What’s in the latest US$3.7 billion economic recovery plan?

The government has unveiled the new Chile Apoya support plan for economic recovery. Involving US$3.7 billion, funds under the plan will go to households and troubled economic sectors, among others. Economist Sergio Godoy gave Chile Today the details.

The US$3.7 billion Chile Apoya plan is expected to help households and businesses still grappling with the pandemic effects.

Aspects covered are transport fares, gas prices, labor subsidies, unemployment benefits, scholarship meal plans, local investment projects, care homes, small-scale mining, and reforestation. The plan rests on the pillars of contributions to households, to small businesses, and job creation measures.

Besides, employees in the particularly hard-hit cultural industry receive a one-time payment.

A Comprehensive Recovery Plan

“We are talking about 4 percent of the annual budget, so the reallocation of funds can be done quite easily, it is not a big problem,” Sergio Godoy, chief economist at investment firm STF Capital, told Chile Today. “The new finance minister, [Mario Marcel], used to be … the budget director in the previous administration and he knows the government very well. He realized that the previous administration actually had huge budgets in 2020 and 2021 and the deficit was about 7 percent of GDP. This year, the government is more constrained and they cannot do the same as before because it is just too much and we currently have an inflation problem.”

He added, “Chile had by far the biggest fiscal expansion of all the emerging markets in the last two years. So managing this program means going back to normalcy, towards a more normal way of expanding, within the political constraints that the government is facing”

Crucially, many of the plan’s measures were already being planned during the previous administration. “Now we have a more left-leaning administration, so there have been some changes in priorities, but for the most part, there are things that were already important,” said Godoy. Yet, the government added some measures President Gabriel Boric promised on the campaign trail and during coalition negotiations.

Also read:

Who is Mario Marcel, Chile’s new Finance Minister?

Encouraging women

Around US$1.39 billion are for promoting employment and help struggling sectors. Of the 500,000 expected new jobs being created under the plan, at least half are supposed to be for women. The IFE laboral, a subsidy to incentivize formal employment, is also key in that respect. The Emergency Family Income (IFE) was included in the 2021 budget to alleviate pandemic hardship.

A minimum wage raise to counter rising inflation was a government priority. “This is a big ideological concern for the left, it is very important that the minimum salary increases. A slightly smaller increase would have probably been better to control inflation, but there are certain political constraints here for the government,” said Godoy. He highlighted that inflation nullifies most of the increase anyway.

Still, Godoy raised concerns. “The problem that happened during the pandemic was that labor informality increased a lot. But when you increase the minimum salary, you push even more people towards informality and this is contradictory to the other plans of hiring people formally through the IFE laboral,” he said. “The implementation might therefore not be very pragmatic. It will probably just be done in a way that keeps together the coalition of people from the center left and people from the far left.”

Yet, the recovery plan will probably not spark much opposition, Godoy said. “If it were a program with a huge budget, that might have been an issue, but with this program, I think that the opposition will just go along with it.”

Other financial factors will also help shape the economy’s trajectory. If the tax and pension reforms pass, the government could gain some breathing space, according to Godoy.

Some aspects of the recovery plan, like more competitive gas prices and a new emergency income in case of new quarantines, require congressional approval or new laws and funds, so policymakers have their work cut out for them.

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