Puerto Rico is “face to face with a harsh reality,” Gov. Alejandro Garcia Padilla said Monday in a speech proposing major pro-growth economic reforms to revive the island’s ailing economy.
“Our public debt, considering the current level of economic activity, is unpayable,” Garcia Padilla told citizens, citing a special report released Monday by outside economists concluding that Puerto Rico would be mired in perpetual recession unless the government takes drastic steps to encourage private sector productivity and restructure its unsustainable debt. (RELATED: Puerto Rico’s MASSIVE Debt is ‘Unprecedented Test of US Bond Market)
The report, written by former World Bank Chief Economist and former Deputy Director of the International Monetary Fund Dr. Anne Krueger with economists Dr. Ranjit Teja and Dr. Andrew Wolfe, recommends eliminating the deficit through targeted spending cuts, as well as instituting pro-market reforms such as cutting business regulation and freezing the minimum wage.
Puerto Rico currently has about $72 billion in public debt, equivalent to 70 percent of its economic output and higher than any U.S. state on a per capita basis. In contrast, the average state has a debt-to-GDP ratio of only about 10 percent, and the only states with higher absolute debt loads are New York and California, both of which have much larger populations than Puerto Rico.
Garcia Padilla denied responsibility for the territory’s predicament, noting that he “inherited a debt of approximately $70 billion and it remains nearly the same,” but also conceded that the measures his administration has implemented “have shown to be insufficient in the face of the scope and persistence of the fiscal and economic crisis we inherited.”
Saying that “we must all assume our responsibility,” the governor went on to call for a three-part approach to resolving the crisis, consisting of a battery of pro-growth economic reforms and negotiating with creditors to restructure existing debt on more favorable terms. (RELATED: Congress Could Make US Retirees Shoulder Puerto Rico’s Debt)
“The first, and most important, step will be to reestablish economic growth,” Garcia Padilla said. “To once again generate prosperity, I will promote local legislation that will make our laws more competitive and align them to the reality of today so they will promote job creation with a major expansion of the private sector.”
Garcia Padilla tentatively endorsed most of the proposals outlined in the Krueger report, with the exception of changes to the minimum wage and cuts to education spending, which he categorically rejected.
Other proposals, which he says “merit serious consideration,” include welfare reform designed to make work “more lucrative than simply receiving public assistance” and encouraging private sector investment by eliminating restrictions that make it difficult for business to register property, pay taxes, and obtain construction permits.
The second pillar of the governor’s plan involves “a negotiated agreement with bondholders for a postponement of payments on the debt for a number of years so that the money can be invested here in Puerto Rico.” (RELATED: Republicans Abandoning Principles in Bailout for Puerto Rico)
While acknowledging that this would require sacrifice on the part of Puerto Rico’s creditors, Garcia Padilla argues that the restructuring would create the necessary leeway for the coming reforms to revive economic growth, enabling the territory to honor its debts over the long-term.
The final element of Garcia Padilla’s plan calls for the creation of a Working Group for the Economic Recovery charged with “preparing, in coordination with the legislative branch, a long term fiscal agenda.”
The group would also be responsible for identifying additional spending cuts to stave off tax increases, improving the efficiency of tax collection, and promoting public-private partnerships for things like infrastructure projects.
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