve/reject; Congress cannot increase or lower revenue estimates in draft budget; may only reduce draft expenditures under constraints; if Congress does not approve annual budget law within 60 days after submission, draft budget automatically comes into force.
- Coverage and definition:
  - Structural balance defined in FRL Article 16 as “the balance that the central government would have achieved if the economy was operating at potential, i.e. excluding the effect that the cyclical fluctuations in economic activity, the copper price, and other factors of similar nature, may have on the government revenues and expenditures.”
  - Structural balance excludes central bank and public enterprises but includes central government’s interest payment and interest receipts.
- FRL gaps and practical issues:
  - FRL directs DIPRES to compute the structural balance according to methodology to be established by Supreme Decree of the Ministry of Finance; that Supreme Decree has not been enacted.
  - FRL does not define the ultimate objectives of the rule; it focuses on the use of fiscal surpluses.
  - FRL authorizes Ministry of Finance to allocate 0.5 percent of GDP per year during 2006–11 for recapitalization of central bank provided central government runs an overall surplus.
  - FRL creates two sovereign funds:
    - Pension Reserve Fund (PRF): funded with minimum annual contribution of 0.2 percent of GDP (can be increased to 0.5 percent of GDP); aimed at covering future (after 2016) minimum pensions and to be funded even in case of overall deficit.
    - Economic and Social Stabilization Fund (ESSF): replaces Copper Stabilization Fund; designed to compensate for drops in revenue in periods of slower growth and/or lower copper prices and to finance future deficits as alternative to borrowing; ESSF resources come from central government overall surpluses (after PRF contributions and transfers for recapitalization).
  - FRL does not include explicit provision to respond to major shocks nor mechanisms to handle temporary ex-post small deviations; rule allows government to modify target at any time but FRL does not specify circumstances, procedures, or return-to-normal process.
  - FRL requires DIPRES to compute structural balance annually and allows independent experts for non-binding judgments on long-term copper price and inputs for potential output; FRL does not require monitoring or independent third-party verification of compliance.
- Practical computation and methodology:
  - Initial methodology (Marcel et al. 2001): estimate expected structural revenues E(SR_t), subtract structural balance SB_t (e.g., 1 percent of GDP originally), calculate expenditures E_t as residual: E_t = E(SR_t) – SB_t; E(SR_t) = E(R_t) – E(A_t) = E(R_t) * (Y_p / Y)^ε where adjustments reflect long-term copper price and output gap; Y_p potential output; ε elasticity of revenues to output gap.
  - Sensitivity: expected fiscal outcomes very sensitive to estimates of structural revenues; overestimation leads to higher expenditures and more expansionary stance.
  - Post-2005 complications: non-linear impact of soaring copper prices, introduction of new mining taxes, production of other minerals (molybdenum), and increased returns of sovereign funds (reached almost 4 percent of total revenues in 2008) made computation challenging; Budget Directorate added adjustments (Table 2) making methodology difficult to replicate and opening room for discretionary adjustments.
  - Authorities have published ample detailed information on methodology modifications and ex-ante/ex-post calculations, enabling calculation of other fiscal indicators (e.g., primary balance).
- Empirical implications and procyclicality:
  - Structural balance has sometimes imparted unintended procyclicality to government expenditures.
  - Structural non-mining balance (structural non-mining revenues minus total expenditures) is a more informative indicator of fiscal impact on domestic demand.
  - During 2000–08 the government’s structural balance of 1 percent of GDP was equivalent to non-mining structural deficits around 0.8 and 1.8 percent of non-mining GDP; in certain years the rule could have imparted a sizeable fiscal impulse.
  - During boom years (2007–08) non-mining structural deficit and real expenditure growth increased significantly even though output gap was positive; 2008 expenditure increase partly reflected discretionary reduction in structural surplus target from 1 percent of GDP to 0.5 percent of GDP, upward revision in long-term copper price, and increased return of sovereign funds (part of structural revenues until 2009).
  - Absence of well-defined provisions to handle ex-post deviations incentivized end-of-year adjustments to ensure ex-post compliance; this enhanced credibility but sometimes led to procyclical tightening or loosening.
- Historical adjustments to target:
  - Structural balance target changed two times: 2008 reduced from 1 percent of GDP to 0.5 percent of GDP; 2009 reduced to zero percent of GDP. Changes usually accompanied by detailed evidence justifying that fiscal sustainability would not be jeopardized.
  - In 2010 rule de facto suspended after earthquake in February; during 2009–10 expenditures were determined by immediate needs and structural balance computed as residual.
- Strengths:
  - Public and market confidence enhanced by rule’s visibility; rule well known and credibility supported by independent panels for long-term copper price and growth inputs.
  - Fiscal performance monitored on ongoing basis; strong responsiveness to new informational demands; public understanding high despite complexity.

### Comparison with OECD practices
- OECD context:
  - 27 out of 31 OECD members have rule-based fiscal frameworks; exceptions: Japan, Korea, Turkey, United States.
  - Most OECD fiscal rules are supported by legislation, medium-term frameworks, well-defined escape clauses, transparency requirements, and accountability mechanisms (e.g., non-partisan fiscal councils).
  - Unlike Chile’s single-indicator focus, OECD rules often combine indicators: debt ceilings and deficit ceilings (overall, structural, primary, non-oil), or ceilings for overall balance and expenditure levels/growth.
  - Only two OECD countries with significant natural resource revenues have special mechanisms comparable to Chile: Mexico and Norway.
  - Some countries (New Zealand, Australia, United Kingdom) emphasize institutional arrangements over specific numerical targets.

### Options to strengthen Chile’s fiscal rule (Section IV recommendations)
- Main areas for improvement identified:
  - (i) simplifying computation of the structural balance;
  - (ii) avoiding unintended procyclicality;
  - (iii) adding a medium-term fiscal anchor;
  - (iv) incorporating explicit escape clauses;
  - (v) strengthening monitoring and transparency mechanisms;
  - (vi) enhancing enforcement and accountability procedures.
- Specific methodological proposals:
  - Adjust non-mining tax revenues to the output gap of non-mining GDP instead of total GDP to facilitate reasonable elasticities for components of non-mining taxes.
  - Define structural balance target in primary terms (exclude net interest payment and especially sovereign funds’ returns).
  - Simplify mining revenue adjustment to reduce discretion. Illustration formula proposed for structural mining revenues SR_t^m:
    - SR_t^m = R_t^m * [Long-term Copper Price_t / Actual Copper Price_t]^γ
    - Where Long-term Copper Price_t < Actual Copper Price_t and γ is estimated elasticity of mining revenues to the price ratio.
    - Assuming γ = 1, the profile and level of structural mining revenues and expenditures would have been broadly in line with authorities’ methodology.
- Measures to reduce procyclicality:
  - Cap annual growth rate of government expenditures in real terms.
  - Routinely publish calculation of structural non-mining primary balance (as percent of non-mining GDP).
  - Add provisions to handle ex-post deviations to avoid last-minute end-of-year adjustments, using examples from Germany and Switzerland (see Table 5). Proposed practical treatment of ex-post deviations:
    - Treat expenditure level determined by structural balance rule, E_t, as an upper limit.
    - If ex-post deviation arises from larger ex-post structural revenues, save the windfall and keep ex-post expenditure at planned E_t.
    - If deviation arises from lower ex-post structural revenues (higher ex-post structural deficit), maintain ex-post expenditure at E_t and store deviations in a notional account, with obligation to adopt corrective actions within three years after account reaches a certain level.

### Concluding observations (Section E)
- Chile’s structural balance rule has delivered strong confidence-enhancing signals and helped accumulate sizable net financial assets, but faces challenges related to complexity, potential procyclicality, lack of explicit escape clauses, absence of an explicit medium-term fiscal anchor tied to net financial position, and limited formal verification/enforcement mechanisms.
- Strengthening options focus on simplifying methodology, making adjustments less discretionary, protecting against procyclical outcomes, introducing medium-term anchors and escape clauses, and enhancing monitoring, transparency, and accountability to align the rule more closely with best practices and OECD experiences.

*Source: _wp1117 - Section IV outlines options to strengthen Chile’s structural balance rule. Section E concludes.*

### 1.5 percent of GDP, the authorities needs to

### _wp1117 - 1.5 percent of GDP, the authorities needs to

### Switzerland: ex-ante/ex-post expenditure ceilings and compensation account
- Ex-ante expenditures: predicted revenues adjusted by the ratio of trend GDP to expected real GDP.
- Ex-post expenditure ceiling: actual revenue multiplied by the ratio of actual GDP to trend GDP.
- Deviations of actual spending from the calculated ex post spending ceiling are accumulated in a notional compensation account.
- Legal requirement: if the negative balance in that account exceeds 6 percent of expenditures (about 0.6 percent of GDP) the authorities are required by law to take measures sufficient to reduce the balance below this level within three years.
- Source citation in text: "Source: IMF (2009)."

### Escape clauses for Chile’s fiscal rule
- Recommendation: include well-designed escape clauses that define “exceptional circumstances” allowing temporary deviations in the face of a major shock.
- Suggested limits: clauses should be limited to a short list (example items in text: earthquake, the recent global crisis, a major demand imbalance).
- Procedural design: precisely described triggers with very limited discretion; pre-determined, credible and transparent procedural mechanisms (e.g., debate in congress) for approval of temporary departure.
- Follow-up requirement: mandate authorities to revise the government’s medium-term fiscal framework to allow fiscal accounts to return to the rule.

### Structural balance rule: long-term fiscal anchor and MTFF
- Proposal: introduce a long-term fiscal anchor as a target (e.g., defined as a floor within a reasonable range) for the government’s net financial wealth.
- Purpose of anchor: be sufficient to cover existing contingent liabilities and provide a buffer to counter unexpected shocks.
- Monitoring requirements: monitor the size of the overall balance on a routine basis and the number of consecutive overall deficits that will be allowed before modifying the numerical target of the structural balance.
- Support mechanism: a full-fledged medium-term fiscal framework (MTFF) that includes:
  - rolling expenditures ceilings and non-mining revenues targets,
  - long term projections of copper revenues,
  - a full account of existing contingent liabilities.
- Stress testing: MTFF could be subject to stress tests and sensitivity analysis routinely or under major parameter changes.
- Rationale: adoption of an MTFF is vital to limit, assess and correct ex-post deviations from the rule.

### Transparency enhancements
- Current practice: government provides a large amount of high quality and relatively opportune information on budget formulation, execution and performance under the structural rule, but information is presented in many documents that are difficult to reconcile.
- Gap: consolidated assessment of government assets and liabilities, and reconciliation with key flows, is not provided on a regular basis.
- Recommended legalization: reflect in a legal document (e.g., a supreme decree) a set of well-defined transparency provisions so they become permanent components of Chile’s fiscal framework.
- Recommended provisions should outline:
  - (i) a clear calendar for fiscal reporting;
  - (ii) the scope and contents of reports;
  - (iii) a clear mandate for fiscal reports to include financial statements and net asset position of public enterprises, the central bank and other public institutions and the consolidated net financial position of the government.

### Accountability: independent fiscal council (FPC)
- Recommendation: expand the mandate of current panels of experts and transform them into an independent fiscal council (FPC).
- Functions proposed for the FPC:
  - (i) objective analysis of current fiscal policy;
  - (ii) independent projections and forecasts of key macrofiscal variables;
  - (iii) assessment on the application of the rule, including an opinion when escape clauses are evoked and suggestions for corrective actions.
- Institutional design: FPC would have an advisory role; final decisions remain with government and congress; FPC should be accountable to the legislative branch.
- Rationale: Chile could leverage experience with independent bodies (central bank’s Monetary Policy Committee and two panels of experts) to implement an FPC.

### Cyclical adjustment on the expenditure side
- Current status: no cyclical adjustment is made to the expenditure side because of the limited size of spending programs with a cyclical component, such as unemployment benefits.
- Future concern: these programs could increase in size over time, increasing automatic stabilizers in Chile’s budget.
- Benefit: larger automatic stabilizers would strengthen the structural balance rule’s capacity to minimize business cycle volatility and minimize the need for discretionary fiscal actions (see Kumhof and Laxton (2010)).

### Tables (selected findings summarized)
- Table 6 (Escape Clauses of Fiscal Rules in Selected OECD Countries) highlights:
  - Spain (2001): balanced or in-surplus budgets; triggers include natural disasters, downturns (1 percent of GDP), large public investment (0.5 percent of GDP); Congress approval; delinquent government must implement a three-year adjustment plan.
  - Switzerland (2003): cyclically adjusted balanced budget; exceptional circumstances trigger; supermajority Congress approval; medium-term adjustment plan.
  - Germany (2009): structural balance budget must not exceed 0.35 percent of GDP; exceptional circumstances or natural disasters trigger; supermajority Congress approval; adjustment plan.
  - Maastricht Treaty (1992) and Stability and Growth Pact (1997, 2005): deficit and debt of 3 and 60 percent of GDP; structural balance close to balance or in surplus; trigger: real GDP decreased annually by at least 2 percent; verification by European authorities; medium-term adjustment plan.

### Conclusions and summary (policy priorities)
- Chile’s fiscal system: broadly well-designed with a strong reputation for prudent fiscal management and an enviable fiscal position; structural balance rule is central to performance since 2001.
- Strengths of the rule: preserved fiscal discipline, room for countercyclical policies, insulated public spending from copper price cycles, improved government net financial position, effective communication tool.
- Priority improvements for the rule:
  - (i) simplification of the calculation of the structural balance;
  - (ii) adoption of well-designed escape clauses;
  - (iii) minimization of unintended procyclicality by incorporating provisions to deal with temporary ex-post deviations and capping the rate of growth of expenditures, especially with sharp upward revisions in long-term copper price;
  - (iv) introduction of an explicit long-term fiscal anchor (e.g., target for government’s net financial position);
  - (v) institutionalization and strengthening of transparency practices in a legal document (e.g., supreme decree) and expanding coverage;
  - (vi) extending the scope and mandate of panels of experts to provide objective analysis and assess compliance with the rule.
- Broader recommendation: adopt a full-fledged medium-term fiscal framework to improve fiscal planning and provide a framework for addressing temporary deviations; publish additional fiscal indicators in the budget, such as the non-mining structural balance, to inform on impact of fiscal policy on domestic demand.

### Appendix highlights: Chile’s copper sector (key figures)
- Annual production: 5.5 millions of metric tons.
- World share: accounts for over 40 percent of world production.
- Within Chilean economy: copper accounts for 45 percent of exports.
- Export destinations: China 35 percent, Europe 20 percent, the U.S. 8½ percent, South Korea 8½ percent.
- CODELCO production share: 30 percent of Chile’s total production.
- Historical copper revenues:
  - 1987–2001 average: 2½ percent of GDP.
  - 2001–09: copper revenues reached almost 5 percent of GDP.
- Sub-soil assets (2007): Chile’s total sub-soil copper assets amounted to 368 millions of metric tons, estimated to last for 63 years if the current annual production of 5.5 millions of metric tons is maintained.
- Chile hosts about 30 percent of the world known copper sub-soil assets.

*Source: IMF (2009).*

### introduction of new taxes on mining, the

### introduction of new taxes on mining, the

### Clear objectives
- The rationale for fiscal rules is usually spelled out clearly in special legislation or guidelines.
- The objectives of fiscal rules in OECD countries typically include ensuring public debt sustainability, addressing common pool problems in highly decentralized countries or within international arrangements, avoiding domestic demand pressures, and tackling ageing-related issues.
- A 2001 policy paper of the Budget Directorate spelled out the objectives of Chile’s fiscal rule.
- The paper noted that the structural surplus targeted with the rule (1 percent of GDP at the time) was to be used to recapitalize the central bank, pre-finance contingent liabilities, and create a buffer of net financial assets to allow the central government to absorb external shocks.
- The 2006 FRL, however, did not refer to these objectives, and only stipulated the creation of two separate sovereign funds for the allocation of overall surpluses.

### Clear link between targets and objectives
- Fiscal rules in OECD countries usually set targets/benchmarks on several fiscal indicators covering both sustainability and cyclicality aspects of fiscal policy. The most common are:
  - (i) an upper limit on gross or net public debt and ceilings on one or several definitions of deficit (e.g. Maastricht Treaty and the Stability and Growth Pact); and
  - (ii) ceilings for the overall balance and the growth rate of expenditures, either in nominal or real terms (e.g. Sweden, Finland, Netherlands).
- Chile’s structural balance rule does not establish a clear link with medium-term fiscal goals.
- The rule is not formulated within a full-fledged medium-term framework nor is it used to assess how current policies would affect the government’s net financial wealth.
- The upward revision of the long-term copper price in recent years has imparted an unintended procyclicality to government expenditures.

### Flexibility
- Fiscal rules in most OECD countries include provisions to deal with unexpected shocks. These provisions allow temporary deviations from the targets and provide guidance for a gradual adjustment to those targets, while avoiding procyclicatlity and preserving credibility.
- The most common provisions include:
  - (i) “exceptional circumstances clauses” that allow for temporary deviations in the face of major shocks;
  - (ii) “notional accounts” to store small ex-post deviations, which would be corrected overtime (e.g. Germany and Switzerland); and
  - (iii) clear procedures to undertake periodic and rolling adjustments of the numerical targets.
- Chile’s rule is, in principle, quite flexible, as it does not constrain the government’s capacity to modify the structural balance target.
- The target has been changed over time for several reasons, and the changes have been usually justified by analytical work.
- Chile’s fiscal framework does not provide much guidance on how to introduce changes to the target or how to implement a discretionary response to a shock.
- In terms of ex-post compliance, Chile’s FRL does not contain mechanisms to assess small ex-post deviations or eliminate them over time.

### Transparency provisions
- OECD legislation on fiscal rules usually contains provisions to promote full transparency of fiscal policy plans and ex-post fiscal performance.
- Through these provisions the public is generally well informed of deviations and of plans to correct them over time.
- Chile’s FRL does not include provisions to promote full transparency (either of the ex-ante calculation of the structural balance or ex-post performance).
- The only requirement is that the Budget Directorate computes the structural balance every year.
- The government monitors fiscal performance on an ongoing basis and has showed a strong responsiveness to new informational demands, even though not required by law.
- Because of those actions, understanding of Chile’s rule by the public is quite high, in spite of its complexity.

### Accountability
- A large number of OECD countries have created independent fiscal councils to provide independent fiscal policy analysis and recommendations.
- The councils usually provide:
  - (i) objective analysis of current fiscal policy;
  - (ii) independent projections and forecasts of key macrofiscal variables; and
  - (iii) an assessment on the application of the rule, and the quality of the fiscal adjustment to comply.
- Typically, the councils only have an advisory role, and are accountable to the legislative branch.
- Chile fiscal framework delegates to two independent panels of experts the determination of critical inputs for the calculation of the structural balance (the long-term copper price, and the rates of growth of the labor force, capital accumulation, and total factor productivity).
- The composition of the panels and their main recommendations are published by the Budget Directorate on a regular basis.
- The recommendations of the panels are not binding, and the law does not assign to any third party the task of assessing compliance with the rule.

*Source: _wp1117 - introduction of new taxes on mining, the*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp1117.pdf_