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Country Report Puerto Rico Product Image

Country Report Puerto Rico

  • ID: 2138738
  • May 2015
  • Region: Puerto Rico
  • 17 Pages
  • The Economist Intelligence Unit

The governor, Alejandro García Padilla, has ordered his economic cabinet to prepare a schedule of spending cuts following the rejection of his tax reform proposal by the island's House of Representatives (the lower house) on April 30th. Unless a new tax package is put in place before June 30th, expenditure must be reduced by as much as US$1.5bn to produce a balanced budget for the 2015-16 fiscal year.

The administration had submitted a tax reform bill to the legislature in February, proposing a radical revamping of the tax structure to introduce a 16% value-added tax (VAT) with a broad base and reduce income tax rates sharply. The reform was expected to yield US$1.2bn in additional revenue to help to close the chronic fiscal deficit and reassure the government's creditors in the US municipal bond market. Puerto Rico's government debt was downgraded to below investment grade in February 2014 by major credit ratings agencies.

The tax reform bill faced an uphill battle from the beginning, even though the ruling Partido Popular Democrático (PPD) has absolute majorities in both houses of the local legislature. After almost three months of angry debate and proposed amendments, six PPD legislators sided with the opposition minority in the House of Representatives to vote against the bill. The vote came just five days after the US Secretary of the Treasury, Jacob Lew, phoned leaders of the local legislature to urge prompt action to address the island's worsening fiscal crisis.

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Country Report Puerto Rico

Government mulls spending cuts after tax reform fails
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