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Puerto Rico's governor seeks tax reform, government spending cuts to help boost economy

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SAN JUAN, Puerto Rico - Puerto Rico's governor said Monday that he plans to boost the U.S. territory's economy by overhauling the tax system and reducing government spending after two credit rating agencies slapped the island with downgrades last week.

Gov. Alejandro Garcia Padilla's message was aired on public TV and radio as Puerto Rico prepares to re-enter the bond market and seeks to reassure investors that it will not default on $70 billion in public debt accumulated for decades.

"The time has come to pay the bills of others who left without paying," he said. "This problem did not develop overnight."

Garcia said he expects to reform the tax system within a year and evaluate whether a current 7 per cent sales-and-use tax is effective. He also plans to reduce government spending by at least $800 million, crack down on tax evaders and reduce government agencies' budgets by 2 per cent, except for the education department.

Garcia also said he would present a balanced budget for the upcoming fiscal year and has submitted legislation to cut an additional $170 million from the current budget. He pledged that layoffs would not occur.

"This is not going to be easy, but we have to do what's right," he said. "There are no magic wands for this task."

Jaime Perello, president of the island's House of Representatives, said legislators are already working on some of the measures and noted that government agencies are ineffective at tax collection.

Puerto Rico has a 56 per cent capture rate and loses some $800 million in revenue annually as a result, economist Gustavo Velez said. He said the government should aim to increase its rate to 75 per cent to collect an additional $391 million a year. He also said the government should slash its payroll, which is its greatest expenditure, and reduce its $820 million deficit by at least $500 million.

Rep. Ricardo Llerandi Cruz of the opposition New Progressive Party said he worried that tax reform would harm the island's working poor and warned that the island might not see any public work projects completed in the near future.

Llerandi also accused the governor of being vague in his message. "There is no specific information of any kind in this message," he said.

Garcia warned that last week's downgrades to the island's debt mean that financing public works will become costlier because of higher interest rates.

The island of 3.7 million people has entered its eighth year in recession and faces a 15.4 per cent unemployment rate, higher than any U.S. state.

Last Tuesday, Standard & Poor's downgraded Puerto Rico's credit by one notch, while Moody's lowered it two notches Friday

Garcia said the downgrades occurred despite his administration taking steps such as making changes to two strained public pension systems.

"We did everything that was suggested to us, but even then, they turned their backs to us," he said.

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