October Economic Update brings mixed news for the state budget

Clark Biegler
Oct 17, 2014

Minnesota’s most recent revenue collections are about 1 percent below projections, but the overall picture isn’t so bad, according to information in the Minnesota Management and Budget’s October Economic Update.

The economic update looks at state revenues for July to September 2014, which make up the first quarter of Fiscal Year 2015, and compares them to what was projected in the February Forecast, adjusted for actions taken in the 2014 Legislative Session. It finds that state revenues came in $46 million lower than earlier projections. This was mostly due to lower income tax and cigarette and tobacco tax collections and the timing of a health care surcharge. The health care surcharge accounted for a $31 million shortfall, which is expected to be reversed in the future. Corporate tax collections came in higher than projections.

While revenues for the first quarter of Fiscal Year 2015 are down, Minnesota finished the prior budget year even better than originally reported. State revenues for the 2014 fiscal year came in $186 million higher than previously projected. And that’s even an improvement from what was originally reported in the July Economic Update.

While there’s mixed news for state revenues, the national economy shows signs for “solid growth in the second half of 2014,” and this growth is expected to continue until at least next year. While this is good news, current projections for economic growth are lower than projected in the February forecast. The current outlook for the economy is dependent on several factors, including improving labor force growth and smooth policy changes by the Federal Reserve.

The economic forecasters are relatively confident in their projections, and they assign a 70 percent probability to their baseline economic forecast. They give a 15 percent chance for a more pessimistic scenario in which the national economy stalls and the U.S. barely avoids a recession, and a 15 percent chance that the economy will be stronger than the baseline prediction.

This update reminds us that the economy can take unexpected turns. It’s important for the state to prepare for the inevitable ups and downs, and the increase to the budget reserve made in the 2014 Legislative Session is an example of the kind of sound planning that policymakers can undertake so that Minnesota can best meet the needs of its residents in good times and in bad.

These quarterly economic updates are helpful in tracking our state’s revenues, but they give only part of the story. For the full picture, we’ll have to wait for the November Economic Forecast to be released on December 4, which will include estimates for both state revenues and spending. We will see then how the combination of higher than expected revenues in FY 2014 and slower economic growth projections may affect the state’s forecasted surplus for the coming biennium. Those November forecast figures will be the baseline against which the Governor will create his recommendations for the next two-year budget.

-Clark Biegler