February forecast’s strong surplus creates opportunity to invest

Clark Biegler
Feb 27, 2015

The state’s February 2015 Economic Forecast released today shows good news for three budget cycles. After years of deficits and cuts in services, these positive projections offer lawmakers an opportunity to invest in broader economic security for all Minnesotans.

First, here’s a look at the numbers. The forecast projects a $478 million positive balance for the remainder of the current budget cycle, the FY 2014-15 biennium, which ends on June 30.

Policymakers are getting ready to set the budget for the upcoming FY 2016-17 biennium, for which the forecast projects a $1.9 billion positive balance. Taking into account the cost for current services to keep up with inflation reduces this figure to $976 million.

The forecast also gives us another glimpse into the FY 2018-19 biennium, where a $3.2 billion positive balance is projected. This becomes a slight deficit of $95 million when the impact of inflation is taken into account.

The February forecast projects larger surpluses than predicted in the November forecast. The strong balances in the forecast are due to a few factors. Revenues are projected to come in higher than expected. The strongest driver here is higher income tax collections, due to expected rising incomes.

The forecast also shows lower projected expenditures. In the 2014-15 biennium, this is due in part to lower Medical Assistance spending. In the 2016-17 biennium, lower projected spending in E-12 education contributes to the positive projected balance. The lower projected E-12 spending is a result of declines in three areas: student enrollment, growth of poverty concentration (which is used to calculate compensatory aid for schools), and special education spending.

Today’s forecast shows a stronger outlook for the U.S. economy, projecting national GDP growth of 3.0 percent in 2015, up from the 2.6 percent projected in November. Growth in 2016 and 2017 is expected to be 2.7 and 2.8 percent respectively, slightly lower than the November projections.

Minnesota’s economy continues to do well. The state’s 3.6 percent unemployment rate in December remains the fifth lowest in the nation and the lowest rate since 2001. Wage growth is projected to be higher than expected in the November forecast, contributing to higher anticipated revenues. In 2015, wages are expected to grow by 5.4 percent, and they are projected to grow close to 5.0 percent each year in 2016 and 2017.

Minnesota has turned the corner after a decade of deficits, and is on firmer footing to make investments in a stronger future. However, even as the state’s economy has improved, many Minnesotans still struggle to make ends meet. As policymakers put together the budget for the upcoming biennium, they should continue to focus on expanding economic opportunity to all Minnesotans.

We’ve been highlighting the importance of affordable child care for Minnesota families. Child care can be one of the largest items in a family’s budget. When families have access to affordable child care, children are nurtured in stable environments and parents can succeed on the job. But for too many families, affordable child care is out of reach; for example, over 6,000 Minnesota families are on waiting lists for Basic Sliding Fee Child Care Assistance.

Governor Dayton has shown his commitment to making child care more affordable for more Minnesota families by proposing to increase funding for Basic Sliding Fee and expand the Child and Dependent Care Credit in his budget. Legislators from both parties have gone a step better by proposing bills with larger funding increases to Basic Sliding Fee that would reach more families, including all of the current waiting list, and protect parent choice by increasing reimbursement rates for child care providers. These bills represent a smart investment in our current and future workforce, and should be a priority for policymakers this session.

The tax policy choices made in the past two years made important progress making our tax system more fair. Minnesota has shrunk the gap between what most Minnesotans pay in state and local taxes (measured as a share of their incomes) and the smaller percentage that those with the highest incomes pay. However, too many of the tax bills proposed this session so far would re-open that gap through tax cuts that would go primarily to those with the highest incomes.

Policymakers should resist the urge to make deep cuts to taxes. History shows that when taxes are cut too much in good times, it makes it more difficult for the state to respond in the next economic downturn. Any tax cuts that are made should be sustainable, well-targeted and have tax fairness as a primary goal.

The forecasters are fairly confident in today’s projections. Global Insight, Minnesota’s economic consulting firm, assigns a 70 percent probability to their baseline economic forecast, and a 15 percent probability to their more pessimistic and optimistic scenarios. In the pessimistic scenario, the economy sees a weaker housing market and weaker foreign growth. In the optimistic scenario, oil prices drop more than expected and there is stronger foreign growth.

Policymakers will be using the numbers in today’s forecast to set their budget proposals. Stay tuned to the Minnesota Budget Project to keep you updated as the state’s budget is put together.

-Clark Biegler