Employers call on the Chilean Government

Translated by Kyla Burke-Lazarus

The article is taken from El Mercurio, a newspaper from Santiago, Chile. The article is found in the “Economía y negocios” or the “Business and Economy” section of the paper. The article addresses the impact the earthquake, that shook Chile on February 27th, 2010, had on the Chilean economy. The article continues to weigh proposed plans to fund the reconstruction, and stresses the need for reconstruction. The ST is informative and persuasive, the text tries to convince the reader that tax increase are not necessarily the most beneficial way to raise the required money.

Source text: “Empresarios piden al Gobierno entregar plan de financiamiento y acelerar reconstrucción”

Employers call on the Chilean Government to Deliver a Financial Plan to Accelerate Reconstruction
Lina Castaneda and Victoria Reyes

To respond to the recent earthquake the Chilean government must now raise U.S.$9.3 billion. Whatever the plan to finance this large sum may be, it will have drastic implications for the economy. The union managers of banking, construction, mining, agriculture, and trade agreed that the final arrangements adopted should not rely n one source of funding but rather be as balanced as possible.

Representatives of various economic sectors gathered yesterday at the seminar, “Economic Projections: Solutions for Sectors,” organized by the Santiago Chamber of Commerce. It was agreed that the government should devise a financial plan that will accelerate reconstruction.
A major concern for the Agriculture Sector is how the funding plans will affect the strength of the dollar. “Unfortunately the days pass, and we continue to wait for a proposed plan. The uncertainty doesn’t help,” says Ema Budinic, manager of research at the National Agriculture Society (SNA).

The Treasury needs to finance about U.S.$ 2,500 million for the next four years. The various potential funding sources will have different impacts on relative prices, explains Alejandro Alarcon, the general manager for the Association of Banks. For example, suppose everything was financed with fiscal deficit, as a result the exchange rate would fall and interest rates would rise.

In the same vein, Javier Hurtado, head of research at the Chilean Chamber of Construction, explains that “if funds are raised by borrowing a lot of dollars internationally, the exchange rate would be negatively affected; if it is mostly local borrowing it will impact the interest rate, and if comes from tax increases, it will affect productivity. ”

Projections by sector:

Banking It’s projected that loans will increase by 10 % this year. For March, April and May, a negative Monthly Index of Chilean Economic Activity (IMACEC) is projected. This figure, which is measured by the Central Bank, aims to estimate the progress of the Chilean net production of goods and services during the period of one month and is an approximation of the Gross Domestic Product (GDP) in the short term. GDP for the first quarter is expected to be close to zero. An inflation of 3.5% has been calculated, with an investment growth of 15%, and a GDP of 4.5% for the year.

Mining Mining will grow by 6% this year, producing five million eight hundred thousand tons of copper and exporting U.S. $ 43 billion worth of materials. The price of copper is projected to be around U.S. $ 3.2 and $ 3.3 per pound.

Agriculture The current realized loss in this field is estimated at U.S. $ 760 million and future losses are expected to increase by 5%. The wine sector will fall between 8 and 10% and crops between 5 and 8%, due to smaller harvests and climate problems.

Industry This sector’s activity should grow between 1.5% and 2.5% over the course of the year. March will show a sharp drop in industrial production and will be the month hardest hit by the earthquake. Exports in March fell from U.S. $ 1.5 billion to 1.0 billion dollars.

Trade It’s estimated that the trade sector’s GDP will be 6%; investments will grow by 15%; and household expenditure by 4%. Sales will increase by 5% and employment by 2.5%. An increase in late fees in the earthquake-affected areas is foreseen. In any event, the South African World Cup should be beneficial to this sector.

Construction Due to the earthquake, housing costs are calculated to increase to U.S. $ 3,943 million and lost capital from stocks is anticipated to reach U.S. $ 20 billion. The sector will grow by 7.2%, even though industries will be affected by a lower income. Investments in reconstructions will enhance the infrastructure of the construction sector, this trend will continue to grow.

Tax Hikes: Not a Good Time

Not all trade unions firmly reject a possible increase in corporate taxes, but the consensus is that it is not a good time to do so.

In that vein, Alvaro Merino, head of research at the National Mining Society (Sonami), affirms that any tax increase carries with it higher costs to business.

As a general rule, higher taxes on production affect investment decisions. At a time when investment companies are ready to support reconstruction, the manager of Research of the Santiago Chamber of Commerce (CCS), George Lever, believes it would be a good idea to explore ways to help channel this support, instead of resorting to the traditional tax hikes.

“We must be very careful in making temporary tax decisions in times of crisis, because historically the increases became permanent and only tax reductions are able to be reversed,” says Lever. He added that there are divisions within large companies that have been badly affected by the disaster and are unlikely to survive even a minimal tax hike.

He sees the initiative to raise donations for disaster relief as a good way to channel the goodwill that exists in businesses.

The National Agriculture Society (SNA) would prefer if the plan to fund reconstruction did not have a component to raise taxes at all. However, because this unrealistic, they hope the increase will be as small as possible, explains the manager of Studies, Ema Budinich.

This, he says, is because tax hikes do not always result in a proportional increase in revenues. This is because there are different loop holes, within the existing legal standards, that companies use to pay less taxes.

Budinich also stresses the need to improve the disaster relief innitiative’s ability to distribute the revenues in a decentralized way, “This is a concept that aims to achieve a democratic system where taxpayers express their preference for how theur tax money is spent.”

However, Javier Hurtado, of the Chilean Chamber of Construction (CCHC), warns that the U.S. $155 million expected to be collected from the initiative does not compare with U.S. $ 9,300 million the Treasury needs to raise.