Aug. 12, 2008 (Bloomberg) — President Michelle Bachelet will keep the 2009 budget “as tight as possible” to help slow the rising cost of living, Economy Minister Hugo Lavados said.

While saying higher public spending isn’t the leading cause of the fastest inflation in 13 years, Lavados told reporters today in Santiago that budget increases next year will be limited to addressing key social needs.

     `Next year’s budget will not be as expansive as many would like,” Lavados said after a conference on Chile-Asia commerce at the Foreign Ministry. “But we will give priority to certain social programs.”

     Chilean economists raised their forecasts for inflation this year to 8.0 percent in a central bank survey published Aug. 7. Policy makers will lift the overnight lending rate by an additional half a percentage point to 7.75 percent at their Aug. 14 meeting, according to the median estimate of 27 economists surveyed by the bank.

     Bachelet ordered her ministers to adopt “austerity” measures, saying a slowdown in government spending may help contain the fastest inflation in more than a decade, government spokesman Francisco Vidal said to reporters in Santiago on July 31.

     Annual inflation rose to 9.5 percent in June and held there in July.

Lavados also said Chilean companies need to invest more in workforce training to boost productivity. Industrial output fell 0.9 percent in June from a year earlier, falling short of the 2.3 percent expansion estimated in a Bloomberg survey of 14 economists.
     “Productivity figures are an alarm signal insofar as marginal labor productivity has reached a certain point where it’s not growing,” Lavados said. “This means we have to pay a lot of attention to workforce training, and significantly improve technical education because they are two elements that, without a doubt, help productivity.”

     Chile’s president announced the creation of a $6 billion dollar education fund on May 21 to finance graduate, professional and technical studies for Chileans who want to study abroad. The government has not specified where those funds will come from.

     Growth in government spending, along with higher energy and food costs, is the cause of faster inflation, Felipe Larrain, an economist at Catholic University of Santiago, said in an economic conference last week.

     “Inflation is not external,” Larrain said. “The problem with inflation is public spending.”

The yield for a basket of five-year Chilean peso bonds in inflation-linked currency units, known as unidades de fomento, declined 6 basis points, or 0.06 percentage point, to 2.94 percent, according to Bloomberg composite prices.

     Chile’s peso rebounded 0.4 percent from a one-month low to 519.55 per dollar, from 521.59 yesterday.