The Wisconsin legislature’s Joint Committee on Finance started voting on the 2017-19 state budget this week. This will be the fourth two-year budget for Governor Walker and the Republican legislature since the wave election of 2010 swept the GOP into control in Wisconsin. How well has the GOP performed at the task of limiting government?
Nobel laureate Milton Friedman pointed out that the best way to measure the size of government was by comparing government spending to the total income. In this way the “true tax” is revealed, because whether financed by taxation, borrowing or inflation, all spending by government must be paid from the income of the citizens.
“Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax … If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what government spends, and the real problem is to hold down government spending as a fraction of our income, and if you do that, you can stop worrying about the debt.”Milton Friedman, 1980 (Watch video)
Wisconsin Liberty Fund is dedicated to limited government. Let’s take a look at recent Wisconsin budgets through Freidman’s lens of total spending as a share of total income. For this exercise we will use data from FRED at the Federal Reserve of St Louis and the U.S. Bureau of Economic Analysis to provide Wisconsin’s annual Gross Domestic Product (GDP) as a close approximation of total state income. The spending will be analyzed using data from Wisconsin’s Legislative Fiscal Bureau’s “Comparative Summary of Budget Recommendations” for each biennial budget as found in the table “Summary of Total All Funds Appropriations by Agency”. This is “All Funds” spending which includes state government spending using federal funds, grants, tuition, fees, etc. By dividing the spending by GDP we’ll get a look at the percent of Wisconsin income spent on various budget priorities.
TOTAL SPENDING – ENTIRE STATE BUDGET AS PERCENT OF GDP
Listen to Scott Walker’s critics and you might believe government spending in Wisconsin has been slashed over the last 6 years. Mmmmm, No. Actually our economy has been growing about 3% annually while our spending has grown slightly slower. Overall Gov. Walker’s proposed 17-19 budget comes in at 23.6% of GDP while Governor Doyle’s final budget for 09-11 spent 25.5% of GDP. Behind this modest success at limiting overall government spending are some significant shifts in spending patterns.
State Budget Pie – The Big Four Take 3/4 of Total Spending
Wisconsin will spend over $75 billion in the next two years. Over 75% of state spending goes to four agencies: Department of Health Services 32%, Department of Public Instruction 19%, University of Wisconsin System 16% and the Department of Transportation 8%. All other agencies together spend 25% of the total on things like corrections, natural resources, technical colleges, veterans, justice, courts, tourism and many others.
Education spending is our top priority in Wisconsin. Education spending in Wisconsin is spread among K-12 spending, the University System and the technical colleges. Lumped together this education spending makes up more than 37% of the budget. No other budget priority gets more money than education.
#1 The Elephant in the Room – Medicaid Spending
The largest and fastest growing budget item has been the Department of Health Services, comprising one dollar of every three spent by Wisconsin government. Most DHS spending is related to the Medicaid (MA) program. The big story here is that after years of rapid growth, Wisconsin’s Medicaid spending has been controlled. For the first time in a decade, Medicaid spending is projected to remain level at 7.6% of GDP.
#2 K-12 Education Spending at Department of Public Instruction
Education is the top spending priority in Wisconsin. 2011 Wisconsin Act 10 has saved billions of dollars for both state and local government. The result was a significant reduction in the cost of K-12 education. The “increases” in education funding in the years since 2011 disappear when viewed as total spending in percent of GDP.
#3 University of Wisconsin System
Governor Doyle imposed cuts on the University system as he managed a large budget deficit. UW spending rebounded during the first Walker budget. In 2013 it was revealed that the Universities had accumulated large cash reserves total nearly $1 billion. University spending as percent of state income has returned to Doyle era levels.
#4 Transportation Spending
The argument over spending on roads and highways is more complex due to the fact Wisconsin, like most states, uses borrowed money to build roads. Responsibility for paying for a road with a life of 10 or 20 years is shared by future users as well as current taxpayers. Best practice in transportation finance would have current taxpayers paying for snow plowing and routine maintenance, with borrowing used for major projects.
Friedman’s “True Tax” holds that the best measure of the size of government is total spending, whether from taxes or borrowed, as a portion of total income. By this measure transportation spending has fallen during Walker’s second term.
Act 10 yielded significant cost savings in K-12 education. Nothing of the sort has occurred at the DOT. Instead the Department has been criticized for financial mismanagement and wastefulness. Many legislators from both parties argue that transportation spending should be increased to properly maintain our highway infrastructure.
Budgeting involves choosing among competing priorities to decide where to spend our limited resources. Voters understand this well because they balance their household budgets the same way. Most voters buy their home with a mortgage, but usually don’t borrow to pay for snow removal, sealcoating a driveway, new tires, or even a new roof. Instead they make hard choices, and often have to give up, forego or delay some other spending priority. The recent Marquette poll illustrates this well:
“Voters were reminded that the state borrowed more than $1.5 billion to pay for transportation and road building over the last two state budgets. Asked how the state should pay for transportation, 35 percent would increase taxes and fees, 3 percent would continue to borrow, 9 percent would reduce construction and maintenance and 44 percent would take money from others areas of the budget. Respondents were not asked which areas they would reduce in order to fund transportation.”Marquette Law School Poll, March 13-16, 2017
Of course elected officials are not fond of these kind of hard choices. Governor Walker has correctly suggested spending more general fund dollars on transportation is the most conservative approach. Shifting general fund dollars to roads requires taking money from other areas of the budget.
Everything Else – that isn’t Health, Education or Roads
The decade has seen a steady decrease in state government spending on all the other departments and agencies. Voters who want us to fund roads by “taking money from other areas of the budget” have this in mind.
Summary – Doyle’s 4th Budget vs. Walker’s 4th Budget
State government is smaller in Governor Walker’s proposed 4th budget vs. the last Doyle budget in 2009. Overall the decrease amounts to about 2% of the state’s total income. Expressed as percent of total income: healthcare spending is up 1.1%, transportation spending down 0.4%, K-12 spending down 0.9%, university spending down 0.1%, and all other spending down 1.8%.