The budget to be submitted by governor Ricardo Rosselló Nevares to the Oversight Board (OB) on or before next Sunday will include the merging of all social services and economic development agencies, the Country’s jails and drive the closing of a significant number of public schools.
Likewise, the budget may contemplate mechanisms to increase the visibility and scope of the Department of the Treasury over the finances of agencies and the various pools of government resources, including the Puerto Rico Sales Tax Financing Corporation (Cofina, by its Spanish acronym), whose creditors have not been affected by the government’s defaults.
The governor’s representative to the OB, Elías Sánchez Sifonte, explained that the budget, the share of which intended for the General Fund could total $9,284 million, will not allow for much room to maneuver or juggle because its balance is presumed to be “finite.”
He warned, however, that several laws signed by Rosselló Nevares clear the way for the Treasury and the Fiscal Agency and Financial Advisory Authority (FAFAA) to intervene and adjust the budget of agencies and public corporations if it were necessary.
“There is no margin for error in this. What’s more, if you sees the liquidity plan, you realize that to meet all the metrics everything is finite, and if goals are not met the entire balance is jeopardized. If poorly executed, the effect of the Fiscal Plan on the economy could be worse than we expect,” said Sánchez during an interview with El Nuevo Día.
He was referring to the projections for a greater contraction of the economy than is anticipated once the austerity measures being supervised by the body created by the US Congress begin implementation.
The Fiscal Plan itself forecasts that the Gross National Product (GNP) —one of the main economic indicators— will fall 2.8% between next July 1 and June 30, 2018. This valuation is at current prices. Without counting inflation, the actual fall would be 4%.
Some experts, such as Nobel laureate, Joseph Stiglitz, have warned that this percentage underestimates the effect of the austerity proposed in the Fiscal Plan. During a recent visit to Puerto Rico, the also former Vice President of the World Bank, estimated that the actual drop in the GNP could reach up to 16%.
Sánchez Sifonte indicated that he is aware of the criticism made over the Fiscal Plan by several economists, many of them world-class. He said, however, that both the government and the OB have their own experts who have worked together and have come up with the figures outlined in that document.
“Are other forecasts possible? Well, maybe so, but we have our experts and trust that this is the most realistic scenario (the Fiscal Plan’s) and feel hopeful that we are going to achieve a better outlook for the future,” said Sánchez Sifonte, while admitting that, beyond the assumed failings in the document, there are other matters that directly threaten the economy of Puerto Rico, such as the US tax reform and a possible hike in interest rates by the Federal Reserve Bank.
All this is particularly important in creating the budget, because the government is obliged to follow the numbers as established in the fiscal document. For example, if the revenue forecasts contained in the plan are not accurate, the government could incur in over spending, which could trigger new emergency measures that would further affect the economic downturn experienced by Puerto Rico since 2006.
And the doubts around the Fiscal Plan include important aspects, such as population projections, economic multipliers, and estimates for collections stemming from the changes outlined in the government’s revenues, specially in the area of taxes.
For instance, as recent as last week, the Department of the Treasury amended its revenue estimates from excise tax increase on tobacco products. From an expected $161 million initially estimated as new revenue, the figure fell to $52 million. This is because the consumption of cigarettes is expected to fall significantly with the introduction of the new tax.
The government is currently working on an item-by-item review of the specific allocations that agencies and entities receiving any kind of state transfer will have in the next budget.
This process, Sánchez Sifonte said, will serve to calibrate the changes that will be established as part of the Fiscal Plan certified by the OB in mid March.
The government is supposed to deliver a budget to the OB by April 30, at the latest. It’s failure to comply with that provision could give the OB the go ahead to initiate the contingency mechanisms that would initially entail the elimination of the Christmas bonus for public employees and a 20% reduction of the government’s work week.
The Rosselló administration must deliver two other documents to the OB on that date: the liquidity forecast for the fiscal year and the plans to implement cutbacks on government spending and structural changes contained in the Fiscal Plan.
The latter, according to Sánchez Sifonte, poses the biggest challenge for the government due to the political adversity that always surfaces when attempts are made to cut government spending.
“No one thinks that the government will muster the political will to make these changes,” said the governor’s representative to the OB. For instance, he pointed out that, within the legislative majority, there is plenty of resistance against the closing of public schools.
“It must be understood that we are in (the midst of) a scenario where we either do that and the number of schools is reduced or the Board’s proposal is implemented and the work week of teachers is reduced. One may think there are other alternatives, but those do not getthe kind of savings required,” he said.
He described a similar situation when referring to the University of Puerto Rico (UPR, by its Spanish acronym). He said the public university system must look for true fiscal autonomy, procuring its own income, as do most US universities.
“The has to become truly independent. They have to be self-sufficient. It is a matter of public policy and I believe they have many resources to generate income,” he said.
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