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Outlook Remains Cloudy


January 27, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

Puerto Rico’s new government can expect major economic challenges in 2005. With local economists forecasting yet another year of moderate growth–between 2.3% and 2.5%–a lot will depend on how the administration of Gov. Acevedo Vilá manages the budget deficit, the issue of taxes, the large government bureaucracy, and the commonwealth’s $8.1 billion unfunded pension liability.

The governor and his new economic team certainly have their work cut out for them. With a budget deficit estimated to reach at least $1 billion in fiscal year 2005, the largest in the island’s history, the administration must undertake drastic measures to reduce government spending and increase revenue. A complete reform of the government’s system is needed. Patching it up is no longer sufficient.

Government employment increased by over 42,000 people during the four years of Sila Calderón, the last thing we needed more of, while salaried employment in the private sector decreased by 51,000 employees. Currently, one of three salaried employees in Puerto Rico is employed in the government. Add to this the fact that in 2005, over 100,000 of these public-sector employees will renegotiate their collective bargaining agreement contracts with government agencies and most are likely to demand higher salaries and benefits the Commonwealth is in no position to provide. Already, police officers have seen the likelihood of the promised pay increase vanish as a result of the Commonwealth’s budget deficit.

The government of Puerto Rico also must find some way to increase its revenue in 2005. Tax reform is inevitable if the government is going to remove the negative outlook received in recent months from credit-rating agencies. However, simply imposing any new taxes is insufficient unless it is accompanied by a complete reform of the government’s bureaucracy. The new administration also will have to lobby the White House for greater federal funds, since President Bush is seeking to reduce the budget deficit, and cuts in federal spending are imminent.

The new leadership in the executive and legislative branches will have to take bold steps and initiatives to put Puerto Rico’s economy on the road to more than just moderate growth. The island’s economic model has become obsolete and can no longer depend on economic tax incentives and low wages to lure companies to Puerto Rico, especially with the wages being offered in China, where the majority of the 1.2 billion population is still earning pennies per hour. The private sector is also looking to the Acevedo Vilá administration to improve the bureaucratic permitting process that has contributed to a less-than-rosy outlook for many industries on the island.

In spite of this, Puerto Rico’s private sector remains positive about its economic performance in 2005. The financial sector expects to continue shining even if interest rates increase somewhat. The tourism sector predicts a sunny outlook, particularly in light of the severe winter season on the mainland U.S., the declining dollar, and safety concerns regarding travel to foreign countries. The insurance industry and retailers are also looking forward to a good year, while construction will continue to rely substantially on public projects in 2005.

Despite the high costs of fuel, the economic outlook for the U.S. mainland is optimistic, with a projected growth of 3.5% in 2005. This is likely to have a positive impact on Puerto Rico due to the island’s close economic ties to the mainland.

This Caribbean Business article appears courtesy of Casiano Communications.
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