The recently released January Revenue and Economic Update gave us some improved news about the state’s economic and budget landscape. The quarterly report from Minnesota Management and Budget (MMB) showed that state revenues for the past several months have come in above expectations. It also reported that the national economy is expected to continue to grow at a fair pace this year. While that growth is expected to taper off over the next few years, this latest report is slightly improved from the November forecast.
Some of the top takeaways from the Update include:
1. State revenues have come in above projections. Revenues for the last two months of 2019 came in $155 million above projections - 4.2 percent more than in the state’s November 2019 Economic Forecast. This is primarily due to increased corporate tax payments.
2. Long-term economic growth is still expected to be low, but somewhat improved over prior estimates. The national economic forecasters have maintained their predictions for national GDP growth for 2019 and 2020 at 2.3 and 2.1 percent respectively. Forecasters predict slowing growth in 2022, although their estimate is 0.1 percentage point higher than November's projections.
3. Unemployment is expected to remain low. Nationally, unemployment was 3.5 percent in November, back to its lowest point since December of 1969. The state's economic consultant expects this rate to continue to drop in 2020, and then start to rise slightly in 2021.
4. Forecasters are fairly confident in their projections. The forecasters are more certain about their baseline economic scenario than they were in November. They assign a 65 percent chance that their baseline forecast is correct. They also give a 25 percent chance for a more pessimistic scenario in which there’s a recession starting at the end of this year, and a 10 percent probability to a more optimistic scenario.
This month's Update brought us good short-term news: revenues are up, and the economy is growing at a good pace for now. However, with slower economic growth and potential for a recession on the horizon, policymakers should prioritize a strong budget reserve to be able to meet Minnesotans' needs in future tough times. The state's budget reserve recently reached its recommended level of $2.4 billion thanks to years of responsibly adding to it. But nearly $500 million is currently slated to be withdrawn from the reserve in July 2021, substantially weakening it. It will be imperative for policymakers to undo this decision.
As we've said before, economic growth is not enough to bring about broad prosperity, and many Minnesotans are not sharing in the benefits. The November forecast projected a $1.3 billion state budget surplus for the current biennium. The continued positive budgetary news in the January Update confirms that policymakers have an opportunity to make some one-time investments to build prosperity when the state's legislative session starts just a month from now. They should prioritize our Minnesota neighbors struggling to afford the essentials, such as child care and health care. Policymakers should advance policies so that more Minnesotans can thrive in today's economy, no matter who they are or where they live.