Puerto Rico Economic Pulse ©

April 2012: An Indictment of Fiscal Discipline in PR

Assessing the impact of government budget cuts & public debt

We examine Puerto Rico’s experience with budget cutting since fiscal 2009. The goal of said “fiscal discipline”, i.e. spending cuts and tax increases, was to preserve the investment grade or credit rating of PR’s public debt by Moody’s and S&P’s rating agencies. This tighter fiscal policy reinforced the contraction of PR’s economy, which started in fiscal 2007 and continued thru fiscal 2011. Cuts in government outlays increased unemployment and were not offset by strength in consumer spending, nor in residential and non-residential investment nor in export growth. Despite lower interest rates, the private sector did not invest given the glut of residential housing, bank consolidation, and a global financial crisis that caused a recession in the US and Europe. Find out how the government deficit was financed? You cannot hike taxes and cut spending without impacting growth. Has PR protected the investment rating of its public debt? What will it take to recover a growth path in the island?