- The draft of the new Constitution would allow regional and local governments to finance and access funds through debt issuance, but the way it regulates this could compromise the financial responsibility of local and regional authorities.
- On the other hand, the absence in the draft of the new Constitution of principles and mechanisms for the control of indebtedness, public spending and fiscal discipline that are enshrined in the current Constitution could have certain consequences.
Debt issuance in the draft of the new Constitution
The draft of the new Constitution establishes that only a law could: (a) authorise the contracting of loans and other operations that could compromise the credit and financial responsibility of the State, its agencies and municipalities, noting that this would not apply to the Central Bank of Chile; and (b) establish the conditions and rules under which universities and State enterprises and those in which the State has a stake can contract loans, which in no case could be made with the State, its agencies and enterprises.
For its part, the draft establishes that among the laws of “em>necessary presidential concurrence” – i.e., those that could only be approved to the extent that the President of the Republic grants his sponsorship during the processing of the bill – are: (i) those that directly incur expenses for the State; (ii) laws related to the budgetary administration of the State, including amendments to the Budget Law; and (iii) those that contract or authorise to contract loans or enter into any other kind of operations that could compromise the patrimonial responsibility of the State, semi-fiscal, autonomous entities and condone, reduce or modify obligations, interest or other financial charges of any nature established in favour of the Treasury or the aforementioned bodies or entities.
Regarding the Central Bank of Chile, the draft indicates that it could only carry out operations with financial institutions, and in no way grant them its guarantee, nor acquire documents issued by the State, other than in exceptional and transitory situations in which the preservation of the normal functioning of internal and external payments so requires, pointing out that under these circumstances the Central Bank of Chile could buy for a determined period and sell in the open secondary market, debt instruments issued by the Treasury, in accordance with the law.
Regarding local financial administration, the draft grants financial autonomy to autonomous regions, autonomous communes and indigenous territorial autonomies, for the realisation of their purposes and interests under the terms established by the Constitution and the law. This financial autonomy would be governed by the principles of sufficiency, coordination, budgetary balance, solidarity and inter-territorial compensation, sustainability, responsibility and economic efficiency. In this sense, the draft of the new Constitution grants regional and local governments the power to issue debt in accordance with the provisions of the law, which must at least establish: (a) the prohibition to use the funds raised for salaries or to finance current expenditure; (b) mechanisms to ensure that the debt is fully and properly serviced by the debtor; (c) the prohibition to establish guarantees or sureties from the Treasury; (d) the establishment of debt ceilings as a percentage of the annual budget of the respective regional and municipal government, and the obligation to maintain an updated risk rating; and (e) restrictions in electoral periods.
Differences between the draft of the new Constitution and the current Constitution
The main differences between the current Constitution and the proposed draft in relation to debt issuance are as follows:
- Quorum for approval of the law: The current Constitution states that a qualified quorum law would be required to authorise the contracting of those loans whose maturity exceeds the term of the respective presidential term, which was not incorporated in the proposed draft. Therefore, law on this matter could be approved with a simple majority,, reducing the constitutional control that restricted the possibility that a new government must assume high fiscal debt from previous administrations.
- Public expenditure control principles: The current Constitution states that borrowing by the State, its agencies and municipalities must be for the purpose of financing specific projects, and the law authorising such borrowing must indicate the sources of funds from which the debt is to be serviced, whereas the proposed draft does not enshrine these public expenditure control principles.
- Initiative of the law: The laws of “exclusive initiative of the President of the Republic” contained in Article 65, paragraph 4 N°3 of the current Constitution have been replaced by the concept of “necessary presidential concurrence“, excluding, however, presidential sponsorship to modify the conditions contracted by local governments, thus enshrining the administrative, patrimonial and financial autonomy of the autonomous regions, autonomous communes and indigenous territorial autonomies. In addition, these regional agreement laws, as they involve the financial responsibility of the territorial entities, are also processed in the Chamber of Regions.
- Budget Law: As regards the annual Budget Law regulated in Article 67 of the current Constitution, the draft of the new Constitution maintains the main guidelines regarding its formative procedure, but adapting it to the new legislative system proposed by the draft and applying to it the “law of regional agreement” procedure, which would imply that it would be reviewed by a “special budget commission” composed not only of deputies but also of regional representatives.
Effects if the draft of new the Constitution is adopted
Regarding the financing and financial stability of regional and local governments, including indigenous territorial autonomies, the draft rules would allow for financing and access to funds through debt issuance by regional and local governments to meet their various financing needs. The possible indebtedness of regional and local governments, especially since the draft of the new Constitution leaves the determination of maximum debt limits to regional agreement laws, could seriously compromise the financial responsibility of territorial entities and put the fiscal sustainability of the respective regions at risk.
Similarly, the absence at the constitutional level of certain principles and mechanisms for the control of indebtedness, public spending and fiscal discipline that were enshrined in the current Constitution, implies that it would be those in charge of the legislative branch who could determine important aspects of public indebtedness, such as the source of financing for the repayment of the contracted debt and the use and destination of the resources obtained from this indebtedness. Of particular relevance would be the future regulatory framework that implements the new constitutional norms on the matter and, especially, the fate of the current legal framework that regulates the system of financial administration of the State, the current norms that regulate international contracts for the public sector, and the other budgetary and financial regulations of the public sector currently in force.
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