https://en.wikipedia.org/wiki/Puerto_Rican_government-debt_crisis
Puerto Rico experienced a debt crisis in 2014, and there are some major misunderstandings about its causes.
First of all, the triple tax-exempt bonds made the situation better, not worse. By being triple-subsidized Puerto Rico was able to offer a lower interest rate compared to competitors which saved the commonwealth money. The debt crisis would have been worse without the triple tax-exemption.
The increase in the debt burden restriction made the situation worse in the long run.
The cessation of federal subsidies made the situation in Puerto Rico worse. Puerto Rico has to deal with the Jones Act which increases shipping costs. Removing the federal subsidies means companies have to deal with higher shipping costs and no major benefits to doing business in Puerto Rico compared to the rest of the country. The cessation of federal subsidies with the elimination of the Jones Act might have been sustainable, but no subsidies with the massive increase of costs from the Jones Act was a death sentence to the economy.
On top of this, local newspapers have reported the commonwealth has had trouble collecting tax revenue, causing a deficit.
If this wasn’t bad enough, the federal government does not give Puerto Rico the same level of funding for their Medicaid program as states do per capita. This leads to doctors fleeing the island and increases strain on the territorial budget.
If that wasn’t enough, out of a $13 billion budget, $3.7 billion are going to “Custody Accounts” held by the OMB and Department of the Treasury. Source
All of this has led to Puerto Rico having a larger budget than one would expect creating a damned if you do, damned if you don’t situation.
If Puerto Rico prioritized raising tax revenue during a recession, that will be a pro-cyclical policy and only make the recession worse. They have been given no choice given how they cannot default on their debt and do not control their currency.
If Puerto Rico prioritized cutting government expenditure that will reduce expenses in health care and education, putting the territory further into poverty, creating a debt spiral.
Neither of these will solve the problem.
The real solution to Puerto Rico’s crisis is the following:
- Repeal the Jones Act so manufacturing from Puerto Rico is competitive.
- The cessation of Federal subsidies while maintaining the Jones Act is what put Puerto Rico into the situation they are in. The federal government needs to absolve Puerto Rico of their debt.
- Puerto Rico needs to improve tax collection so they can cover future expenditures.
- For purposes of Medicaid, Puerto Rico needs to be treated as a state, even if they are not granted statehood.