News out of DC likely grows Wisconsin deficit even more

A surprise headline out of Washington today was the Congressional Budget Office’s projection of higher U.S budget deficits for the near future. This increase in the U.S. deficit would go from $439 billion in the recently-completed 2015 Fiscal Year to $544 billion in 2016, and would be a reversal of the trend since 2011, as the deficit had been cut by more than 2/3 in the four years since that time.

In addition, future U.S. budget deficits were projected to rise by an additional $1.5 trillion over the next decade. The CBO explains a couple of the reasons behind this projected increase.

About half of the $1.5 trillion increase stems from the effects of laws enacted since August—which will reduce revenues by $425 billion and increase outlays by $324 billion over the 2016–2025 period, CBO estimates, adding $749 billion to projected deficits. Much of that amount stems from the extension of tax provisions by the Consolidated Appropriations Act, 2016, which will reduce corporate and individual income taxes.

About 30 percent of the increase in CBO’s projection of the cumulative deficit through 2025—$437 billion—results from revisions to CBO’s economic forecast. Lowered expectations for growth in the economy and for wages and corporate profits led the agency to reduce its projections of tax receipts from all sources by $771 billion over the 2016–2025 period. Lower projections of inflation, interest, and unemployment rates, among other changes, led CBO to mark down projected outlays by a smaller amount, $334 billion.

I’ll leave the tax cuts and extra spending alone for now (I’ll tie them in later), and concentrate on the GDP growth projections that the CBO relied on for this report.

The CBO says 2015’s full-year GDP is still expected to come in at 2.0%, just as they projected in August. But 2016’s growth was revised down to 2.7% vs 3.1% in August, and 2017 dipped to 2.5% vs the last projection of 2.7%. And that 3-year CBO trend of 2.0%-2.7%-2.5% growth for 2015-17 is a notable slowdown compared to what the Wisconsin Legislative Fiscal Bureau had in their state revenue projections from 12 months ago.

Gross Domestic Product.

It is estimated that real GDP grew by 2.4% in 2014. Global Insight expects accelerated GDP growth of 3.1% in 2015, primarily caused by lower energy prices, which stimulates growth by increasing the amount of disposable income that consumers can spend on discretionary purchases. Real GDP is expected to grow at a rate of 2.7% in 2016 and 2017. Growth in nominal (current-dollar) GDP is expected to track a similar course, accelerating from 4.0% in 2014 to 4.9% in 2015, followed by a slight slowdown to 4.6% in 2016 and 2017.

So 3.1% growth in 2015 was predicted by LFB in January 2015, but now CBO says it’ll be 2.0%. And while 2016 and 2017’s rate isn’t that different, it’s from a much lower BASE due to the 1.1% gap in 2015, so those total output numbers would also be lower.

Let’s also see what the LFB predicted would happen for job growth 1 year ago.

Employment.

The average unemployment rate for 2014 was 6.2%, an improvement from a rate of 7.4% in 2013. The unemployment rate is expected to continue to decline through the forecast period, dropping to an average rate of 5.5% in 2015, 5.3% in 2016, and 5.2% in 2017. The labor force participation rate has fallen each year from 2006 through 2014, declining a total of 3.2 percentage points from 64.6% to 61.4%. This trend is expected to reverse over the forecast period, with the labor force participation rate increasing to 61.6% in 2015, 61.8% in 2016, and 62.0% in 2017.

Total nonfarm payrolls reached their first quarter 2008 pre-recession peak of 138.3 million during the second quarter of 2014. Global Insight expects total nonfarm payrolls to continue growing over the forecast period, increasing to average payrolls of 141.7 million in 2015, 144.2 million in 2016, and 146.0 million in 2017. Private sector payrolls, which reached their prerecession level in the first quarter of 2014, increased 2.5 million in 2014 and are expected to increase an additional 2.8 million in 2015, 2.4 million in 2016, and 1.6 million in 2017. Public sector payrolls grew by an estimated 37,000 in 2014, and are expected to continue growing by 59,000 in 2015, 87,000 in 2016, and 210,000 in 2017 due to increases in state and local employment. Federal employment is expected to decline slightly. Public sector payrolls are not expected to reach prerecession levels over the forecast period.

Now compare that with the actual data that came in. Labor participation rates did not increase in 2015 vs 2014 (the numbers from the BLS are slightly higher than what the LFB quotes, but participation rates were down by 0.1% in December 2015 vs December 2014). This lack of increase in participation rate helps explain that while the unemployment rate was lower than the LFB’s paper indicated for last year, job growth was not as high in 2015 as what the LFB thought it would be.

12-month change in total jobs, Dec 2015
LFB projection private sector +2.8 million
Actual private sector +2.55 million (-250,000)

LFB projection total jobs +2.86 million
Actual total jobs +2.65 million (-210,000)

Average unemployment rate
LFB projection 2015 5.5%
Actual rate for 2015 5.3% (-0.2%)

So even And with the unemployment rate being lower than expected, this may mean that job growth could be somewhat limited, barring a huge increase of participants into the work force (not likely given the large amount of Boomers that are leaving jobs).

What this means is that these projections of U.S. job and GDP growth would reduce the amount of revenue growth that could come in Wisconsin over the next 2 fiscal years (everything else being equal, of course). So combine those slower growth prospects with the below-budget income tax revenues that we’ve seen in Wisconsin for the first 5 months of the 2016 Fiscal Year, and it would seem very likely that the LFB would reduce Wisconsin’s projected revenues from the amounts that were written into the 2015-17 budget 6 months ago.

Now, some of these revenue issues may be offset a bit by the added spending in that deficit-increasing bill that passed Congress, especially in Transportation. By the same token, some of the state’s tax revenue will also go down with the addition of those federal tax cuts, as many of those will reduce federal taxable income, which then reduces how much income the state can tax). So I can’t say one way or the other whether that new tax bill that went through in Congress will help or hurt the Wisconsin state budget picture.

But here’s what I do feel comfortable saying. Today’s CBO report not only predicts higher budget deficits for our federal government in coming years, but the lowering of economic growth mentioned in that document portends a current budget deficit in Wisconsin that will have to be dealt with. It seems likely that those lower projections would be the final source of data needed for the LFB to say Wisconsin tax revenues will be projected down when their numbers come out in the very near future, and it’ll make for even more “fun” in a Walker/WisGOP budget that was screwed up to begin with.