By Sebastian Boyd and Nathan Gill

Oct. 7 (Bloomberg) — Chile’s budget deficit will be smaller this year than earlier forecast as rising copper prices trimmed the projected shortfall in tax revenue.

This year’s budget deficit will be about 3.6 percent of gross domestic product as government income falls 22 percent short of initial projections, budget director Alberto Arenas told lawmakers today in Valparaiso. The government in June forecast a gap of 4.1 percent and a tax shortfall of 24 percent.

The outlook for Chile’s public finances is improving on the back of higher-than-forecast copper prices and early signs of economic recovery. Gross domestic product will probably shrink 1.6 percent this year, Arenas said, a number at the optimistic end of the central bank’s 1.5 percent to 2 percent September forecast.

“We’re estimating a deficit for this year of 3.1 trillion pesos, around 3.6 percent of GDP,” Arenas said. “Last June, we estimated a deficit of 4.1 percent of GDP, so what we’re estimating today is better.”

Chile’s economy was battered this year after the global economic slowdown lowered prices for copper exports and a salmon virus crippled fish farms. Activity expanded in August from July for the fourth straight month, the central bank said on Oct. 5, cutting the year-on-year decline to 0.1 percent.

Economic Crisis

Lower-than-forecast commodity prices cut revenue from the state-owned copper company, Codelco, and from privately owned mines’ royalties, while a slowing economy eroded tax collection, the budget office said. Copper is Chile’s leading export, and Codelco is the world’s largest copper mining company.

“The decline in forecast government revenue is mostly due to the effects of the international economic crisis,” Arenas’s budget office said in a report distributed today. “The biggest effects are due to lower-than-budgeted prices for copper and molybdenum.”

The government’s budget forecasts match the market consensus and the projected deficit shouldn’t affect the country negatively, Cesar Perez, the managing director of Santiago-based brokerage Celfin Capital SA, said today.

“The budget is in line with reality,” Perez said in a telephone interview from Santiago. The budget deficit “won’t affect our credit quality and much less our sovereign spreads. There’s a lot of credibility in Chile’s financial system and its fiscal management.”

The government cut its forecast for this year’s average copper price in June to $1.92 a pound from the $2.90 per pound it forecast last October. The metal has since appreciated again and Arenas today forecast the average price for 2009 would be $2.27 a pound.

Chile’s government will run a deficit equivalent to 1.1 percent of gross domestic product next year as the economy grows 5 percent, Finance Minister Andres Velasco said Oct. 1.

The government expects consumer prices to fall 0.8 percent this year, Arenas said.