As I explained in earlier articles, the austerity storm is coming, it is real and it is going to hit state governments hard. For half a century, we have used budget deficits to build a bigger federal government than we can afford, and by funneling some of the borrowed money to states (in the form of federal funds) we have also expanded state governments beyond what taxpayers can pay for.
The austerity storm comes when the federal government can no longer borrow at negligible cost, and when states' bond ratings plummet as a result of unpaid liabilities and structural deficits. While the federal government will be able to continue to borrow some money - from the Federal Reserve as a last resort - states will quickly be hurled into fiscal panic. Bond rating agencies will demand rapid-fire spending cuts or tax increases, executed exclusively to reduce the budget deficit and with little or no regard for long-term consequences. If higher taxes slow down growth, then so be it; if people dependent on Medicaid, subsidized school lunches or welfare have to suffer, then so be it. Under fiscal panic, nothing matters more than short-term, upfront improvements in the state budget.
As I explained last week, our states are growing weaker, fiscally. Back in the 1990s they could generally pay for 64 percent of their spending out of their own revenue; in the past five years that rate has been about 56 percent. In a coming article I am going to explain what that difference means for the U.S. economy, and how it is going to play a key role in the austerity storm, when it breaks out. For now, though, let us take a look specifically at Wyoming.
Using state revenue and spending data from the Census Bureau, here is a quick review of our state's finances from 1992 through 2014.*
As a general observation, Wyoming has been fairly good at maintaining a stable rate of self sufficiency in paying for its state government. The rate of total state expenditures paid for out of the state's own sources has remained steady at approximately 60 percent.
The federal-funds share has been equally steady at about 40 percent. This, however, includes severance taxes which the federal government defines as a gift from Uncle Sam to the grateful people of Wyoming. Therefore, due to a decline in severance tax revenue in recent years, the federal-funds share of our state's total expenditures has declined somewhat.
Figure 1a reports own-source and federally-sourced revenue:
Source: Census Bureau
Again, since severance-tax revenue is defined as federal aid to Wyoming, the steady rise in the grey portion of the columns in 2000-2006 is a reflection of the boom in the production and prices of minerals products.
Let us now compare these revenue numbers to spending. Figure 1b adds a blue function for total state expenditures:
Source: Census Bureau
If you look carefully, you can see the beginning of our state's current budget problems already in 2010. In 2011 there is again a spike in revenue, but from 2012 on the budget gap widens.
Figure 1b establishes with clarity that our state has a deficit problem because of the sharp spike in state spending in 2007-2010. State expenditures rose by, on average, 8.34 percent per year; with compounded interest that is a 27-percent increase in three short years.
The growth in spending did not stop there, but it slowed down to 1.4 percent per year from 2012. This, however, did not help: the very size of government had already outgrown the state's tax base. Evidence of this is in the fact that from the revenue side, the deficit opens up because of a 7-percent drop in federal funds (think severance taxes).
Revenue from own sources dropped by a minuscule two percent, though this decline should not be ignored. There is a clear policy message in it: Wyoming taxpayers - outside of those who pay severance taxes - cannot keep up with state government spending.
The simple truths is that if state spending had grown at the same rate from 2007 and on as it did in 1993-98, total expenditures would have been $1-$1.2 billion lower per year than it actually was. Please note that this does not mean that government would have stopped growing, only that the growth in its spending would have averaged 2.9 percent per year rather than almost six percent, as was now the case.
This difference in growth in government spending is a powerful image of the root cause of our current budget crisis here in Wyoming. The root cause is not a sharp increase in revenue, especially since that increase was not the result of any drastic tax hikes. If government suddenly finds itself with more money on hand than it intends to spend, then sound policy suggests returning that money to taxpayers. After all, it is theirs to begin with...
We now have a good picture of what caused our state's budget crisis. This picture allows us to analyze various scenarios under fiscal panic and an austerity storm. More on that coming; sorry for the slow roll-out of the articles, but this kind of analysis requires quite a bit of tedious data analysis. Hang in there!
*) The Census Bureau has begun releasing state budget data for 2015, though they have not yet come to the point where we can add that year to our review. As soon as those data are out, though, I will analyze them in a separate article.