Fiscal policy and the economic cycle in Chile

Abstract

This article studies the effect of the stabilization of fiscal expenditure and the anti-cyclical use of taxes as stabilization variables in the Chilean economy, through the calibration of a basic macroeconomic model adapted to the actual conditions of that economy. The results show that some 25% of the variability of economic growth could be eliminated by obviating fiscal cyclical impulses through constant growth of public investment and consumption and through anti-cyclical taxes. On the one hand, it is proposed that a system of stabilization of the growth of fiscal expenditure should be established, through a system of rules and degrees of flexibility subject to specific clauses. An important element in the implementation of stabilization policies is a tax revenue stabilization fund which would register and store up the counter-cyclical reactions of the fiscal authorities and make fiscal expenditure independent of the revenue obtained at any particular point in the economic cycle. On the other hand, an analysis is made of both the feasibility and the efficacy of fixing the value added tax (IVA); in a more flexible manner, as well as the problems of inconsistency over time that this would cause. For this latter reason, an analysis is also made of the costs and benefits of supplementing more flexible application of the IVA with greater flexibility as regards income tax or tax incentives for investment. It is concluded that the State has a variety of instruments that could be used to implement an anti-cyclical policy, such as the possibility of establishing rules for the growth of expenditure, stabilization funds, and greater flexibility of taxes.