November 30, 2020

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The largest budget in a decade




The economic depression Puerto Rico has been experiencing since 2006 resulted in a decline of the island´s purchasing power of least 21 percent. Next fiscal year, the local government will seek to leave behind austerity measures in the face of the economic downturn triggered by the COVID-19 pandemic.


The revenue and spending scheme promoted by both the Oversight Board and Governor Wanda Vázquez Garced represents the largest budget for Puerto Rico since the beginning of the decade when the island still had access to capital markets and the Treasury Department could access loans to balance itself.

Yesterday, neither La Fortaleza nor the Board had detailed their respective budget proposals, which differ by less than $200 million, as the Board´s executive director Natalie Jaresko recently acknowledged. By congressional provision, the entity determines how to use the contributions Puerto Ricans made to the Treasury.

On one hand, the situation has a high potential to generate fund insufficiencies that will trigger new fiscal problems. The Fiscal Agency & Financial Advisory Authority (FAFAA) estimates that Puerto Rico’s economy will contract by up to 7.4 percent (gross national product) over the next fiscal year, which will cause a drop in government collections at a time when there will be an increase in spending.

On the other hand, an increase in government spending, as the governor confirmed Thursday during her State of the State and Budget message before the Legislature, would help contain the impact of the COVID-19 pandemic on an economy already battered by a prolonged depression that seems to have no end and that, little by little, undermines the government’s economic capacity.

I don’t think the impact of the lockdown on the government’s revenues is being contemplated here. FAFAA says the economy will fall by more than 7 percent. That would be the largest drop since we started measuring the economy in 1950. How is it possible that if the economy is going to collapse we will have more revenues to cover this level of spending? That has to be thoroughly explained,” said economist José Caraballo Cueto, stressing the need to maintain balanced budgets.

In theory, the real way out of this fiscal situation is to improve the economy by increasing local production and the exports of goods and services. However, during the governor’s message on Thursday, no program was announced seeking to fix the economic mess, except for a non-recurring incentive for farmers and the hope brought by a measure in Congress seeking to extend benefits to pharmaceutical companies that establish their operations on the island.

“The governor spoke about improving exports, but I didn’t see a program to encourage exports. There was nothing, not even proposals to teach entrepreneurs how to export and open to markets. I’m worried that good ideas won’t be implemented. Puerto Rico has an export potential not being exploited,” Caraballo Cueto said.

According to economist José Alameda, the problem with reviving a federal incentive to attract manufacturing to Puerto Rico is that it again creates a dependency on profits that Puerto Ricans don’t control since those decisions are made in the U.S. Congress.

He agreed with Caraballo Cueto on the export capacity that is not being exploited by local entrepreneurs and indicated that a better economic model should not be based on federal incentives but on strengthening local capital with a view on exports.

Caraballo Cueto said these incentives could have a positive effect if they are designed so that manufacturing activity is linked to local businesses and companies.

It never rains but pours

While looking for answers to the economic dilemma, which yesterday were not part of the debate between the Executive and the Legislative branches, government services seem increasingly affected by the drop in revenues that until recently was addressed through tax and fiscal measures.

An analysis of the government’s purchasing power by El Nuevo Día reflected that, even if an increase in government spending were approved, the consolidated budget (which includes agencies, public corporations, and other government instrumentalities) would have a purchasing power 21 percent lower than it had in 2005, the last of the economic bonanza years. El Nuevo Día’s analysis included adjustments made to the amounts based on both the Consumer Price Index and inflation rates published by the U.S. Bureau of Labor Statistics.

If the equation includes population rates, it also shows a significant decline. According to Alameda, the real budget per capita was reduced by 6.3 percent between 2010 and 2019.

Dramatic labor austerity

The government payroll reflects a good part of that reduction. The total invested by the government in that line went down by 24 percent since 2005, without considering the impact of inflation over a decade and a half. When including this factor, the purchasing power of the money invested by the government in the payroll dropped by 44 percent during this period.

Bonanzain professional services

However, when looking at the line of professional services the government hires, the picture is quite the opposite. According to data from the Office of Management and Budget (OMB), the government has tripled (+198 percent) what it spends on this item.

“What happens is that, to the extent that you reduce the payroll, then you can justify that you don’t have the personnel to address some government’s affairs and you then hire professional services, especially because that way you have the perfect excuse to give an economic reward to the person who helped you in the electoral campaign,” said public administration expert Mario Negrón Portillo.

“There is a tendency to outsource services that were performed by the employees dismissed from the government,” added Alameda, as he examined the data.

Alameda said that if Puerto Rico’s economy had remained in a growth structure, the budget for the General Fund would be around $17.145 billion and the consolidated budget near $47.388 Billion.

“The problem here is not inflation. The rate has been mostly between 2 percent and 1 percent, but when you don’t manage to adjust your income to inflation for many years, the purchasing power ends up being much lower, because of that prolonged effect,” Alameda said.



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