The Mega Bill nears the finish line
Chile’s Reconstruction and Economic and Social Development Bill (also known as the Mega Bill) is now approaching the final stage of the legislative process. Combining tax cuts, employment subsidies and regulatory reform, the bill has survived nearly every legislative hurdle pretty much intact. Now one final vote remains in the Senate, although the opposition has already threatened a challenge in the Constitutional Court.
Most recently, the bill passed the third constitutional stage in the House of Deputies. On July 21, deputies approved virtually all of the amendments introduced by the Senate, leaving only one outstanding issue, concerning compensation for the Municipal Common Fund for revenues lost to new property-tax exemptions. The matter still must receive a final reading in the Senate, since the government is unsure of whether it can count on the necessary 26 votes. This reading is likely to occur in early August.
The rest of the bill is pretty much settled – in what is a major political win for the government, and for Finance Minister Jorge Quiroz. Included in the bill is the gradual reduction of the corporate income tax rate from 27% to 23%; the reintegration of Chile's corporate and personal tax systems; employment incentives mostly targeted at service-export sectors; and modest investment incentives, including tax relief for the construction sector, and a long-term tax-stability regime designed to encourage large investment projects. In many ways, this bill undoes the tax increases and tax changes former president Michelle Bachelet implemented in her second term, that the business community believes had long-term negative effects on investment and growth.
However, critics are right to worry about the fiscal implications of the bill. The CFA has warned that the package is likely to worsen Chile’s fiscal position during the remainder of the decade. Other critics argue that the permanent tax cuts are being justified via overly optimistic and highly uncertain assumptions about future GDP growth, and spending restraint. If these optimistic forecasts fail to materialize, the reform could place additional pressure on public finances.
There is a political paradox in all of this. Kast campaigned voicing sharp criticisms of predecessor Gabriel Boric's fiscal profligacy. But it now turns out that, unless growth picks up sharply, deficits and debt growth could end up being higher under Kast than under Boric.
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