Memorandum from Mr. Edgar L. McGinnis of the Division of North and West Coast Affairs to the Chief of That Division (Mills) and to Mr. Bainbridge C. Davis of That Division

In an excellent and comprehensive report (No. 315 dated Nov. 31) the Embassy at Santiago summarizes the Chilean Minister of Finance’s October 27 report to Congress on the fiscal situation. The report gives considerable ground for optimism and indicates that Chile has made substantial gains in putting its fiscal house in order. The Finance Minister’s report makes the following principal points:

Government receipts and expenditures will be balanced during the current fiscal and calendar year at 12,328 million pesos.
There has been almost no resort to borrowing nor creation of new money for budget needs; on the contrary, substantial Fomento investments in housing, public works, etc., are included in the budget.
Allowance is already made for current cost of living bonus for public employees and budget includes substantial payments on various arrears.
Treasury cash position is comparatively sound with a net current and cash surplus of 1,200 million pesos.
1949 income and expenditures indicate a surplus of income of 770 million pesos.
Public debt service was maintained and debt reduction amounted to 620 million pesos during the fiscal year.
Amortization on privately held short term external debt ($4,945,000 and 2,009,000 pounds on 12–31–47) increased from 2½ to 5% annually.
Cost of living increased at a much slower rate in 1948 than in the previous year.
Foreign debt settlement arrived at.
By the end of 1948, 75% of foreign exchange due for merchandise on consignment will have been paid; amount of merchandise in customs is down to normal.

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On the debit side the Finance Minister included the following:

Inflation is still a serious problem with credit increasing more rapidly than the needs of production require.
Anticipated pay increases in 1949 for public servants will require added sources of revenues.
Large part of Treasury’s surplus cash will be required for cost of living bonuses to public employees, etc.
Government and semi-governmental investment activities lack coordination.
Only limited economies can be achieved by reduction in government personnel; State development activities can not be increased further save with foreign aid.

Sr. Alessandri stated that the government favored gradual correction of inflationary forces which would include 1) remunerative prices to increase production; 2) upward adjustment of wages and salaries “in the interests of justice”; 3) government expenses to be reduced with fewer employees; 4) concentrate on finishing pending development projects (steel plant, etc.) and postpone new ones until former produce or save foreign exchange; 5) development institutions should use resources only to increase production; 6) social security agencies should be consolidated to curtail competition among them to pay maximum benefits.

The Embassy comments that the Alessandri exposé unquestionably indicates extensive improvement in the Chilean fiscal position, but adds that underlying conditions now favor Chile—since her exports enjoy an excellent market. The Mission feels that the balance achieved by Sr. Alessandri is fairly precarious and that his suggested remedies for inflation are influenced by political necessities of the moment, e.g. his tacit admission of another turn in the wage-price spiral and the government’s efforts to please everyone (e.g. salary increases, “semana corrida,” differential exchange rates for small exporters, etc.).

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