There was an opinion piece in the Wall Street Journal last month regarding Puerto Rico, called “Profligate Puerto Rico on the Brink”. It was written right at the time the the current Governor Alejandro García Padilla declared that Puerto Rico couldn’t pay its debts anymore. As someone who is involved in Puerto Rico with friends and clients whom I advise on matters there, I found most of the points agreeable — that Puerto Rico has not tried serious reforms before deciding to declare insolvency.
Some points he raises:
–The proposed budget for the fiscal year beginning July 1 contains no plans for head-count reductions.
–Puerto Rico’s debt crisis is the result of years of government mismanagement. Dozens of agencies and publicly owned corporations have run deficits year after year, making up the difference by borrowing from bond markets.
–The administration seems to believe higher taxes are the answer. An increase in the island’s sales tax passed last month, to 11.5% from 7%, is projected to raise more than $1 billion in a year. This is the fifth tax increase since 2013, intended cumulatively to generate more than $4 billion. In reality, they have raised less than $1.5 billion in new money as more Puerto Ricans move their economic activity underground, businesses cut outlays, and the exodus to the U.S. continues.
–In Puerto Rico, the decline in the real economy has been less than 8% over the past decade, and while total employment has declined 16%, the population has declined more than 10%, leaving the unemployment rate only slightly higher than it was in 2006. Yet the commonwealth continues to spend more on growth-inhibiting programs—regulations, fees and taxes—rather than on pro-growth stimulus initiatives like agency mergers, investment in business infrastructure and public-private partnerships.
One items, however, was incorrect; this has to do with Governor Fortuño, the Republican governor from several years back. The author suggested that overspending is a bipartisan problem by including Fortuño in his list of horribles . However, Governor Fortuño was the one leader who actually did make systemic changes to reduce Puerto Rico’s deficit. He eliminated 38,000 government jobs thereby reducing the size of the government by 20%. Then he cut income-tax rates by half and corporate-tax rates by nearly a third. He lowered the deficit to $660 million from $3.3 billion. For this, I disagree that he was just lumped into the analysis with the other profligate Democrats before and after him.
Reducing the size and scope of government is a major key part of getting Puerto Rico back on track. Without trying to sound callous, Puerto Rico should feel, to some degree, the consequences of their extraordinarily poor choice they made four years after the leadership of Fortuño who put Puerto Rico onto a path to solvency. By choosing to discontinue the rational, solvent course he had carved out and subsequently electing a leader that instead promised the unaffordable, Puerto Ricans must have to first experience tough reforms and cutbacks help Puerto Rico thrive once again.