Can Wisconsin Grow Its Way out of a Deficit in the Next Budget?
Perhaps, but Further Budget Cuts Are Likely to be Part of the Solution
It appears that the Wisconsin Legislature is on the verge of passing a slightly amended version of the Special Session tax cut bill, which uses the projected state surplus in a way that leaves the state with a “structural deficit” of about $700 million at the beginning of the next session. (See note below.) The good news is that the way the Fiscal Bureau calculates structural deficits doesn’t make any estimate of revenue growth in the next biennium. The bad news is that it also doesn’t account for any spending growth, and it depends on fairly strong revenue growth over the next 15 months, which is by no means guaranteed. (Technical correction: The structural deficit was reduced to $658 million by a Finance Committee amendment that requires $38 million to be cut/lapsed at the outset of the next biennium.)
Proponents of the proposed tax cuts contend that tax growth in the next biennium can be expected to surpass the amount needed to close the structural deficit. That’s likely to be true — provided that the economic recovery doesn’t slow over the next three years, and if policymakers are prepared to once again freeze many appropriations or cut them below the levels needed to keep up with population growth and inflation. Although fiscal conservatives congratulated themselves in 2012 for eliminating the structural deficit, many seem not to mind starting a new biennium with a potential hole in the budget, which I surmise is because they aren’t bothered by the possibility (or likelihood) of having to eliminate that hole by making deeper spending cuts.
Over the past few days there have been several pieces of economic, fiscal and international news that I think should serve as reminders that assuming significant revenue growth in the current biennium and the next one could be problematic. At the federal level, the Bureau of Economic Analysis said Friday that real GDP growth dropped to just 2.4% in the last quarter of 2013, which compares to prior projections of 3.2% for the last three months of the year and was far below the 4.1% growth in the third quarter. At the state level, new tax figures released Friday by the Department of Revenue show that the adjusted General Fund tax collections in January fell 2.2% compared to January 2013.
Those two pieces of news strike me as warning flags, not as alarm bells. A number of economists have suggested that the weaker figures for the federal economy were primarily the result of short term factors, such as the weather. And because January 2013 was a strong month for Wisconsin tax collections, the comparative decline in January of this year isn’t a major surprise. I think the more worrisome news comes from the international developments in the Ukraine and elsewhere – considering the potential economic implications of rising tensions and global instability. In any event, all of these recent events should serve as reminders that even the Fiscal Bureau doesn’t have an infallible crystal ball, and there are risks in using projected budget balances for new tax cuts or spending increases.
Fortunately, the structural deficit that the Fiscal Bureau projects for the 2015-17 budget is smaller than numerous others in the last two decades. However, it should be remembered that some of those structural deficits increased between this point of the biennial budget and the start of the legislature’s next biennial session. And the time to take steps to reduce structural deficits is when you have higher than expected revenue projections.
Some of the other states with surpluses are taking a more cautious and responsible approach. In California, for example, Governor Jerry Brown has recommended putting much of the anticipated revenue increase into paying off state debt and building up reserves. Wisconsin lawmakers should proceed with similar caution.