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Este informe no está disponible en español. CARIBBEAN BUSINESS Commonwealth to collect over $1.3 billion in additional taxes in Fiscal 2006 Taxpayers to pay for more bureaucracy and less capital improvements By ELISABETH ROMAN & CARLOS MARQUEZ April 7, 2005 A new direction or more of the same? More taxes will pay for more government spending Removing product exclusions from the 6.6% excise tax; increases in taxes for financial institutions; increase in the tax on capital gains; increases in the cost of vehicle registration stickers for luxury cars; and higher water bills are just a few of the measures the administration of Gov. Aníbal Acevedo Vilá has proposed to increase revenues and balance the Commonwealth’s budget. These, on top of the increases imposed on beer, alcohol, and higher taxes on cars by the Calderón administration in recent years, are contributing to a substantial increase in the cost of living for the consumer in Puerto Rico. Bottom line of the fiscal 2006 Commonwealth budget: Puerto Rico’s taxpayers, consumers, and business will pay over $1.3 billion one way or another to help cover the government’s expenditures. Once again, Puerto Rico taxpayers will have to brace themselves economically as the Commonwealth digs further into their pockets to finance greater government spending.
Puerto Rico’s economic, social, and political reality is inescapable. The reality is that almost 50% of the population lives under the federal poverty level; unemployment is high; and if it weren’t for the fact that one out of every three salaried employees in Puerto Rico works for the government, unemployment rates would be substantially higher. Puerto Rico is also constantly losing human capital as more well-educated, middle-class professionals relocate to the mainland U.S. in search of a better quality of life, economic opportunities, and a lower cost of living. Puerto Rico’s economic reality is growth has been sluggish since the mid-1970s. The Commonwealth’s credit rating is lower than any state in the U.S., and the island has just about lost the competitive edge it once had in such areas as manufacturing. Furthermore, although the Puerto Rico Constitution mandates a balanced budget, the Commonwealth has used every gimmick, every fund it could find or invent, everything but reducing the size of government and spending less, rendering this constitutional requirement moot. Not only has Puerto Rico’s economy been experiencing slow growth for the past three decades, since 1970 the Commonwealth’s total debt has increased from 35.3% to 74.4% percent of the island’s Gross Product (GP) and from 44.2% to 80.1% of the island’s Personal Income (PI). Throughout most of this period, Puerto Rico’s unemployment has remained in the double digits and the labor participation rate under 50%, the lowest in the U.S. Fiscal 2005-2006 Last month, Gov. Aníbal Acevedo Vilá submitted the Commonwealth’s budget for fiscal 2006 (from July 1, 2005 to June 30, 2006). While the budget reflects over $1.3 billion in additional tax revenues to help balance the budget, it isn’t aggressive when it comes to reducing the government’s spending. The Commonwealth’s new consolidated budget for fiscal 2006 seeks to spend $25.66 billion, an increase of $820 million more compared to fiscal 2005. In fiscal 2006, the government’s operational expenses are slated to increase by $1.06 billion from the previous fiscal year and will reach nearly $20 billion. Operational expenses increased from 72.5% of the total budget in fiscal 2001 to 76.4% in the fiscal 2006 budget. As part of the Commonwealth’s operational expenses, payroll and related areas will have increased from $5.9 billion in fiscal 2001 to $7.84 billion in the fiscal 2006 budget submitted by Gov. Acevedo Vilá, for an increase in payroll expenses of $1.9 billion in just five years. While the Acevedo Vilá administration seeks to collect over $1.3 billion in new taxes, it is increasing operational expenditures by over $1 billion. The fiscal 2006 budget proposed was called a "new direction," however, upon close examination, when it comes to increasing government spending, it is closer to former Gov. Sila Calderón’s Por Buen Camino (On the Good Path) campaign. The largest individual share of the 2006 consolidated budget will be financed from the General Fund, which adds up to $9.68 billion. The amount of the budget covered by the General Fund, according to the Office of Management & Budget, increased from $7.24 billion in fiscal 2003 to $8.85 billion in 2005, an increase of 22.3% in two years. Where will the General Fund obtain the revenues to finance the increases proposed in the fiscal 2006 budget? The Commonwealth plans to collect $1.38 billion in additional tax revenues, which represents an increase of 16.6% in additional taxes when compared to fiscal 2005. Many of these taxes, as usual, will be hidden increases to the importer and businesses that will be passed on to the consumer causing more inflation and a higher cost of living. Among the additional revenues the Commonwealth seeks to obtain in fiscal 2006 are $259 million in added income taxes from individual taxpayers and $247 million more in taxes from corporations, mostly from the financial sector. Another big chunk will be derived from a 93.2% increase in excise taxes to businesses that will be passed on to consumers or $695 million, increasing excise taxes from $746 million in fiscal 2005 to $1.45 billion in fiscal 2006. The bottom line is that Puerto Rico’s taxpayers are going to foot the bill for government spending to the tune of an additional $1.37 billion in fiscal 2006 with these and other taxes the Commonwealth seeks to collect. The impact to taxpayers and all consumers’ pockets doesn’t end there as revenues from internally generated sources–what we pay for government services such as electricity, water, highway tolls, etc.–will also increase by almost $480 million. This translates into higher fees and utility rates from services obtained from "other government," the so-called public corporations. The removal of exemptions to the general excise tax could mean over $600 million in higher costs to consumers as the price of imported items would increase as the merchandise goes through the distribution chain. While this could represent higher costs to consumers for imported goods, the government would not receive any additional revenues on the higher costs of the item since the tax was paid when the item entered the island before it went through the distribution chain. If we take the higher cost of goods as a result of removing exemptions to the excise tax and the additional taxes and rates Puerto Rico residents will have to pay under the new budget, it could cost local residents and taxpayers an additional $2 billion in their pockets next fiscal year.
In December 2000, government employment, excluding municipalities, was 277,000. By December 2004, Commonwealth employees had grown to 316,800, an increase of almost 40,000 jobs in four years, according to statistics released by the Puerto Rico Department of Labor. From December 2003 to December 2004, the government hired over 21,000 new employees. Almost 40% of the salaried employees in Puerto Rico are either directly employed by the Commonwealth government, including municipalities, or has a job in an activity that depends directly on the government. "Putting it into a historical perspective, at the end of every administration there has been more employees in the central government than when they started, except one, which was ours," said former Gov. Pedro J. Rosselló, now senator for the district of Arecibo. "After having decreased the percentage of salaried employees in the government of Puerto Rico during my administration, over the past four years jobs were increased again by over 39,000. So, here, they are complaining about the excess government, but it was the Popular Democratic Party administration that created the situation again." According to statistics published in the December 2004 Fiscal Survey of States prepared by the National Association of State Budget Officers, the Commonwealth of Puerto Rico would rank second, just under California with a population of 35.8 million and just ahead of Texas with a population of 22.4 million, in state government employment. The government of Puerto Rico has a larger number of employees than such states as Florida, population 17.4 million; Illinois, 12.7 million; New York, 19.2 million; and New Jersey, 8.7 million. The Commonwealth also employs almost four times the number of people than in the state government of South Carolina and over four times those employed by Connecticut; both states have a similar population to Puerto Rico. While the Commonwealth government has been hiring more employees and increasing its spending levels by comparison, according to the National Association of State Budget Officers, most states have cut their budgets. Thirty-eight states cut their budgets by nearly $13.7 billion in fiscal 2002, and 40 states cut their enacted budgets by $11.8 billion in fiscal 2003. Fifteen states reduced their enacted budgets in fiscal 2004 by nearly $2.2 billion, and four states have also cut their current fiscal 2005 budgets by $1.3 billion. In contrast, Puerto Rico’s budget increased by almost 24% over the past four years. Although the overall fiscal situation in many states on the mainland has been improving, they are still keeping spending levels under control. Fiscal 2004 data shows expenditures grew less than 5% in nearly two-thirds of the states and nine states experienced budget reductions during the same period. In fiscal 2005, nearly half the states appropriated expenditures of less than 5% above prior year levels; 15 states will increase expenditures ranging from 5% to 10%; eight states will increase expenditures by more than 10%; and three states will have reduced budgets. In fiscal 2003, 21 states reported reduced expenditure growth–the highest number of states since the first edition of the Fiscal Survey of States was released by the National Association of State Budget Officers. In contrast, the Commonwealth’s budget increased from $20.069 billion in 2001 to $24.842 billion in 2004. The productivity level of the Commonwealth’s employees also leaves a lot to be desired when compared to those in the States. According to the Washington Economics Group, a government employee in Puerto Rico, when comparing population to the number of employees, serves an average of 13.1 residents. In comparison, a state employee in North Carolina serves an average of 59.7 employees and 86.5 in the state of Florida. Less investment While the budget proposed for fiscal 2006 presented by Gov. Acevedo Vilá includes an increase in operational expenses, investments for capital improvement projects will be cut. Capital improvement projects include all infrastructure projects. The proposed budget includes $2.97 billion for capital improvements, which is a reduction of $341 million or 10.3% when compared to fiscal 2005. From fiscal 2001 to 2006, expenditures for capital improvements were reduced from 15.6% of the total budget to 11.6%. In reality, the reduction in capital improvement projects is much higher as construction costs continue to increase every year. Roberto Sabater, president of the Associated General Contractors, recently told CARIBBEAN BUSINESS that in 2004 alone, the cost of construction materials increased by 20% in the mainland U.S. Steel, for example, increased by 31.3%. Sabater expressed concerns the government continues to spend, but is reducing its investment in capital improvement projects. Salvador Muñiz, a professional construction cost appraiser in Puerto Rico, estimates that in 2003 and 2004 electrical supplies went up by 70%, plumbing related materials by 40%, and asphalt by 15%, among a long list of others. This means the budget proposed for capital investment won’t go as far since it will generate fewer projects at higher costs. Commonwealth’s public debt The reduction in capital improvement projects in fiscal 2006 is also a reflection of the Commonwealth’s limited credit margin. The Commonwealth government and the public corporations are running out of credit margin. According to a report presented by the Government Development Bank (GDB) to the Puerto Rico Legislature, the most active Puerto Rico public corporations in the capital markets–Highways Authority, Electric Power Authority (Prepa), Public Buildings Authority, Aqueduct & Sewer Authority, University of Puerto Rico, the GDB, Industrial Development Co., and Ports Authority–had combined debts of $15.286 billion and a remaining credit margin of $2.956 billion. In March, Prepa borrowed an additional $500 million in "new money" and the Ports Authority borrowed $90 million. Public corporations’ debt is controlled by the limitations imposed by the Trust Indentures and is subject to the flow of revenue the public corporation generates. However, there are corporations that receive tax revenues (subsidies), and their debt is guaranteed by the Commonwealth. The Commonwealth’s debt, including municipalities and public corporations, stands at approximately $40 billion; but what is most disturbing is the ratio of the debt to the economy. As of June 30, 2004, the debt reached a record 74.4% of the island’s $50 billion GP and 80% of the island’s PI. These debt ratios are even higher than those recorded during the financial crisis of 1975. In the mainland U.S., the federal government debt to Gross Domestic Product (GDP) ratio was 37.2% in 2004, way below the 60% debt-to-GDP ratio used by most economists as the cut-off point. In Puerto Rico, the debt to GP ratio reached almost 75% by 2004. In addition, total government expenditures in the mainland U.S. as a percentage of the GDP was 30.9% in 2004 and was distributed as follows: 19.8% in federal government outlays and 11% in state and local government expenditures. By comparison, in Puerto Rico total government expenditures exceed 50% of the island’s GP. Over the past four years, the problem has been that the Commonwealth has reduced its borrowing to invest in economic development and capital improvement and used the funds to pay for the massive bureaucracy. The GDB became the Commonwealth government’s lender. By June 30, 2004, almost 50% of the GDB’s assets consisted of loans to government agencies and public corporations. At a time when States throughout the country have been reducing their spending levels–eliminating agencies, downsizing others, and privatizing or creating private- public enterprises to provide services–Puerto Rico must question the need of the Commonwealth to get further into debt to pay for increased spending. From Dec. 31, 2000, to Dec. 31, 2004, Puerto Rico’s debt increased by 50% from $26.183 billion to $39.419 billion, an increase of $13.326 billion or 50%. On a per capita basis, the public debt went from $6,876 to $10,120. Puerto Rico has a higher debt per capita than any state. Some states–such as Arizona, Colorado, Wyoming, South Dakota, and Nebraska–have no state general obligation debt. Moody’s has also issued Puerto Rico the lowest credit rating of any of the States. One of the reasons for the high debt per capita is a product of the Commonwealth’s highly centralized government, which, in most cases, can't be compared to U.S. state governments. Most services provided by the central government in Puerto Rico such as public schools, police and fire services, and the ownership of public utilities are not typically assumed by state governments on the U.S. mainland, but by local governments such as counties, towns, and cities or by the private sector. As a result, the current ratio of tax-supported debt to total personal income is much higher than in the States. The ratio is also affected by the low levels of income in Puerto Rico; per capita income is about one-third the U.S. average. How Puerto Rico spends the funds it borrows is what concerns the credit-rating agencies and investors the most. Government bonds are usually issued to finance capital projects with long lives, such as schools, highways, and prisons. Most states balance budget gaps by cutting spending, increasing taxes, or both. The Commonwealth’s continued use of debt or one-time gimmicks to balance its budget was the primary reason behind its credit downgrade in October 2002 and its current negative outlook. The government of Puerto Rico must now demonstrate to the credit rating agencies that it is progressing towards a real structural reform. The Commonwealth’s high spending levels and debts have impacted Puerto Rico’s ability to borrow for future economic progress. It is also affecting the island’s economic growth. Puerto Rico’s economy has been growing at a slow rate in comparison to the mainland U.S., the Caribbean, and Latin America. The Commonwealth’s debt has also been growing faster than the local economy. Real economic growth in Puerto Rico has been, at best, sluggish over the past 30 years. The average real annual growth from fiscal 2001 to fiscal 2004 was 1.5%. The Puerto Rico Planning Board projects economic growth for 2005 at 2.3% and 2.6% in 2006. By comparison, economic growth in the U.S. is averaging 4%, and 5% in Latin America and the Caribbean. A transformation is needed While the new governor’s intentions in dealing with the Commonwealth’s fiscal crisis may be worthy, the fact is the budget measures submitted by the Acevedo Vilá administration aren’t enough. It plans to collect more taxes from the island’s taxpayers without imposing any real cuts on a massive Commonwealth bureaucracy with poor productivity levels. The fiscal measures taken to balance the budget are again temporary patchwork that cost taxpayers more and don’t contribute to real economic growth. "Acevedo Vilá says there is a problem, however, the proposed budget for 2006 is higher than fiscal 2005," says Sen. Rosselló. "The proposed budget is $9.68 billion compared with the present $8.85 billion. That means a greater tax burden, directly or indirectly to the taxpayer and the general population." Puerto Rico requires a structural transformation and real fiscal reform. This transformation must begin with government and a re-examination of its role in our society. Puerto Rico’s transformation must take place in the context of a coherent overall framework focused on economic efficiency, stressing predictability, transparency, and accountability. Puerto Rico must consider implementing a fiscal responsibility act that will hold government officials accountable for their spending and require the government to publish long-term objectives for key fiscal indicators, such as the level of public spending, taxes, and debt. Fiscal responsibility should be regarded as the political norm, and the requirement to publish fiscal strategies over the long term will help to curtail the chronic short-term mentality that generally characterizes political decision-making. A real fiscal transformation also requires support and assistance from Puerto Rico’s private sector. It is up to the private sector to challenge the historically paternalistic attitude and interventionist policies of the Commonwealth. The vision of the government and economic transformation must be stated by the island’s leaders, so everyone understands the challenges we face. According to economist José Joaquín Villamil, president of Estudios Técnicos, "a widely accepted model for the provision of public services has become that of public-private partnerships. There is no good reason why the same principle should not apply to setting the economic agenda. The relationship between government and the private sector need not be adversarial. On the contrary, the objective is to be mutually supportive in achieving agreed upon goals and objectives." Reform should not be limited to just taxes and can’t be implemented without a total fiscal and government reform, which must involve a total government restructuring and downsizing. It should not be conceived as a measure to just bring additional revenues to the government’s coffers, but should be conceived as an economic tool to promote investment and savings in the private and public sectors. It also requires a rethinking and reformulation of the role government should play in our society and economy. "Government, by its very nature, finds it extremely difficult to generate the preconditions for its own restructuring, particularly in a political environment such as the one which characterizes Puerto Rico. This is why civil society has to assume the role of catalyst, in support of those in government who are convinced of the need for major change," Villamil said. The president of Estudios Técnicos says countries such as Chile and Finland show us that a major transformation can be achieved if the willingness exists to collaborate and reach a consensus on key strategic issues. In post Pinochet Chile, where political divisions were very deep, this was achieved with respect to issues such as education, economic development, provision of public services, and, not least, on the transition to democracy. "Osvaldo Sunkel, one of Latin America’s best-known economists, once indicated ‘the scarcity of resources should not be made worse by the scarcity of ideas.’ It is quite clear to me that Puerto Rico needs to recapture the spirit of innovation in the social and economic spheres, which characterized it in the 1940s and 1950s. This is particularly true in the present context," Villamil added. Not all privately owned companies succeed and not all state-owned enterprises are failures, but the evidence is clear that, on average and over time, private firms outperform state firms. This is the essential case for public-private enterprises or outright privatization. Just legislating new taxes as Gov. Acevedo Vilá proposes isn’t the solution. Although there is a need to generate additional revenue in the very short term, there is also the need to drastically cut spending. Recognizing the very serious fiscal condition of the government and the warnings from the rating agencies arising from that situation, some measures will undoubtedly be approved that will generate more resources. However, these should be viewed as the first step and should lead to a major transformation of the government itself and its role. The fiscal crisis is just one manifestation of the problem. Perhaps an even more dramatic situation arises from the obsolescence of many government agencies created decades ago in response to specific conditions and now seriously in need of being either reinvented or simply eliminated. Institutional obsolescence is a grave and urgent problem if we take seriously the need to be competitive in a very demanding global context. There is a broad agreement that the tax system has to be simplified and made more agile and more compatible with economic development needs. However, the real problem lies in the size and nature of public sector expenditures, which has been growing at a faster rate than Puerto Rico’s GP. Tax reform will have a major impact on municipalities, so the issue regarding how many municipalities the Commonwealth really needs must be addressed. Puerto Rico has 78 mayors for four million people, with most of their municipalities facing their own fiscal crisis. New York City has one mayor for 8 million residents. Yet not a word has been said in this new direction on the role of municipalities and their fiscal implications. Decentralization of government is as crucial as consolidation of municipalities. "The big question in terms of municipalities is regarding the reality of the so-called special communities perpetual fund. This should be thoroughly analyzed," says Rosselló. "An image has been projected that there is $1 billion somewhere. I still haven’t been able to identify where the $1 billion is, and, second, they say that $1 billion is a perpetual fund which means that only the interest income is used and not the principal." "What I have seen up to now is that they [the Calderón administration] took $500 million from the GDB for the special communities, to the bank’s detriment, and in addition a credit line. A credit line is not a fund, it is debt. So, we have to see what the real situation is; and if in reality there are resources available, these should go to the municipalities. The municipalities are closer to the people and the communities, and these are the types of small projects that should be left up to municipalities." Fiscal reform also means examining budget allocations with a critical eye. There are, for example, $4.7 billion in donations, subsidies, and distributions embedded in the budget, 26% of operational expenses. A detailed analysis should be conducted to evaluate their purpose, structure, and effectiveness. The private sector should become a promoter of change in our government institutions. Puerto Rico must stand firmly and oppose the historical forces that in the past have impeded the full development and use of our people’s creative and productive capacities. Both the executive and the legislative chambers must exercise the highest levels of leadership, so that together we can elevate Puerto Rico in the future to the standing and level that we all envision. The Commonwealth must stop talking about spending, and Puerto Rico should begin discussing economic investments. An economic model based on tax incentives historically promoted by the Popular Democratic Party and strongly advocated by the Calderón administration and supported by the new a governor until a year ago when he was resident commissioner, has created slow economic growth in Puerto Rico for decades. Puerto Rico’s recent history is one of lost opportunities because the Commonwealth either lacked the capability to execute or the imagination and courage to be innovators. If Puerto Rico’s political parties are serious about wanting higher living standards and converging growth rate with wealthier economies, the government will have to bring its policies and institutions into line with those of the top performers. For Puerto Rico’s economy to converge with wealthier economies it will have to grow an average rate of 4% to 6% and not the mere 2% it has in recent years. Puerto Rico’s economy and well-being also continues to be a matter of the island’s political status. Whether the island seeks to be independent, a state, or enhanced commonwealth, it still needs to pay off the massive debt and deal with the lack of competitiveness, poor government productivity, and the fiscal situation created under the Commonwealth government over the past 50 years.
Tax remedies presented by the Aníbal Acevedo Vilá administration are not new to the Commonwealth of Puerto Rico. The decision by the administration to eliminate exemptions to the 5% general excise tax, better known as 6.6% arbitrio, to help reduce the Commonwealth’s budget deficit is a repeat of 1975. Over 30 years ago, when Puerto Rico started to feel the pinch of a deteriorated economic model and a global recession, the Commonwealth began improvising with economic and fiscal policies. At the time, Puerto Rico’s public debt had tripled from $1.7 billion in 1970 to $5.3 billion in 1975. The total debt increased from 35.3% of the island’s Gross Product (GP) to 73.9%, and from 44.2% of the island’s Personal Income to 77.1%. The checkmate to Puerto Rico’s economic bubble was the oil crisis when prices tripled in the international markets. Facing a financial crisis not much different from the situation Puerto Rico faces today, a Tax Reform Commission was established by the Commonwealth government. Economist Ramón J. Cao, Ph.D., explains in his 2004 book Impuestos en Puerto Rico that the purpose of the commission was to propose a reform that would increase tax revenues, stimulate economic growth, promote a more social equitable distribution of the burden and simplify it. Some of the concerns at the time included tax evasion; the complexity of the Commonwealth’s tax system; excessive burden on the individual taxpayer; mechanisms available to the banking sector to minimize tax exposure; and a property tax with a tax base value frozen in 1957, among others. Cao reminds us in his book that in 1974, the Organization of American States (OAS) had been commissioned to conduct a study on the feasibility of a consumption tax in Puerto Rico. At the time, the conclusion of the OAS’s report was to recommend a Value Added Tax (VAT) for the island. La Vampirita is born The Commonwealth administration at the time couldn’t wait to have a VAT implemented; the considerable growth in the public debt and government employment required immediate action be taken to increase revenues to the Puerto Rico Treasury (Hacienda). The action taken was to widen the reach of the excise tax on durable goods to include nondurable goods, with exemptions on artículos de primera necesidad or items of basic need. A special surcharge tax on personal income was implemented and became popularly known as la vampirita de Cuchín, in reference to former Gov. Rafael Hernández Colón, under whose administration the tax was imposed. In addition, a franchise tax was levied on financial institutions and a temporary increase in their income tax was applied. Revenues to the Treasury increased by 17.5% in 1975 and 24% in 1976 as a result of the added tax, according to Cao. Three decades later on June 3, 2002, the Ways & Means Committee of the Puerto Rico House of Representatives approved H.R. 3005 to evaluate a tax reform. On Dec. 5, 2003, the committee rendered a report recommending the 5% excise tax be substituted by a consumption tax, either VAT or sales tax. In March 2004, Puerto Rico’s State Society of Certified Public Accountants presented a study recommending the implementation of a sales tax, while local economists Cao and Fernando Zalacaín, who participated in the study, recommended a VAT; and the International Institute for Advanced Studies Inc. from Cambridge, Mass., recommended a sales tax. During the height of the 2004 gubernatorial campaign, BearingPoint, a spin-off from KPMG (the auditors for the Sila Calderón administration and former employer of Juan Agosto Alicea and Juan Flores Galarza) submitted a $4 million report recommending tax reform and the replacement of the 5% general excise tax with a VAT-like invoice credit General Consumption Tax (GCT). The BearingPoint report was not made public by the Calderón administration. In January it was leaked to the press. The New Progressive Party (NPP) had included in its political platform the substitution of the excise tax for a sales tax. In October 2004, Popular Democratic Party gubernatorial candidate, Acevedo Vilá, launched a campaign against the proposed sales tax by the NPP (since it would tax food, medicine, and other items of basic need). After winning office, new Gov. Acevedo Vilá in February established a Tax Reform Commission (similar to the 1975 commission). By March 2005, Gov. Acevedo Vilá proposed to remove excise tax exemptions on such items as food, medicines, children’s apparel, and books or printed materials to collect an additional $639 million in tax revenues and help balance the Commonwealth’s nearly $2 billion deficit. If the surcharge on personal income tax was referred to as la vampirita (little blood sucker) this decision may become known as la vampirota (big blood sucker). The measures taken by the Acevedo Vilá administration are a blueprint of those taken 30 years earlier by the Hernández Colón administration. Furthermore, just as the Commonwealth’s tax policies in 2005 are a repeat of those in 1975, many are concerned that 2006 could become a repeat of 1976 when capital markets were closed to Puerto Rico general bonds. The relation of total debt to Gross Product (GP) and total debt to Personal Income (PI) are more relevant indicators than just nominal total debt. They measure the rate of increase of the debt to the productive capacity and the income of the island. The higher the ratios the less flexibility the island has for sustained economic development. Debt to GP is a measure of the degree of indebtedness and the indicator helps to assess the debt situation and debt carrying capacity. Its relevance is that the ratio measures the outstanding obligations in relation to the broadest measure of the income-generating power of an economy. There are no simple rules on what constitutes a reasonable burden, however, 60% is widely accepted. PI measures wages, salaries, and other income sources, including rental income, government subsidy payments, interest income, and dividend income. The ratio measures the affordability of the debt. Puerto Rico’s debt has been increasing more rapidly than its PI.
This Caribbean Business article appears courtesy of Casiano Communications. or
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Reality check
Government employment
History is repeated in governor’s proposed tax solutions
