The Budget: The Big Issue In 2005

by John Marino

February 4, 2005
Copyright © 2005 THE PUERTO RICO HERALD. All Rights Reserved.

. Budget deficits in San Juan and Washington have underlined the commonwealth government's precarious financial position, which is quickly arising as the big issue of the year -- if not the entire four-year election term -- in Puerto Rico.

Gov. Acevedo Vilá's budget chief, Ileana Fas Pacheco, has said this year's budget deficit could hit $1 billion or more, and she reckons, it could take a decade before the commonwealth can rein in spending enough to strike a balanced budget -- despite the "tough choices" the administration is making.

That pales in comparison to the record-setting budget deficit being racked up in Washington, D.C., however, which is expected to hit $427.5 billion this year. Most observers believe the federal fiscal crunch, plus President Bush's pledge to halve the deficit before leaving office, will cut the amount of federal funds Puerto Rico receives annually.

How bad a hit Puerto Rico will take on the federal funding front will be clearer after President Bush delivers his budget address on Feb. 9, but already Resident Commissioner Luis Fortuño is saying the island has to be "realistic" and prepare for the fact that some federal spending programs will likely be affected.

Fortuño said nobody should expect dramatic increases in current federal programs. He cited funding for the second phase of the Urban Train as one potential area that might be impacted, while others have mentioned Medicaid and Medicare, as well as Community Development Block grants, used for municipal public works projects, could be cut.

The federal budget woes are indeed bad news for Puerto Rico, which has seen an increase of about $500 million annually over the last decade. During the Calderón administration, federal funding rose by some 21 percent. Annual federal funding for the island is currently $14.6 billion.

Meanwhile, federal tax changes could slash Puerto Rico's annual rum rebate revenues by $140 million of the $382 million it currently receives. And a proposal to extend a provision that allows controlled foreign corporations to ship profits back to the United States tax-free could further hamper the island's attractiveness as a destination for industrial investment, just as a federal tax break for island subsidiaries of U.S. firms expires.

Federal funding issues aside, the Acevedo Vilá administration is making it clear it is strapped just trying to find the funds for the current budget. Slashing agency expenditures and instituting a hiring freeze is on the table. But the administration has so far stuck to its vow not to institute a consumption tax, although it would suck revenue from Puerto Rico's vast underground economy, save taxpayers money by eliminating the regressive excise tax and allow the government to roll back income tax rates -- at least a bit.

The New Progressive Party-dominated Legislature will no doubt, with relish, overturn some of former Gov. Sila María Calderón's costly pet projects, like the public campaign finance law. But it has also shown a propensity to embark on popular ventures, such as police pay hikes and a rollback of new taxes on 4x4 vehicles, without it being clear if there is money to pay for them.

It's healthy that the debate on spending priorities has begun. But for them to prosper both sides have to agree on a key goal: government spending must be cut.

Despite a constitutional requirement that the commonwealth government runs a balanced budget, successive PDP and NPP administrations have flouted the restriction for years. Political will, backed up by public demand, is a requirement to exit the quagmire.

The government fiscal mess is already the No. 1 public issue. Overburdened taxpayers, the business community, even the academic community, are clamoring for government reform.

Despite the roiling political environment, and bleak economic landscape, there is a widely agreed upon course of action the Legislature and La Fortaleza should take that could dramatically reshape the bloated commonwealth bureaucracy.

Payroll is the commonwealth's big problem, just paying the salaries of all its employees leaves little left over for anything else. Instituting a government-hiring freeze, however, could quickly put a dent in the problem because of the steady flow of retirees out of the system.

The government must also change policy at the Government Development Bank, which has been loaning money to the commonwealth to plug budgetary holes for years. The GDB should only lend money to the central government when a repayment source has been identified.

Sobriety also has to be brought to Puerto Rico's public corporations so that they generate enough money to pay for themselves. Consider the mess at the water utility. While government officials have refused to raise rates, the government has been paying for its $200 million annually deficit through legislative appropriations. Cutting out the subsidies and raising rates is the only way to go.

And a sweeping tax reform, including corporate and individual taxes, should be enacted -- and quickly. Repeal the excise tax, enact a consumption tax to suck revenue from the underground economy and provide at least some relief to the overburdened salaried employee, who has been paying for the government all along.

This is the real test for the NPP power base in the Capitol and the PDP power base at La Fortaleza.

John Marino, Managing Editor of The San Juan Star, writes the weekly Puerto Rico Report column for the Puerto Rico Herald. He can be reached directly at: Marino@coqui.net

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