The latest issue of Bloomberg Businessweek features an interesting editorial about Puerto Rico’s need for some “tough love” to address its lingering debt problems. One notes with interest (and boldfaced emphasis) some of the editorial’s suggestions.
To strengthen the island’s balance sheet and its credibility in the debt markets, tax reform is essential: By some yardsticks, Puerto Rico’s tax take as a percentage of gross domestic product is only one-third the average for developed countries. That said, jamming through big, time-consuming reforms, such as the proposed value-added tax, with the wolf at your door is never a good idea — especially if your tax collection system is weak. Opposition to the tax bill may have been driven by politics more than prudence, but this legislative defeat should give the government a better chance of getting tax reform right.
It will also force policy makers to focus on cutting spending and putting together a viable long-term fiscal plan — as U.S. Treasury Secretary Jacob Lew pushed for in a flurry of calls to the island’s leadership last week.
Congress could help mightily by approving a bill to allow the island’s faltering public utilities to restructure their debts under the protections of U.S. bankruptcy law. Working with the White House, Congress should also ease the burden of federal regulations that hurt Puerto Rico’s competitiveness — exempting it from having to use costly U.S.-flagged ships for trade with the mainland, for example, and allowing it to pay new entrants into the labor force less than the U.S. minimum wage.
Governor Garcia Padilla has already taken difficult steps to trim spending, but next year’s budget will need to shrink more. To his credit, Garcia Padilla has warned that cuts will affect all departments, and that “improvised and capricious” tax gimmicks are off the table. Puerto Rico doesn’t warrant a federal bailout. But Washington can do more to help 3.6 million American citizens to help themselves.
Tax reform without gimmicks? Spending cuts? Regulatory reform? Ignoring the minimum wage? No bailouts? It seems someone has figured out that Puerto Rico needs the opposite of Obamanomics.
