I’ve read several comments lauding the move toward a structural budget balance in Wisconsin under Governor Walker’s administration. I decided to take a look at what the actual evidence for a surplus is, and what the economic impact has been of policies purported to improve economic performance.
Figure 1 depicts the budget balance by fiscal year over the past decade and a half, plus projections from the Legislative Fiscal Bureau.
Figure 1: (Negative of) General Fund Amounts Necessary to Balance Budget, by Fiscal Year, in millions of dollars (blue bars); and estimate taking into account shortfall of $200 million (red square). “structural” denotes ongoing budget balance, assuming no revenue/outlay change associated with economic growth. Source: Legislative Fiscal Bureau (May 22, 2014), Table 6, Wisconsin Budget Project, and author’s calculations.
Recent actions have pushed the balances in the 2015-17 biennium into deficit. But even the news for the 2013-15 biennium has turned dark. By June 2014, it was apparent that there were both tax revenue shortfalls and outlays in excess of planned [Peacock/WBP]. I’ve included an alternate projection for FY2013-14, shown as a red square in Figure 1. There are also some downside risks to the balance on the spending side (primarily Medicaid/Badgercare), which I have not included, so this is not the worst case scenario.
To some extent, the shortfall in revenues is not surprising. The administration has implemented a contractionary fiscal policy (cutting taxes , cutting spending to increase the budget balance which drives down output and hence revenues. The main tax cuts were:
- An income tax rate reduction, included in the state’s two-year budget that passed in 2013, which reduced revenue by $648 million over two years;
- A 2013 property tax cut of $100 million; and
- A 2014 tax package that further cut income tax rates and also included another property tax cut. The combined package reduced revenue by $507 million over two years.
The cuts amounted to $1.9 billion. 
My predictions of what would occur have been borne out in actual developments in aggregate economic activity. Wisconsin has experienced substantially slower growth than it otherwise would have.
Figure 2: Growth rate of real GDP for Minnesota (blue), Wisconsin (red), and United States (black), calculated as log first differences. NBER defined recession dates shaded gray. Source: BEA, NBER, and author’s calculations.
Note that a regional comparator, Minnesota, that embarked upon a different fiscal path has experienced substantially faster growth, as documented above. Forecasts indicate continued lagging.
To sum up: A procyclical fiscal policy has been undertaken in the past three and a half years, with predictably counterproductive results. The depressed level of economic activity has resulted in a revenue shortfall.