Tax cuts approved, but Chile's fiscal gap remains unsolved

The Senate approved the tax core of President José Antonio Kast's mega-reform in the early hours of this morning, and the market reaction captured with precision the magnitude of the moment: the IPSA lost ground to 10,948.74 points in a volatile session, but the move reflects caution about what lies ahead — the Chamber of Deputies has yet to ratify the text — rather than a rejection of the reform's substance. JP Morgan, which recently upgraded Chile from Neutral to Overweight, said as much in a report published ahead of the vote: passage of the mega-reform is "the most important political catalyst for Chilean equities this year."

What the Senate cleared after a session that stretched into the early morning is substantial. The gradual reduction of the corporate income tax from 27% to 23%, effective from commercial year 2029, was approved by 26 votes to 24, a margin that illustrates both the significance of the measure and the government's political fragility. In the same vein, the reintegration of the tax system — which allows business owners to credit taxes paid at the corporate level against their personal obligations — passed with an identical result. Tax invariability, perhaps the most debated element, was structured into three tranches: 20 years for investments above US$350 million, 15 years for projects between US$100 million and US$350 million, and 10 years for commitments between US$50 million and US$100 million. The employment credit, by contrast, obtained much broader backing, with 44 votes in favor.

JP Morgan argues that the corporate cut, by leaving final personal taxes of up to 40% unchanged, creates a structural incentive to retain earnings within companies and reinvest them, which in its view supports the thesis of a recovery in local capital investment. SOFOFA, for its part, has estimated that a four-percentage-point reduction in the corporate tax could generate at least 80,800 additional direct jobs and, under the government's growth scenario, exceed 330,000 positions between 2026 and 2030.

However, the legislative victory coexists with an underlying fiscal warning that cannot be ignored. The second-quarter Public Finance Report itself, published by the Budget Office (Dirección de Presupuestos), shows that even with the mega-reform approved, the gap between the structural fiscal balance targets and the actual projections does not close in any year over the 2027-2030 period. According to La Tercera, the structural deficit projected for 2027 in the with-reform scenario reaches 2.4% of GDP, versus a target of 1.8%. By 2030, the gap remains 60 basis points wide. The government assumes a lower GDP for 2026, but points to 3.7% growth in 2027 should the reform fully materialize, financed in part by higher copper revenues and additional spending cuts of roughly US$790 million. Between 2027 and 2030, the Finance Ministry still needs to find close to US$13 billion to square its own fiscal commitments.

Against that backdrop, the signal from former minister Marcel Grau — who publicly questioned the miscellaneous bill on the same day of the Senate vote, warning of possible cuts to social spending — is no minor data point. Constitutional reservations announced by Senator Yasna Provoste and Senator Juan Luis Castro add legal uncertainty that could stretch out for months.

The copper picture, meanwhile, offers a parallel narrative of robustness with built-in caveats. BHP reported production of 1.95 million tonnes in its fiscal 2026, brushing up against the two-million-tonne mark for the second consecutive year, in a context where the metal's price ran roughly 35% above the prior year. The company nevertheless projects a decline to between 1.65 and 1.8 million tonnes for 2027 on the expected drop in Escondida's ore grade. The dollar index was down 0.38% at the close, while Comex copper futures rose 0.16% to US$6.38 per pound, levels that sustain Chilean fiscal revenues but do not resolve the structural gap that Dipres has just quantified. Antofagasta Minerals, the Luksic family's mining arm whose shares trade on the London Stock Exchange, produced 285,000 tonnes of copper in the first half, 10% less than in the same period a year earlier, though its CEO Iván Arriagada is confident that higher grades at Los Pelambres and Centinela will allow it to meet annual guidance of between 650,000 and 700,000 tonnes.

Pressure on industrial exports adds another layer of complexity. Exports from the Biobío region fell 16.1% in May, dragged down by a contraction of more than 34% in shipments to the United States, in what the INE identifies as the largest single factor behind a cumulative 4.6% decline in the first five months of 2026. The slowdown in U.S. demand, in line with the global moderation also reported by China, hits directly at the industrial base of the country's central-south region.

Faced with this picture, the government is advancing on several fronts pointing to the medium term. Subrei is working on an interministerial roundtable to design a foreign investment screening mechanism for strategic sectors, a move that fits the global trend of reviewing foreign capital flows into critical infrastructure. Codelco chairman Bernardo Fontaine acknowledged before the Senate that Chile has lost share in the global lithium market — from 38% of supply a decade ago to 21% today, with a projected drop to 14% by 2030 — and that the joint project with Rio Tinto at the Salar de Maricunga could still take eight years to materialize. "We have definitely been left behind by the lithium boom," he admitted.

What lies ahead has three immediate points of observation: the return of the miscellaneous bill to the Chamber of Deputies, where the government will need to reenact the negotiations that proved so tight in the Senate; the trajectory of copper prices in a context of Chinese deceleration that JP Morgan and BHP are watching closely; and the Finance Ministry's capacity to articulate the additional spending cuts that Dipres itself acknowledges as unavoidable if the fiscal target is to be taken seriously. The probability of a technical recession, which Clapes UC puts at 13% after five consecutive months of Imacec declines, remains the backdrop to all of the above.

**BHP Group (NYSE: BHP)** — The Australian miner reported copper production of 1.95 million tonnes in its fiscal 2026, 3% below the previous year, with Escondida contributing 1.2 million tonnes