The Cyclically Adjusted Balance: Lessons from the Chilean Approach to Fiscal Policy for States with Fiscal Dependence on Commodity Markets

Samuel Boleslawski
3 days ago
4 min read

Introduction

The Chilean government’s fiscal revenue is dependent on the performance of commodity markets, in that copper exports remain one of the government’s key sources of revenue. Chile owns 19% of global copper reserves, and is the leading producer globally of copper, accounting for 24% of global production (García Bernal, 2025). Copper itself maintains a highly volatile price on world markets, with price ‘booms’ and ‘busts’ causing significant problems for a government intending to establish an optimal fiscal policy rule, in that they can cause significant revenue fluctuations between years. On average, 2.7% of Chile’s fiscal revenue from 2015 to 2024 was attributable to the copper industry, with this figure reaching as high as 7.6% in 2021, demonstrating the instability of this source of governmentlal revenue (García Bernal, 2025). These recent figures are also eclipsed by figures from the early 2000s where elevated copper prices drove copper to provide a massive source of Fiscal revenues. In response to the fluctuation of copper revenues, Chile´s adoption of a cyclical adjusted balance into its fiscal rules prove an interesting case study regarding appropriate fiscal policy for states with fiscal dependence on commodity markets.

Overview of the Nature and Purpose of Fiscal Rules

Fiscal rules are self-determined restrictions set by governments to limit certain budget aggregates, such as the government’s yearly budget deficit. Fiscal rules generally intend to promote ensure fiscal sustainability by reducing both the discretionally of government spending and the pro-cyclical nature of government spending, which in turn reduces volatility of GDP. Thus, such rules can help address fiscal concerns such as excessive levels of governmental debt, and to prevent government from increasing spending during periods of economic growth and decreasing spending during recession (which would create a pro-cyclical effect through changes in national aggregate demand).

Chile's implementation of the Cyclically Adjusted Balance as a Fiscal Rule Tool

A key type of fiscal rule is that creating a limit for yearly governmental deficits, as this is a good mechanism for preventing spiralling government debts. However, simply dealing with a restriction on the total value of yearly deficit is pro-cyclical, as it will tend to reduce the government’s budget during periods of weaker economic activity, and increase the government’s budget during periods of stronger economic activity. Such a restriction is not particularly useful for states where revenues strongly depend on commodity prices, as this would transmit volatility in the prices of commodities into volatility in government spending, which in turn would create broader macroeconomic instability.

Chile has sought to deal with this issue through the introduction of the cyclically adjusted balance (CAB), which is the government’s fiscal balance (revenue less expenditure) adjusted for the effects of cyclical variation in government revenue. This approach was introduced in the 2001 ‘Regla Fiscal Estructural’ (structural fiscal rule), and uses at its base long-term trends calculated assuming GDP remains at its potential level, and the price of copper remains at its long term equilibrium (García Bernal, 2025). The cyclically adjusted balance then takes takes into account short term deviations in copper price from the long-term trend, and adjusts the nominal fiscal balance by this ammount such as to obtain a cyclically adjusted fiscal balance which shows what fiscal balance would have likely been but for short-term fluctuations in copper prices. Thus, in years where copper prices are higher, the balance would be adjusted down to reflect a temporary surge in revenue, and in years where copper prices are lower, the balance would be adjusted up to reflect a temporary decrease in revenue. This cyclically adjusted balance is then subject to a rule limiting annual governmental deficits, rather than such a rule applying to the nominal fiscal balance.

For example, considering direct revenues from the sale of copper by the state owned mining company Codelco, the cyclical adjustment to be made would be:

This quantity would be subtracted from the government’s actual fiscal budget in order to obtain a figure for fiscal balance which adjusts for cyclical changes in direct revenue from sales of copper due to copper price fluctuations. Similar adjustment would be made for indirect changes in revenue arising from variation in taxation revenue from private copper mining companies which are associated with fluctuations in global copper markets.

In effect, this enables Chile to maintain a deficit rule that avoids pro-cyclicality, whilst still limiting the possibility of runaway government debt. Thus, the cyclically adjusted balance is a useful starting point for states seeking to implement a deficit rule, but whose governmental revenue is subject to significant short term fluctuations.

Evaluation of Effectiveness and Conclusion

One key criticism that is made of the cyclically adjusted balance is that it does not go so far as to create counter-cyclical fiscal policy, but rather only removes pro-cyclicality. Ideally, during periods of weaker economic activity, which in this case would be associated with lower global copper prices, the government should not simply spend the same as it would otherwise, but rather increase spending to augment aggregate demand. The opposite should be true during periods of unusually high economic activity arising following high copper prices. As such, whilst the model is an improvement over the consideration of a generic fiscal budget, it does not by itself go so far as to achieve countercyclical objectives.

It is somewhat difficult to evaluate the extent to which the cyclically adjusted balance has been successful at eliminating pro-cyclical fiscal policy in Chile, as it is highly difficult to isolate the effect of the fiscal rule on fiscal policy among numerous other possible confounding variables. Nonetheless, Chile has recently tended to demonstrate greater macroeconomic stability and more countercyclical government spending when compared to countries in similar economic positions (Ministerio de Hacienda, 2022), which does suggest that the overall fiscal framework in place in Chile is relatively effective.