US Treasury Secretary says gov’t fiscal plan provides adequate framework
SAN JUAN – Before the Financial Oversight and Management Board opted to reject the governor’s fiscal plan, U.S. Treasury Secretary Jacob Lew viewed the plan favorably but suggested some changes.
“You asked for our assessment of the proposed fiscal plan, which we have undertaken with the benefit of Treasury’s experience with economic crises across the world. In that context, I believe that Promesa’s 14 Fiscal Plan requirements, together with the comprehensive approach that the Board has taken to cover all tax-supported entities in the proposed Plan, provide a credible framework to guide the Commonwealth’s policy choices,” Lew said in a letter to the oversight board, dated Nov. 16, before the its third official meeting on Nov. 18.
He said the plan achieves a credible debt restructuring that is “necessary to remove the overhang of uncertainty on the economy,” and give the island breathing room to implement growth-enhancing reform. Conversely, the absence of a credible debt restructuring would lead to excessive reliance on fiscal austerity that proves “self-defeating” to growth and debt sustainability. “The proposed Fiscal Plan does not include a formal debt sustainability analysis, although one must be included in the certified Fiscal Plan as required by the Promesa’s legislation,” he said.
The Treasury secretary also said the plan didn’t rely on fiscal austerity. In the aftermath of an economic crisis, fiscal discipline is often necessary but, during an extended period of economic contraction, there are limits to the scale and pace of budget cuts and tax increases that can be achieved without further damaging growth. “Given this reality, the proposed Fiscal Plan’s adequate funding for vulnerable constituencies and the delivery of essential services are both critical. In addition to providing support to the economy, these efforts can also help to curb outmigration and preserve the tax base, both vital to stabilizing fiscal balances and lifting GDP [gross domestic product] over the medium-term,” he wrote.
He also noted that sustainable economic recoveries require an appropriate balance of fiscal stimulus in the short-term to lift confidence and investment, coupled with efforts to promote growth potential over the medium-term. The latter effort should include a well-sequenced agenda of structural measures and governance controls that attract capital back to the island. “Puerto Rico must make it easier to do business, increase workforce participation, and create the conditions that will allow Puerto Rico to compete in the global economy. As a general matter, the Commonwealth’s proposed Plan recognizes the need for stimulus and reforms to improve growth outcomes. Additional detail and clarity on the proposed measures would allow for a more thorough assessment of their feasibility and potential impact on growth,” he added.
Some of the plan’s included assumptions could benefit from counterbalanced projections.
“The proposed Plan’s macroeconomic projections, with respect to both real growth and inflation, are higher than levels that have been realized in Puerto Rico in more than a decade. The plan that is ultimately certified by the Board should include an analysis of downside risks to growth so as to avoid the material risk of overstating the amount of debt that can be sustained by the economy’s future performance,” he said.
Lew emphasized that the Commonwealth and Congress must work together to resolve Puerto Rico’s long-standing structural healthcare inequities and strengthen incentives to promote economic development on the Island. “The projected exhaustion of Affordable Care Act [ACA] funds in early 2018 will materially reduce the Commonwealth’s revenues and impair access to health care for up to 900,000 Americans living in Puerto Rico. The Treasury Department also strongly supports federal legislation that would give Puerto Rico healthcare parity with the states and pro-growth tax measures such as the Earned Income Tax Credit [EITC],” he said.
Warning that the end of Promesa’s automatic stay on litigation nears, Lew urged the oversight board to “make maximum use of the powers given to it by Congress to pursue consensual negotiations and, if unsuccessful, Title III filings before the stay’s expiration. Timely certification of the Fiscal Plan will promote voluntary negotiations and should be the Board’s top priority; additionally, prompt certification of a fiscal plan will also permit Puerto Rico to begin its annual legislative budgeting process.”