Puerto Rico Can Prevent Default Through Tax Increases, Expense Cuts

Puerto Rico Can Prevent Default Through Tax Increases, Expense Cuts

Puerto Rico can prevent a costly default by implementing fiscal and structural reforms such as increasing taxes and reducing expenses, according to a report released by Centennial Group International.

Puerto Rico can fix its deficit problem

Jose Fajgenbaum, Jorge Guzman, and Claudio Loser, the authors of the report emphasized that Puerto Rico has a deficit problem, not a debt problem.

“Deficit is fixable and extensive history exists of other governments that made similar or greater fiscal adjustments and subsequently grew their economies,” according to the report.

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According to Fajgenbaum and his colleagues, the plan outlined by Puerto Rico Governor García Padilla is not the answer to deficit problem of the Commonwealth because it has significant risks.

They pointed out that the Governor’s plan ignored legal limitations, long lasting economic costs, and significant costs to on-island retail and institutional investors who hold substantial amounts of Commonwealth obligations. The Governor’s plan also prioritized the Go and Commonwealth guaranteed debt by the Puerto Rico Constitution.

Fajgenbaum and his colleagues noted that Puerto Rico has 18 different debt issuing entities, which account $72 billion of outstanding debt. According to them, each of the entities should be considered individually given that fact that each has its legal particularities.

The authors emphasized that Puerto Rico already started implementing fiscal reforms, and its deficit is declining. Its estimated deficit was around 1.3% of GNP in FY2015.

Padilla previously stated,“Our economic development plan is working, and we will continue to grow the economy, attract investments and create jobs.”

Suggested fiscal and structural reforms for Puerto Rico

Fajgenbaum and his colleagues noted that Puerto Rico can prevent default by implementing fiscal and structural reforms outlined in the Kruger Report, which include the following:

1. Increasing its revenue by $3 billion per year by 2020, $4 billion per year by 2025

Puerto Rico can achieve such objective by increasing SUT, increasing property taxes (the last assessment of real property values was in 1958) and individual income taxes from higher labor participation. It should also implement an income tax surcharge on corporations receiving exemptions and an eventual move to a flat rate.

2. Reducing expenses by $2 billion per year by 2010, $2.5 billion by 2025

Puerto Rico can attain this goal by freezing formula-based General Fund appropriations, reducing the number of techers to match the size of the student population, cutting sunsidy to the University of Puerto Rico and slashing excess Medicaid subsidies.

When it comes to structural reforms, Puerto Rico should change labor laws regarding overtime, vacation time, mandatory bonuses and others. It should also make its welfare benefits consistent with labor market conditions.

Puerto Rico should also reduce transportation costs by seeking Jones Act exemption, cut energy costs through PREPA reform, and modernize processes to facilitate new business startups particularly property registrations, new business permits, and tax collections.

Puerto Rico needs financing to provide a bridge for the implementation of its reform measures, according to the report. The overall balance of the central government of the Commonwealth is shown on the chart below after implementing the fiscal and structural reforms suggested by the report.

Puerto Rico

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