Ensure the State's Economic Forecasts Take Inflation Into Account
July 2007
Minnesota's economic forecasts are essential tools for understanding the state's fiscal health. Unfortunately, they have a serious flaw.
Minnesota Management and Budget (MMB) prepares forecasts every February and November. They measure the state's projected revenues against projected spending under current state laws. They are a key yardstick for the Governor and Legislature to measure their taxing and spending proposals.
The flaw with the forecasts is that they adjust future revenue for inflation (assuming growth in income, sales and other taxes) but do not adjust future spending for inflation. A 2002 state law prohibits it. Put simply, the forecast assumes that personnel, health care, rent and other costs stay flat. By excluding inflation in this way, the public and policymakers get a mistaken impression of the state's economic future. The forecast might imply that the state has more resources available for new initiatives than it would be prudent to spend, or disguise a lack of resources to meet current commitments. Including inflation in the forecast helps decisionmakers understand whether fiscal decisions are sustainable.
State leaders need to address budget deficits, but they should do it by legislation rather than by changing forecasting methods. In forecasting, the state needs to provide accurate information about the cost of maintaining current services — and distinguish that from the budget choices about whether to fund those inflationary increases. Including inflation on one side of the ledger but not the other paints a confusing and inaccurate budget picture.
Our Recommendation
The Minnesota Budget Project recommends taking inflation into account in the forecast by eliminating the provision in current law that prevents the MMB from doing so. As was done prior to 2002, MMB should include a general inflationary increase in determining the state's fiscal health in future budget cycles. This would not automatically affect funding—in order for a program or service to receive an inflationary increase in its base funding, the Legislature would still have to approve it. It would simply help legislators make better informed decisions.
Enacting this recommendation would:
- Provide good financial information about the future cost of the state's commitments.
- Encourage responsible fiscal management by providing a clear understanding of the state's future fiscal health and whether proposed initiatives are sustainable.
- Maintain flexibility by preserving existing budget authority; no automatic funding increases are created.
- Encourage accountability by recognizing the long-term implications of budget decisions.
- Promote stability by providing the tools needed to make sustainable budget decisions.
