Chilean Reconstruction Law Needs Broader Support for Economic Growth

Chile's proposed Reconstruction Law, designed to stimulate a stagnant economy, requires a wider consensus beyond its current narrow support to achieve its ambitious goals. The law bets on future economic growth to offset reduced current revenues and increased debt, aiming to eventually reduce unemployment and raise wages. While focusing on investment, its immediate productivity measures are limited, relying on a dynamically growing future economy to foster innovation. The risk of a controversial law, passed with minimal votes, being reversed if the government loses its majority is significant. Investors consider long-term stability, and doubts about the permanence of approved rules can dilute the law's intended expansionary effects. Despite having just enough votes to pass the Senate, the government would benefit from seeking broader approval, which necessitates more time and concessions. For comparison, a controversial tax reform under President Bachelet in 2014, though approved by a large majority in the Chamber of Deputies, secured broad Senate support (33 of 38 senators) through prior agreement. The current Reconstruction Law, however, passed its general vote in the Senate with a slim margin of 26 out of 50 senators. Such a marginal approval in the Senate, which tends to have more inertia than the volatile lower house, does not provide a solid foundation. Since President Piñera's first administration, no ruling party has held an outright majority in the Chamber, and the current government relies on agreements with parties like the PDG and Libertarios to form a majority. The Senate has generally lacked an officialist majority, especially after the binomial system, with only the Nueva Mayoría briefly achieving one. The current government holds exactly 50% of the Senate seats, requiring at least one additional vote for simple majority decisions. The Reconstruction Law's current support base is fragile and potentially volatile over the long term. Investors demand legal certainty, not just formal approval. Consequently, the impact of the tax cuts on the economy, particularly on the long-term investments crucial for Chile's economic growth, job creation, tax revenue, and social progress, may be limited.