Newsletter: Puerto Rico Economic Pulse©

In 2010, President Obama expanded healthcare in the US through the Affordable Care Act. Since April 2014, more than 7 million have signed up for private coverage, thereby reducing the number of uninsured in the US to its lowest level since 2008 and significantly raising payments. To reign in the expenses, Obamacare lowered Medicare spending by $716 billion from 2013 to 2022. Of this, $156 billion comes from Medicare Advantage (MA), which lets the elderly use public money to buy private health plans. Private insurers passed along the extra subsidy to consumers in the form of additional benefits or lower fees. Obamacare sought to bring private payments in line with traditional Medicare. But now, Medicare Advantage has become increasingly popular with about three in ten Medicare beneficiaries enrolled in a private plan in the US. In contrast, this proportion is about seven in ten in PR. Insurers argued that Obamacare’s cuts would force them to raise prices or cut benefits. CMS raised payments for the states but cut 11% for PR in 2016. Find out the consequences of this decision.

A series of rapidly developing events are drastically—but not unexpectedly—reshaping PR’s development and growth possibilities. In all likelihood, the end result of the ongoing negotiations will impose strict limitations to the government’s ability to play an active role in the economy, a dramatic shift from its historical role. As a result and for the first time in PR’s modern economic history, the market will largely and freely drive economic activity in the Island. This may not be all that bad. In fact, the emerging landscape should be populated by competitive albeit small businesses, some of which will supply foreign markets. Furthermore, the economy will tend to reallocate its resources to those areas in which it can produce with competitive—and comparative—advantages and it is in this sense, that the current crisis is nurturing future opportunities. The road for the next decade may be bumpy but rewarding.

The public discussion surrounding the government’s attempt to overhaul PR’s tax system coupled with fresh indications that some agencies are on the brink of insolvency is quickly shifting the economic prospects for the next decade. Regrettably, the current situation risks intensifying the ongoing migration wave which, were it to materialize, could lead to a long-lasting plateau. As it stands, population and public finances are the economy’s two most fundamental issues. To grasp this, we take a look at the unfolding long-term scenarios within the current public policy context. Next month’s issue of Pulse will follow this up by examining an alternative scenario, where public policy undergoes a significant turnaround starting in 2017. Whatever the specific outcome nonetheless, one thing is clear: economic activity will not recover without first correcting its misaligned fundamentals.

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?