The extreme polarization facing national politics and the unprecedented indebtedness of the federal government represent a dangerous situation for Puerto Rico.
Faced with a federal public debt of $35 trillion and a fiscal deficit of $1.9 trillion, the Federal Congress will be forced to introduce massive cuts in discretionary spending. (teresa.canino@gfrmedia.com)
It was essential to write a column on this topic: the sustainability or permanence of federal aid to Puerto Rico under the possible political and fiscal scenarios of the federal government. The issue has taken on a unique prominence during the past weeks of the electoral campaign. Publicly, I have been consistent with the issue of the high dependence on federal aid that Puerto Rico has generated during the past two decades.
In this forum, I have explained the danger and vulnerability of the island's increasing dependence on federal funds at a time of high political volatility in the federal capital and in the face of the serious financial situation facing the U.S. government. The extreme polarization facing national politics and the unprecedented indebtedness of the federal government represent a dangerous situation for Puerto Rico, whose economy is increasingly dependent on federal aid.
In the heat of the political campaign, the traditional political parties have begun to use the issue of federal funds as a transcendental element in the petition for the electorate's vote.
However, in the heat of the debate and the empty refrains, devoid of fundamentals, they seem to ignore the political and fiscal realities described above, but worse yet, they do not seem inclined to generate alternative proposals in case, for fiscal or political reasons, Uncle Sam decides to begin to ration the sending of discretionary funds.
Essentially, at this juncture, Puerto Rico faces two dangerous scenarios. Faced with a federal public debt of $35 trillion and a fiscal deficit of $1.9 trillion, the federal Congress will be forced to introduce massive cuts in discretionary spending. The other risk is that under a hypothetical scenario in which the Independence Alliance prevails in the elections, an orderly transition discussion to possible independence will be generated.
Thus, in this column, I will try to explain empirically and with data, how viable Puerto Rico is under a scenario of gradual or immediate reduction of federal funds and how we can manage the risks associated with either of these two scenarios.
How much are the federal funds coming to Puerto Rico?
Since the impact of the hurricanes and Covid-19, federal funds sent to the island have increased dramatically and in 2023, they reached $33.862 billion. These funds can be segmented into two items: programs that we have already paid for, such as Social Security ($9.836 billion), Medicare ($7.458 billion) and veterans' pensions ($1.5 billion); and discretionary funds, such as Medicaid, Nutrition Assistance Program (PAN) funds, college scholarships and WIC, among others.
For FY 2023, discretionary aid totaled $15.068 billion, while federal transfers earned were $18.794 billion. Various local government agencies also receive significant federal grants to finance programs and services.
In 2014, total federal transfers accounted for 26% of Gross National Product (GNP), but in 2023, total aid accounted for 42% of GNP. It is evident that calamities, bankruptcy and economic stagnation have increased reliance on nondiscretionary funds obligated to Puerto Rico. In the past decade, the largest increases were in veterans' pensions, which increased from about $869 million to $1.5 billion, the Medicare Program increased from $4.481 billion to $7.458 billion, and the NAP increased from $1.868 billion to $3.342 billion.
To the flow of traditional federal funds, we must add the multi-billion dollar appropriations allocated to the reconstruction of the island, which amount to $40 billion. I have argued that the local economy has entered an accelerated phase of federalization via massive injections of money sent from the north.
The urgency of creating plans to mitigate the potential impacts of the reduction in federal funds.
Clearly, in the current context, federal funds play an important role in the functioning and stability of the Puerto Rican economy. Therefore, in the short and medium term, Puerto Rico will not be viable without the funds it currently receives. Sixty percent of families depend on aid and there are entire industries, from food and health to construction and education, that operate thanks to the funds received annually.
This does not imply that the local government and the federal Congress are looking for alternatives to mitigate the effects of a potential reduction in the funds that the island currently receives. Under the hypothetical scenario that the federal fiscal crisis worsens and cuts in discretionary funds begin to be implemented, there would be direct effects on access to health, food, and education, which depend on Medicaid, PAN and university scholarships, respectively. In addition to the direct impact on the beneficiaries of these programs, the contraction of the productive sectors that are funded by such allocations-from food companies to educational institutions-would have multiplier effects on the rest of the economy.
Under the hypothetical scenario that the Independence Alliance prevails in the elections, even if in the short term there is no immediate loss of federal funds, a discussion may begin in the federal capital to move Puerto Rico toward independence. This scenario implies that the federal government and the local government negotiate a gradual transition process so as not to affect the medium and long-term viability of a hypothetical republic.
Under any of the aforementioned scenarios, locally, we must begin to generate serious and deep discussion on how to reduce dependence on funds we do not control and start building an economy based on the production of our own wealth and our own work.
This article was originally published in Spanish at El Nuevo Día.
