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Chile FinMin Larraín warns Bachelet government on growth

Jan 21, 2014

A shift away from policies that promote economic expansion could be counterproductive for Chile, cautions finance minister Felipe Larraín in an interview with LatinFinance

Chile's finance minister Felipe Larraín has urged the incoming administration of Michelle Bachelet not to abandon pro-growth policies, following campaign pledges of major tax and education reforms to redress the country's social divisions. "I'm concerned about one thing: growth," he said in an interview with LatinFinance. "So I would say [to the incoming administration] 'don't forget growth.' Growth is essential in trying to retain the opportunities for investment in our economy, to develop our entrepreneurs, to give them new ways to find new opportunities."

     
     
  Chilean finance minister Felipe Larraín
Source: World Economic Forum
 
Bachelet, who ran on a platform of social policies to address a deep divide between rich and poor, was elected December in a landslide victory. Analysts say an overhaul of the tax regime - which is expected to include a hike in corporate taxes to 25% from 20% - is likely to be among the laws Bachelet will prioritize as she seeks extra funds for social reforms upon taking office in March.

But Larraín warned that shifting away from policies to promote economic expansion could prove counterproductive. "We need to be talking about how to stimulate investment and keep unemployment low," he said, adding that a conservative fiscal policy in recent years was critical to creating an environment conducive to job creation and growth.

"We maintained growth of spending less than GDP growth, we restrained our spending by $6bn per year," Larraín said. "We created an environment conducive to growth." He added that the outgoing center-right government of Sebastian Piñera had reduced unemployment to 5.7%, its lowest level in 30 years, by boosting Chile's average GDP expansion rate since 2010 to 5.4%, compared to a global rate of 4% over that period.

"Returning the Chilean economy to solid growth is one of the most important objectives we have achieved," Larraín said. But he denied that Bachelet's victory reflected an indictment of his government's policies. "I don't think it's an indictment. We faced a formidable candidate and politics is complicated and it would have been tough for any candidate [to beat Bachelet]."

Chile, Larraín said, is facing "a middle-income trap" in which it is increasingly difficult to meet the demands of a growing middle class. "University students want free higher education and we disagree, we think that is a mistake," he said.

The new administration is likely to face a similar set of challenges in managing public expectations as those that dogged his own government, Larraín said. "There is a shift to the left in the program but one thing is what you say in the campaign the other is what you can actually do in government," he said.

"One thing remains to be seen: how this government manages expectations. I wish them well but this is the fundamental problem. Managing it is not going to be easy." LF

The Republic of Chile won LatinFinance's award for Sovereign Bond of the Year 2013 for its $1.5bn 2022/2042 deal.



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