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Legislature to cut $500 million from governor’s proposed budget

Spending cuts considered vital to approve the budget before upcoming deadline


June 17, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

Gov. Aníbal Acevedo Vilá presented a proposed budget March 16 for legislative approval. According to the proposal, the budget would increase from the current $8.854 billion to $9.684 billion. This represents an $830 million increment to a budget that already faces a $1.3 billion deficit as accepted by government officials, although CARIBBEAN BUSINESS estimates the deficit is closer to $1.7 billion.

Members of the legislative branch have declared their opposition to increasing spending by such an ample margin. Informed sources tell CARIBBEAN BUSINESS that after meeting with 137 government agencies in public hearings held six or seven days a week since the budget was presented, the Legislature is ready to cut more than $500 million from the governor’s proposed budget. "If you have a deficit of this magnitude, how can you tell the people we now have $830 million more to spend? It isn’t logical to be sending that message," the source stated.

The same source confirmed that during the hearings numerous discrepancies arose between what the agencies stated they needed in assigned funding and what the Office of Management & Budget gave them. For example, the Agriculture Department was assigned $11 million for payroll, yet they requested $40 million for this purpose. The same problem applied to the Fire Department.

One of the main problems members of the Legislature had with the proposed budget was the large sum assigned to "other operational expenses."

"The grave part about this budget is that in the past this division [other operational expenses] had between $200 million to $300 million assigned. Now, we are talking about $1.75 billion," the source stated.

Another concern was many agencies were assigning funds to create reserves for future use. "If this is a budget of transition, designed to attend to a fiscal crisis, it isn’t the opportune moment to set aside reserves within any agency. It is a budget to attend to real spending needs, period," the source added.

The Legislature also expressed uncertainty in reference to the early-retirement program proposed by the executive branch to help decrease the government payroll. Sources say if a vacant position must be filled, there will be no relief for the payroll situation. On the contrary, payroll still would have to be paid. In addition, the agencies would have to make pension contributions for the retired workers since the liquidity of the Government Retirement Fund is vulnerable.

Possible spending cuts and tax instrument adjustments

Informed sources tell CARIBBEAN BUSINESS the Legislature is considering cutting the budget in three specific areas. "Provided Services" could reduce publicity and professional services. "Donations, Subsidies & Distributions" also could receive less funding for publicity and other contracts. Finally, "Other Operational Costs" could be affected by cuts to such areas as those established to create future reserves. These were signaled as the main areas for spending cuts, although sources confirm other cuts are under consideration.

Although the budget approved by the Legislature surely will be less than that proposed by the executive office, the source refrained from saying if it will exceed the current budget. Ileana Fas Pacheco, director of the Office of Management & Budget, commented that the measures presented by the Legislature should go beyond budget cuts and include tax instruments to improve the government’s revenue base. If the budget presented by the Legislature were to exceed $8.854 billion, it would have to consider some of the tax measures proposed by the executive branch, although sources state that most of them would be altered. Despite the possibility of modifications to the proposed measures, Fas Pacheco sees this consideration as a step in the right direction.

There are certain points in the proposed tax measures for which the Legislature would require negotiation. For example, the proposed increase in registration fees for luxury vehicles, designed to bring $30 million in revenue, would mean some car owners would have to pay $4,000 in registration fees, which members of the Legislature consider unfair because there already had been a large tax increase on luxury cars a few years ago.

Another measure presented by the executive branch was the elimination of all exemptions to the 6.6% excise tax, to bring in $639 million. Members of the Legislature argue that having extra taxes on food and medications will result in a cascade effect to the consumption chain, with a negative impact on consumers. The costs of health plans potentially could rise along with the price of medications. In addition, sources believe the creation of a fund to assist those most affected by the extra costs, subtracts from what would be additional government revenue.

The proposed tax on the banking sector, designed to bring in $180 million a year for two years, would tax bank’s net interest income. The negative impact that resulted from the mere consideration of the tax was signaled as indicative of the potential effects of the tax on the island’s banking industry. For this reason, members of the Legislature believe the measure needs to be varied to ensure the industry won’t be hurt.

The measure that members of the Legislature seem to be most receptive to is the proposed tax increase on capital gains to 20%, expected to generate revenue of $60 million. Sources confirm that in the past this tax has varied between 5% and 20%, all the while bringing in considerable taxes without seemingly hurting investments.

While the Legislature still hasn’t presented an official alternative budget, sources confirm, at the very least, it will be $500 million less than originally proposed. If the budget isn’t approved by June 30, the current budget would go into effect once again, which then would require a whole new series of negotiations.

This Caribbean Business article appears courtesy of Casiano Communications.
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