CEPAL Review no. 124

204 CEPAL Review N° 124 • April 2018
I. Introduction
High and rising debt levels undermine a country’s credit rating, thereby generating greater uncertainty
in financial markets and driving up the risk premium. This forces the country in question to spend
more on debt service, thereby putting greater pressure on other expenditure. In many cases, the only
way to reduce the deficit in the short term is by cutting back on public spending, which has negative
social consequences.
The dynamics and sustainability of the public debt depend on the behaviour of the public deficit
and its interrelationship with the different phases of the business cycle, its vulnerability or volatility in the
face of exogenous shocks, capital markets, domestic and external interest rates, and the real exchange
rate. A country’s net public debt represents accumulated past fiscal outturns, while future balances
incorporate the resulting interest income and expenses. Systematic fiscal imbalances will thus generate
future interest expenditure, which in turn will contribute to the accumulation of new debt.
For nearly two decades, Chilean fiscal policy has been based on a cyclically adjusted balance (CAB)
rule applicable to total central government, which is consistent with the medium-term macroeconomic
equilibria —in other words with a level of public debt that is sustainable through time. 1 In practice, this
implied a decreasing trend in the accumulation of gross liabilities by the budgetary central government 2
until 2010, which has tended to reverse more recently but without returning to the levels of pre-rule
years. Figure 1.A shows that, on average, the gross debt/GDP ratio fell from 22.6% in 1990-2000
to 11.1% in 2001-2016.
Figure 1
Central government debt, 1990-2016
A. Central government financial assets and total gross
financial liabilities, 1990-2016
(Percentages of GDP)
50
45
40
35
30
25
20
15
10
5
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Total gross financial liabilities
Financial assets
1
The total central government encompasses institutions that are subject to the same budgetary planning and execution rules,
which are closely related to the Executive Branch, plus the extra-budgetary operations associated with this level of government.
2
Although this paper considers income and expenditure flows for total central government, it analyses both gross and net
debt stocks for the budgetary central government. The perimeter of the latter excludes unpaid recognition bonds for reasons
explained below.
Fiscal sustainability and the cyclically adjusted balance policy: methodology and analysis for Chile