Restoring economic growth will demand radical changes in the current government structure. Puerto Rico must implement several structural reforms to modernize the Island’s institutional framework and to create a friendly business environment. It must be the private sector, not the government, the major driving force of economic growth and long-term development. The current administration and the private sector must work together to implement these reforms within a broader agenda of social and economic transformations.
Fiscal reform
Puerto Rico needs to develop a culture of public finance transparency and reliable fiscal planning to restore credibility to the capital markets. As recommended by many external organizations the commonwealth should adopt multiannual budgets aligned to specific macroeconomic goals. Also, local government should consider the creation of an independent fiscal council like the U.S. Congressional Budget Office (CBO), to promote sustainable fiscal planning.
Tax Reform
Previous tax reforms have not accomplished the desired goals in terms of economic growth and expansion of the tax base. In the short term, any tax reform should be aligned with a comprehensive economic reactivation strategy to break the current contraction cycle by simultaneously broadening the tax base and reducing rates across a range of taxes, including corporate and individual taxes.
Welfare reform
The social impact of the welfare state has been dramatically adverse. Furthermore, welfare programs have seriously affected Puerto Rico’s economic potential. For instance, historically the local economy labor market participation rate has been relatively low compared to U.S. standards. During the last decade, as the economy entered in depression, participation rate plummeted from 50% in 2005 to 39% in 2015.
According to the U.S. Census Bureau, the poverty rate in Puerto Rico is 44.9%, twice the level of Mississippi (24.2%), the poorest U.S. state. It is evident that policies adopted to reduce poverty on the island have failed[1].
The administration must develop a comprehensive policy to reduce dependency on federal and local welfare programs. Through a “welfare to work” social policy, government and the private sector could work together to transition current welfare recipients to the labor market.
[1] Odishelidze, A., and Laffer, A. Pay to the order of Puerto Rico: The Cost of Dependence to the American Taxpayer. (2004). Allegiance Press.
