Economist Estimates Two-year $3.1 Billion Wisconsin Deficit

Thursday, September 23, 2010 at 2:57 AM by

A short paper released Wednesday by Professor Andrew Reschovsky, an economist at UW-Madison’s La Follette Institute, explains that a conservative estimate of the structural deficit in Wisconsin’s next biennium is $3.1 billion. That figure approximates the gap between revenue and spending in 2011-13 if one assumes 3 percent per year revenue growth and modest increases in spending to maintain current services. It represents a shortfall of about 10 percent of projected spending needs.

A Journal Sentinel article by Jason Stein does a nice job of explaining the report’s findings and the reactions of the gubernatorial candidates.

For any of you who have a desire to understand the differences between the various sorts of deficit figures that tend to get thrown around, let me provide a quick tutorial regarding three of the ways that one can calculate the budget gap for the next biennial budget:

  1) The “structural deficit” is a calculation made occasionally by courageous people like Professor Reschovsky who are willing to stick their neck out and make assumptions about revenue and spending growth. It represents the gap between the amount of General Purpose Revenue (GPR) the state can reasonably expect to take in during the next biennium and the spending that is needed, based on certain assumptions about the amount of additional spending that will be needed to preserve current services. (I’m glad that Reschovsky is willing to tackle such a calculation, so I don’t feel a temptation to try it.)

  2) The “structural imbalance” – This is a less debatable calculation that the Legislative Fiscal Bureau performs from time to time. It’s the amount of GPR growth that is needed in the next biennium to maintain existing commitments (such as phased-in tax cuts or newly created programs), with flat funding for everything, and no increases for inflation or caseload growth. The advantage of this figure is that it sidesteps the potentially controversial questions of how much taxes might increase and how much additional spending is essential to maintain the status quo.

  3) Later in the budget process, it’s common for a larger figure to emerge for the budget deficit or budget gap, usually after all the agency budget requests for the next biennium have been submitted and tallied and after there are new estimates of the revenue that can be expected in the next biennium. Typically, it’s a figure that compares those revenue estimates with the total of the agency budget requests. As such, it is sometimes a controversial figure because conservatives often argue that the agency requests are inflated – even though for the last couple of biennial budgets most agencies have been following orders to submit bare bones, cost-to-continue budgets. At the outset of the last biennial budget, that deficit figure was more than $6 billion.

In early July, the Legislative Fiscal Bureau issued a memo that said the GPR structural imbalance going into the 2011-13 budget is about $2.5 billion. However, that number is now considerably too low because of factors like the Supreme Court ruling that the state will have to pay back (with interest) the $200 million transferred several years ago from the medical malpractice fund, and because of increased costs for Medicaid and BadgerCare Plus. In addition, the July LFB memo assumes that federal law will allow the state’s lapsed estate tax to be restored automatically next year, but it appears highly unlikely that Congress will actually allow that to happen.

Professor Reschovsky started from the LFB numbers, and then made adjustments to reflect more recent developments. However, as I noted above he went beyond the “structural imbalance” calculation by actually estimating revenue increases (3% per year) and made fairly conservative assumptions about needs for additional spending (1.75% more per year in areas outside school aids and Medicaid). .

One can move the spending and revenue assumptions up or down a little, but the bottom line won’t change very much. Anyone who takes an honest look at the state’s fiscal situation can see that Wisconsin policymakers have another extremely challenging budget ahead of them, which cannot be balanced without some combination of: deep cuts in state services and/or local aid, increases in state taxes and fees, or extensions of some of the federal fiscal relief that is currently scheduled to expire.

That fiscal challenge would grow immensely if candidates who have pledged tax cuts get their way.

Jon Peacock,
Project Director

Categories: 2011-13 biennial budget, Blog, spending | Comments Off on Economist Estimates Two-year $3.1 Billion Wisconsin Deficit

Comments are closed.