Monday, January 5

Dawn of Economic Realism in Puerto Rico

Posted by Advantage Business Consulting at Monday, January 05, 2009

Puerto Rico Daily Sun
Vicente Feliciano
December 27, 2008

Time and timing are of the essence in order to tackle the fiscal deficit and structural adjustments required by the Puerto Rico economy. Actions must be taken fast, but also in the correct order.

In the middle of a deepening recession it is wrong to approve recessionary measures. Therefore, the correct way to close the fiscal deficit for 2008-09 is through borrowing or selling assets.

Increasing the IVU, lowering public sector salaries… are recessionary measures that should be postponed to the fiscal year 2009-10.

It has been argued that the IVU should be raised two points in order to borrow $5 billion to close the fiscal deficit and perform public works. This would be like putting the cart before the horse.

The right economic strategy is to borrow against the lottery revenues or the existing IVU. This will be enough to cover the present deficit and start performing public works. In addition, support in the form of Federal transfers should start flowing sometime between March and April.

Once these measures tie us up to June 2008, the process of restructuring the government and the tax system can start in earnest. Definitely, the middle class needs a tax cut. This will add to the deficit of some $2 billion. A combination of painful spending cuts and tax increases would be required to cover the gap.

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