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Puerto Rico Think Tank: Fiscal Responsibility Law is the Answer

By on February 8, 2016

SAN JUAN – Arguing that a fiscal control board would enforce the kind of strict, inflexible and static budget control measures that have already failed in Puerto Rico, the Center for the New Economy (CNE) is proposing a fiscal-responsibility law that would help introduce governance reform and ensure solvency.

The proposal was presented by CNE’s president, Miguel Soto-Class; public policy director, Sergio Marxuach; and research director, Deepak Lamba-Nieves.

Soto said Puerto Rico’s debt is unsustainable and the only alternative available to the island is restructuring and putting fiscal policy on a sustainable path.

The Fiscal Responsibility Law for Puerto Rico proposed by the CNE has two components. First, it has a simple, intuitive and objective fiscal rule. The second component consists of procedural guidelines that support a large-scale overhaul of Puerto Rico’s public financial management systems, institutions and practices.

Marxuach said the fiscal rule would keep expenditures below what the government can raise in taxes in the long run, thereby ensuring sustainability, while allowing deficits whenever the economy is operating below potential and tax revenue is abnormally low, thereby guaranteeing flexibility.

“We propose a rule for Puerto Rico requiring that annual General Fund spending shall not exceed: cyclically adjusted revenues, as determined and certified by an independent panel of professional economists and other fiscal policy experts, minus a small structural surplus,” Marxuach said.

Within that limitation, the Legislature would assign funds among and between the Commonwealth’s government agencies and departments according to its own spending priorities, he said.

The implementation of this type of fiscal rule has several advantages because government spending would be independent of short-term fluctuations in revenues caused by cyclical swings in economic activity and other financial vagaries that affect government revenues. This type of fiscal rule, by limiting spending to permanent fiscal income, smooths out government spending over the economic cycle. In essence, the government saves during upswings and dissaves during downturns.

“Therefore, the fiscal rule precludes both sizeable spending upswings when the economy is booming and drastic fiscal tightening when there is a substantial economic slowdown,” he said.

The fiscal rule requires the commonwealth to run a small surplus (to be determined as a percentage of the gross national product) over the economic cycle because Puerto Rico’s debt burden is not sustainable over the long term and the Government Development Bank needs to be recapitalized.

Regarding the public financial management system reform, the CNE says Puerto Rico needs to adopt strategic budgeting practices that include implementing performance-based budgeting.

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