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