It's The Budget, Stupid

by John Marino

May 27, 2005
Copyright © 2005 THE PUERTO RICO HERALD. All Rights Reserved.

. If there were any doubt that the government budget mess is THE issue of the year in Puerto Rico, it was erased in recent days with the twin downgrade of the commonwealth's credit by the two main U.S. credit rating agencies.

Both Moody's and Standard and Poor's cited the commonwealth's bloated payroll, history of deficit spending and stagnant tax revenue streams in announcing the move, which had been expected since the two entities gave a negative outlook to Puerto Rico's credit last year.

The immediate fallout of the move is it will cost the government millions more to borrow money, increasing the financial pressure the commonwealth is under. But the damage goes beyond that. The S&P and Moody's downgrade sends a clear signal that Wall Street has lost trust in the commonwealth government and its ability to adequately manage its finances, and this could harm the island's investment climate in a much broader way.

The timing of the announcement, a month before a new commonwealth budget needs to take effect, can be seen as a message to government officials: pass a budget now that shows us you are serious about getting your financial house in order. Then, undertake a much wider fiscal reform over the long haul.

Even if the timing was pure coincidence, administration officials and lawmakers must now know that the budget they pass is not just for local consumption. Wall Street analysts, and current and prospective investors on the island, are watching with close scrutiny. And they will be expecting sure steps towards cutting government bureaucracy and spending to levels the commonwealth can afford.

The Popular Democratic Party administration of Gov. Acevedo Vilá has proposed a budget that takes some of these requisite steps, and he deserves credit for that. Some unpopular moves, such as cutting subsidies to public corporations and instituting a government-hiring freeze, are good ideas that deserve to be instituted. But there is also much objectionable in the proposed budget, such as the sweeping elimination of excise tax exemptions, even on such necessities as food, medicine, books, education materials and other publications.

The New Progressive Party-controlled Legislature initially laid out some worthy budget goals: trimming Acevedo Vilá's budget by $1.3 billion, which is the size of the increase he is proposing, plus budgetary items not based on recurring revenue. That's a worthy goal, as using non-recurrent revenue (i.e. onetime cash windfalls) to balance the budget over the course of years is the primary reason for the commonwealth's credit downgrade.

But the Legislature has provided scant few details on how it would reach these goals, even though it has had about two months to provide them. Worse, the battle over the Senate presidency and consistent political spats with the Acevedo Vilá administration has projected the image that the Legislature is essentialy leaderless, so consumed is the NPP in its political battles.

The NPP Legislature has blown a golden opportunity to sell the Puerto Rican public on an alternative budget, but it still has a month to roll up its sleeves and deliver a proposal Acevedo Vilá will enact. Not reaching a budget accord will only further weaken the investment climate in Puerto Rico, and neither party can afford to let that happen.

The battle over the Senate presidency could be resolved as early as this week, with Sen. Pedro Rosselló believed to have won majority support within the NPP Senate caucus to wrest the presidency from fellow statehood senator Kenneth McClintock. But the feud has been allowed to fester too long, and Rosselló has taken a public relations beating in his long drive to attain the Senate presidency. That will compromise his potency as a political leader even after consolidating political power by presiding over the Senate.

The credit ratings agencies cited the budget impasse as a negative factor contributing to the downgrade. And one analyst, in comments to local reporters, cited the "political chaos" from the battle for the Senate presidency as another negative factor.

The good news, if there is any in the credit downgrade, is that the analysts have basically told the commonwealth how to fix its financial mess. And those recommendations should be used as a guide as the opposing PDP and NPP camps work to hammer out a budget accord.

The big problem is the boated government payroll, according to S&P and Moody's, so steps need to begin to cut its size. Also, the Government Development Bank has too many outstanding loans to government agencies, and such subsidies must end, as well as the subsidies to public corporations. Thirdly, the government needs to increase revenues in the short term as it works to slash spending and undertake a tax reform that will leave it on more solid footing over the long haul.

Additionally, local economists and business people have been making additional recommendations that are also worthy of implementation. For example, the Center for the New Economy believes the Acevedo Vilá proposal to increase the amount of commonwealth funds by 16.6 percent is too high, while the NPP Legislature's plans to slash the budget by $1.3 billion is too drastic. The local think tank recommends tying the budget's growth of commonwealth funds to local economic growth, which next fiscal year is expected to be 5.9 percent.

That's a sound target to shoot for as lawmakers work to strike a budget accord with the administration. The clock is ticking on the current budget, which expires June 5, and there is little time left for political bickering in attempting to enact a new one.

One of the more credible figures in this drama is GDB President William Lockwood, who has taken pains not to point fingers in the budget mess. He has suggested the Legislature form a task force with administration officials to push a budget forward. That's another idea worth taking up.

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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