February Forecast shows surplus, but need for caution

Clark Biegler
Feb 26, 2016

The new state budget figures released today reflect the overall strength of Minnesota’s economy and demonstrate that some resources are available for policymakers to invest in a more durable, shared prosperity. In this uneven economic recovery, it is all the more important to focus on supporting the work of everyday Minnesotans through fair and sustainable tax and budget choices.

Today’s February 2016 Budget and Economic Forecast provides the official numbers that policymakers will use to guide their tax and budget decisions in the 2016 Legislative Session. The forecast projects a $900 million positive budget balance for the current FY 2016-17 biennium, and $1.2 billion in the next budget cycle, FY 2018-19. The state continues to be in good economic health, but today’s numbers are lower than the November forecast’s projections.

As always, the figures for future budget cycles should be approached with caution. The FY 2018-19 projection assumes that funding for most services will not increase to keep up with inflation. Taking into account the impact of inflation changes the FY 2018-19 surplus figure into a $558 million deficit.

Compared to the November figures, the February Forecast expects slightly slower national economic growth, which plays a clear role in the lower surplus numbers measured today. The forecast shows that the national economy grew 2.4 percent in 2015, and now projects annual growth rates between 2.4 percent and 2.8 percent through 2019. The U.S. economy continues to see falling unemployment for workers across age, gender, education level and racial groups.

The state continues to have adequate resources to fund our commitments, but there have been some changes since November:

  • Slower expected economic growth means revenues are still growing, but will come in lower than projected this November.
  • Spending is lower than expected, primarily from lower health care costs. This is due to higher federal funding for the Children’s Health Insurance Program (CHIP) in Medical Assistance. The forecast also projects slightly higher spending in E-12 education due to higher special education costs.

Minnesota’s economy continues to perform better than the national economy in terms of lower unemployment. But the state’s future economic strength depends on more Minnesotans succeeding in the workforce. Policy choices that enable working people to better make ends meet are more crucial than ever, like expanding access to earned sick and safe time. And tax and budget choices should include targeted, strategic investments in a broader, more durable prosperity, including expanding the Working Family Tax Credit and making child care more affordable. In contrast, using the surplus for large, poorly targeted tax cuts would take us in the wrong direction.

The forecasters are fairly confident in their projections. Global Insight assigns a 65 percent probability to their baseline economic forecast. They assign a 20 percent probability to their more pessimistic scenario in which a short recession is triggered by weaker international markets and the U.S. construction sector, and a 15 percent probability to an optimistic scenario in which higher productivity, foreign growth and household formation strengthen the U.S. economy.

Legislators will go into session on March 8 to start their work, and Governor Mark Dayton will release his FY 2016-17 supplemental budget on March 15. They should prioritize working Minnesota families, by making targeted investments in broader prosperity and refraining from large, permanent tax cuts that threaten the state’s economic future.

-Clark Biegler