Government plans for a temporary increase in a key mining tax was rejected by Chile’s Congress on Thursday, dealing Sebastián Piñera, the president, his first significant blow.

The rejection also left a $1bn hole in government plans for reconstruction spending after the country’s earthquake and tsunami in February. Ministers had wanted to increase the 4-5 per cent royalty to 4-9 per cent based on the price of copper, the backbone of Chile’s economy, and to enforce the scheme for three years. To woo miners who had been promised no changes to the tax regime until 2018 when the royalty was introduced in 2005, the government promised tax stability until 2025.

The opposition leftist coalition that was ousted this year by Mr Piñera after two decades in power drew the line at that extension, saying it was a concession to rich mining companies equivalent to selling copper off cheap. After an impasse, it was left to a cross-party commission of Congress to decide on the issue.

The government made a last-minute change to its plan, boosting the amount it sought to raise through the royalty increase to $1bn from $600m by enforcing the change for three years not two. But that was not enough to sway opponents, who wanted to slash the tax stability extension by four years.

The government said the opposition “has turned its back on the quake victims”.

Congress’s rejection means the government is likely to have to tap a fund of copper revenue savings or to issue debt to plug the financing gap in its $8.4bn package to rebuild schools, homes, hospitals and infrastructure flattened by the earthquake and tsunami. Evelyn Matthei, a government senator, said the revamp would have funded 80,000 permanent homes for people living in temporary shelters.

Felipe Larraín, the finance minister, told the FT in an interview before the change was struck down that the proposed scheme was “a better system” which would have meant a 7-8 per cent royalty at current prices. With the 35 per cent tax on income sent abroad, that would have meant a combined mining tax of more than 40 per cent.

“With that, Chile would have been in the mid-range of mining tax rates in the world. We didn’t want to distinguish ourselves by having the highest in the world,” he said.

Government “will have to get this financing in less macroeconomically appealing ways such as using the sovereign fund”, said Mr Larraín, referring to Chile’s $11bn windfall copper savings. But using cash from that risked putting pressure on the exchange rate.

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