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A need for government reform


February 24, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

When Sila María Calderón arrived in the governor’s office she pledged to fix the government’s fiscal problems, including reducing the deficit estimated at the time at $400 million and creating a transparent government. When the Calderón administration departed it left behind a record structural deficit that will probably reach $2 billion; a public debt that went from $23.8 billion in 2001 to almost $38 billion in 2004; $17 billion in new bonds issues; a public sector that increased by over 42,000 salaried employees in just four years; a commonwealth’ pension plan that is near collapse with $11 billion in unfunded liabilities; and the outlook for the government’s bonds and the Government Development Bank downgraded to negative.

The amount of the Commonwealth’s structural deficit has officially gone from $550 million to $1.4 billion, leading many in Puerto Rico to call for fiscal and tax reform. Now sources have informed CARIBBEAN BUSINESS that the "structural" deficit may go as high as $2 billion creating a very serious fiscal crisis for the government. The growing deficit is projected to have an impact on government agencies and services including education, health, safety, and roads and highways and if something is not done soon to bring government spending under control it may impact the commonwealth’s bonds. This situation has created a fiscal situation that is both difficult and complicated says Designated Treasury Secretary Juan Carlos Méndez. The worst part is that in struggling to reduce the deficit the government will have to cut spending drastically. When the biggest spender of goods, services, and construction cuts back, the entire economy will feel the impact.

An even more dramatic situation arises from the obsolescence of many government agencies and public corporations that were created in response to specific conditions, and which are now seriously in need of being either reinvented or simply eliminated. For decades the government of Puerto Rico has created new agencies, added employment, and provided higher salaries and benefits to public sector employees often without identifying where the revenues to pay for these would come from or if those employees deserved the salary increases.

In addition, public corporations created precisely so they would operate as private entities, generating their own revenues so they would not be a burden to the public treasury, are now receiving millions of dollars in subsidies in various forms from the government’s budget. The debt of the commonwealth’s public corporations has also increased nearly 20% during the past two years.

What is clear is that the current fiscal crisis can’t be resolved by simply increasing taxes, reducing cell phone use and the number of official vehicles. It will require a complete government reform and agreement from the executive and legislative branches. Government agencies must be carefully evaluated to see if the services being provided are still required by Puerto Rico’s taxpayers. Productivity measures must also be implemented to evaluate the quality of services being provided by public sector employees and obsolete agencies need to be identified and eliminated.

Allowing Puerto Rico’s highly developed and fully capable private sector to provide some of the services that can effectively be negotiated with the private sector is a step in the right direction. This is something that is underway throughout the mainland U.S. and in many developed economies. Last week CARIBBEAN BUSINESS reported on the efforts of Florida and North Carolina to reduce their government bureaucracies by eliminating some agencies, and privatizing and outsourcing others. The effort in these states has resulted in a reduced burden on taxpayers, greater private sector investment and economic expansion, and among the lowest unemployment rates in the nation.

The time has arrived for Puerto Rico to revamp its outdated economic model. We can no longer depend on the government to create the jobs that aren’t being generated in the private sector. One out of every three salaried employees in Puerto Rico works for the public sector, a rate that is more in line with underdeveloped countries. We had passed that stage 50 years ago. Now we seem to be going backward.

Next month, analysts from credit rating agencies will be in Puerto Rico to see how and what government officials have done to fix the Commonwealth’s fiscal crisis. The credit rating agencies are expecting to see a plan in action. So are Puerto Rico’s taxpayers.

This Caribbean Business article appears courtesy of Casiano Communications.
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