Puerto Rico Can Prevent Default Through Tax Increases, Expense Cuts

Puerto Rico

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.

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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About the Author

Marie Cabural
Marie received her Bachelors Degree in Mass Communication from New Era University. She is a former news writer and program producer for Nation Broadcasting Corporation (NBC-DZAR 1026), a nationwide AM radio station. She was also involved in events management. Marie was also a former Young Ambassador of Goodwill during the 26th Ship for Southeast Asian Youth Program (SSEAYP). She loves to read, travel and take photographs. She considers gardening a therapy.

5 Comments on "Puerto Rico Can Prevent Default Through Tax Increases, Expense Cuts"

  1. Puerto Rico should change its official language to English for starters.

  2. So Marie studied Mass Communications and is an Event Manager and now she is an expert in Puerto Rico’s Economy? Where does she get the facts that property values have not been assessed since 1958? Every year property taxes for my home are increased. There is no overtime, health plan coverage has been cut for everyone, we have had FOUR tax increases to gasoline, bonuses and benefits overall have been cut, there is NO RETIREMENT fund for government employees anymore (now it’s a “savings” plan). The amount of permits and fees on EVERYTHING a potential small business needs to pay is staggering, our sales tax was JUST NOW INCREASED from 7% to 12% and STILL IT IS NOT ENOUGH. What NEEDS to be cut is salaries and benefits for Senators, Representatives, Mayors, the Governor and Government Executives plus all their buddies with JUICY CONTRACTS. Do you know that after 8 years a mayor can retire with FULL BENEFITS? Anyone who has the nerve to say that we (the people) need to “sacrifice” a little more has no idea what it is to live here. Do the math and see where all the money is ending up…

  3. You lost me here, sweetheart: “reducing the number of techers”…. techers wint 2 skool and spelt it honest to god wid a pincil an everthang like this:

    “teachers”

  4. jaja, this graphs looks like the graphs the governor keep tossing at us projecting fantasies. The more taxes they raise the less they are going to get. They just don’t get that people are broke and fed up from all the lies and thefs. Its a structural problem, there is a deficit becase there are no real jobs and people are leaving. Keep raising taxes and people will keep leaving or worse.

  5. You can’t cut teachers! The school system doesn’t even have substitutes! Every day there are hundreds of students outside cause their teachers are absent. The governor & ALL politicians are the ones that need to cut their vacations & their thousands of $$$ spending on suits & lunches with our money. They don’t spend one penny of their own. None of the 78 mayors pays taxes. There is no overtime! Let’s get it in writing that all mayors will take at least at $20,000 pay cut-incl. the gov. Every mayor earns more than NY’s mayor-& ours just parade around. Our gov. doesn’t want solutions, just people who will subsidize PR’s spending so they can continue as usual-that’s why you’ll never hear him say he’s slashing his/his staff’s salaries or that they’ll all begin paying taxes, or give up their police escorts, or free cell phones, or cut their 3 hr lunch hours, etc..
    S. Cruz

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