Puerto Rico Economic Pulse ©

May 2015: The PR Budget: Averting Doomsday?

An analysis of the FY2016 General Fund Budget Proposal

Governor García-Padilla submitted his fiscal year 2016 central government budget request for $9,800 million and a consolidated budget for $28,820 million in spending to the PR legislature on May 20, 2015. Both budgets involve a 2.5% increase over fiscal 2015. The Governor’s proposal relies on new and higher taxes, approved on May 29, 2015. Despite fierce opposition from some members of the incumbent and opposing political parties, Act 72 imposed an 11.5% enlarged SUT plus a megastore tax, effective July 1. However, according to the president of the Government Development Bank “…it is likely that the Treasury will not have the necessary liquidity to operate during the first quarter of fiscal 2016. The lack of cash on hand to operate the central government is exacerbated since at present the GDB does not have enough liquidity to finance the Commonwealth”. How did we get here?

Puerto Rico Economic Pulse ©

April 2015: An Economy Under Siege

Review of Global, US & PR economies in FY 2014 and forecasts from 2015 to 2017

Now, more than ever, business, households, and financial institutions, among others, require an assessment of the current state of the Puerto Rico economy. Our economy must measure its performance and the risks it faces now and in the immediate future within the context of global and US economies. Going into the 8th year of negative economic growth and fiscal distress, we face the greatest challenge yet: being accountable for the sad state of our internal affairs. Public debt is 104% of GNP, the liquidity of the Government Development Bank (GDB), PR’s fiscal agent is dangerously low, credit ratings of General Obligation Bonds (GO’s) and of key public corporations in charge of main utility services, such as electricity, water, ports, highways, and health are now at “junk” investment grade. Investment for growth is very low. The Governor has proposed a major overhaul of the tax system with lower income tax rates and a new VAT consumption tax. This Pulse provides a snapshot of main sectors, forecast, risks, and challenges ahead thru 2017.

Puerto Rico Compass ©

Q1 2015: Is Consumption Puerto Rico’s Lifeline?

A review of economic indices Q1-2015

Recently released data showed that real GNP in Puerto Rico fell -0.9% in fiscal year 2014. This result was more or less in line with the consensus forecast, and it represents a continuation of a recession, which started in 2007 and has lasted now 8 years. The underlying details of the six quarterly economic indices for Q1-2015 were mixed, however. The good news is that growth in the leading index reflects the impact of cheap oil prices with lower gasoline and electricity prices expected to continue in coming months. In addition, consumption of goods and services was less negative than the previous quarter. On the other hand, construction continued in negative territory with -7.6 percent on a year-ago basis. Banking and manufacturing have not improved and continue in negative territory. Overall, the economic indices for Q1 this year reflect the poor performance of the economy and the uncertainty generated by an upcoming overhaul of PR’s tax system with a proposed VAT tax of 16%. At time of publishing this issue, the Legislature had defeated this bill.

Puerto Rico Economic Pulse ©

March 2015: Oil & PR Liquidity: A Dangerous Strategy

The risks to pull out from the near term abyss are huge

The Government’s delicate financial position has deteriorated significantly since January 2015. Delays in approving a tax increase on oil imports—against which the PR Highway and Transportation Authority (PRHTA) would issue bonds to service its debt with the Government Development Bank (GDB)—have led to onerous terms for the Commonwealth. Furthermore, the storm set-off by the proposed tax reform, unrelated to the tax hike on oil-related products, has increased uncertainty across the board and possibly tilted the Island’s fragile socioeconomic balance in the wrong direction. Unfortunately, the problem is even more delicate. Recent revisions to employment data meant that economic activity has been even slower than initially thought, perhaps resulting in yet another contraction in GNP. Inflation entered negative territory with the General Fund having at one point only $10 million in its coffers. This issue analyzes the economic and financial risks this is creating.

Puerto Rico Economic Pulse ©

February 2015: Proposed Tax Reform: A Swinging Pendulum

Highlights and potential impacts on the PR economy

Why the need to overhaul PR’s tax system now? Is there a convincing case for this tax policy reform to support a recovery in PR’s economic growth? The current tax reform calls for a Value Added Tax (VAT) to replace the current Sales and Use Tax (SUT) while overhauling the current income tax system and generating “adequate” revenues. The proposed VAT to be implemented effective January 2016 calls for a temporary increase in SUT from 7% to 16% on April 2015. A new source of revenues would enable other taxes, such as income taxes for certain brackets, to be abolished. Businesses would be subject to a higher yet flat corporate income tax rate as well as capital and dividend gains. Consumption patterns between income brackets can differ and a complex regressivity mechanism for lower income groups is not yet clear. Employment effects could be larger since smaller firms may have layoffs, ultimately worsening the situation on the island.

Puerto Rico Economic Pulse ©

January 2015: Does PR Need a Different Consumption Tax?

Pros and cons of the proposed Value-Added Tax

Much has been said and speculated about the proposal to replace the current sales tax with a new value-added tax. The arguments for and against it have so far filled media outlets, sometimes with contradictory facts and figures. Moreover, the very nature of the VAT makes it a more complicated and technically involved scheme than the current sales tax. As a result, much of the public conversation so far has been clouded with commentaries that contribute very little analysis regarding the practical consequences that the proposed VAT would bring to businesses, individuals, and municipalities. In addition, there are a number of technical issues regarding the implementation of the proposed tax structure that have not been properly addressed yet either. To help bridge this gap, this issue of the Pulse takes an in-depth look at some of the consequences of implementing a VAT in PR. Anticipated consequences range from uncertainty to high inflation to lower than expected fiscal revenues.