Puerto Rico Governor-elect Alejandro García-Padilla will be undertaking an administration facing a very difficult scenario, with severe resource restrictions. For one thing, there are limits on issuing new debt and the situation with the government Retirement System can’t get much worse.
Some things he can do to address the difficult panorama ahead:
- Distinguish between financial issues and economic issues. They are related, obviously, but they are not the same. Dealing with the former as if you are dealing with the latter is a serious policy mistake with potentially major consequences. Not confusing the two, but understanding how they relate, is essential.
- Dealing with the retirement system mess is urgent. The options are few and they boil down to either increasing the funds’ income with increased allocations, difficult for a government already strapped for funds, or cut the outlays by reducing benefits or perhaps extending the age of retirement. There aren’t that many short-term options.
- General Fund revenue will decrease, unless the economy grows at substantially higher rates than at present. One solution: increase taxes and duties that have no negative impact on the productive sector. Examples could be a tax on luxury items, an asset tax or duties on specific expenditure items. The key thing is to make sure that any new sources of revenue don’t have a negative impact on investment. Another less politically palatable option, repeal lowered taxes in Law 1 of 2011.
- The governor-elect should immediately appoint a working group to identify subsidies and incentives embedded in government budgets (including those of public corporations), evaluate their need and their effectiveness. Obviously, the end result should be the elimination of those that either serve no useful purpose or are ineffective.
The above are mostly financial or fiscal issues, economic issues are somewhat more diffuse and will require more time to be put in place and to generate the desired objectives. Some steps that could be taken immediately:
- Appoint a working group on economic development strategies with the specific objective of identifying short-term measures to stimulate investment (for example, expensing investment in productive activities), to generate permanent jobs.
- The governor-elect should consider creating a “Permanent Commission on Social and Economic Development” with ample private sector representation to oversee economic development strategies and initiatives. One immediate task of the Commission would be to review the structure of the economic development system to assure that its agencies work coherently, within a common vision and policy framework.
- Put in place the process to reform the labor market to make it more efficient and flexible. Labor market reform should stimulate participation in the labor force, promote higher productivity (and thus wages) through training and innovation and provide for greater labor mobility.
There are other issues, of course, such as the precarious state of public corporations, that need to be dealt with urgently. The above suggestions are a small sample of possible initial steps.