March 20, 2014 / 4:30 PM / 4 years ago

Chile finance minister says tax reform will help balance books

SANTIAGO, March 20 (Reuters) - Planned tax reforms in Chile will not only improve the country’s income distribution but also help it achieve fiscal structural balance before the end of the new government’s four-year term, the finance minister said on Thursday.

Center-left President Michelle Bachelet, who took office on March 11, was handed a slowing economy with a fiscal structural deficit, which strips out the impact of the economic cycle, of between 0.7 and 1.0 percent of gross domestic product.

Bachelet has promised more than 50 reforms in her first 100 days in office, including a key pledge to overhaul the country’s education system using funding from a tax reform package.

She has also promised to reduce the fiscal structural deficit to zero by 2018.

Chile, the world’s top copper producer, has the worst income distribution among the Organization for Economic Co-operation and Development’s 34 member states.

“Our objective is to advance towards a tax regime in Chile that effectively confronts inequality and helps improve income distribution,” said Finance Minister Alberto Arenas in front of a packed audience of the country’s business elite.

“But it’s also very important to take on (via this reform) a reduction in the structural deficit in our fiscal accounts,” he added.

He urged the business community to support the tax reform, arguing it is a path to improved human capital and sustainable economic growth.

Some have raised concerns that the reforms could affect investment, with Arenas’ predecessor Felipe Larrain sounding a note of caution earlier this month before leaving office.

The reform, slated to be presented to Congress on March 31, will look to hike corporate taxes to 25 percent from 20 percent and eliminate loopholes, giving the government a predicted additional $8.2 billion in tax take, equivalent to three percentage points of GDP.

In practice, the structural balance rule means when that the economy is booming the government saves copper windfalls, which are transitory, in order to be able to spend those revenues when fiscal income drops. (Reporting by Felipe Iturrieta; Writing by Anthony Esposito and Meredith Mazzilli)

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