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Measuring the Structural Deficit in Wyoming

The Wyoming state government will soon find itself dealing with a troubling budget deficit. Judging from the two most recent CREG forecasts, the deficit looks very persistent, caused by a structural imbalance between revenue and spending.

   However, the CREG reports - for obvious reasons - put their emphasis on the revenue side of the equation. If Wyoming is indeed facing a structural deficit, the cause is not confined to the revenue side. Therefore, to determine whether or not there is indeed a structural deficit looming on the horizon, we need to examine the spending side as well.

It is crucial for any anti-deficit policies to work that we first determine the exact nature of the deficit. In a new research paper, Estimating the Structural Deficit in Wyoming, published later today, I explain the difference between structural and cyclical deficits and provide a method for measuring the long-term balance between state government spending and tax revenue.

Based on this method I draw the conclusion that Wyoming is indeed suffering from a structural deficit. Since 2007 the Wyoming state government has allowed its permanent entitlement spending to get out of hand, outgrowing the state's tax base at staggering pace. Adjusted for inflation:

  • In 2007, for every $100 in growth in entitlement spending, the state's tax base only grew by $59.10;
  • In 2009, for every $100 in growth in entitlement spending, the state's tax base growth was $52.70; and
  • In 2012, for every $100 growth in entitlement spending, the tax base grew by $44.50.

Not only is permanent entitlement spending outgrowing the tax base on a long-term basis, but the disparity is growing. 

Herein lies the reason why Wyoming is facing an open-wound deficit in a couple of years; the only reason why the deficit has not been glaringly visible in the past few years is artificial bloating of tax revenues caused by minerals-based inflation. That inflation, which was particularly strong in 2003-2008, simply disguised the underlying structural imbalance in the Wyoming state finances.  

In my paperEstimating the Structural Deficit in Wyoming I explain that the deficit exposed in the CREG reports is, so to speak, the deflation hangover after a sustained inflation-based spending spree by our state legislature.

The paper is the first in a four-part series. The coming three parts will present the only workable solution to the deficit, namely structural spending reforms. Part two is scheduled for March, part three for April and the fourth and final part for May.

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