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Historic state budget forecast presents historic opportunity

Nan Madden and Clark Goldenrod
Dec 07, 2021

The State of Minnesota is projected to have dramatically more resources than previously expected, according to the November 2021 Budget and Economic Forecast released today.

The forecast projects a $7.7 billion general fund surplus for the current FY 2022-23 budget cycle, and a $6.0 billion structural balance for the upcoming FY 2024-25 budget cycle (which drops to $4.8 billion when the impact of inflation is included). This reflects stronger economic growth than expected in the state’s prior budget projections, and continued strong economic growth expected into the future.

These are unprecedented figures; they represent a historic opportunity to tackle the ongoing health and economic effects of the pandemic, and make transformational changes to build a more equitable recovery in which all Minnesotans are healthy, safe, and economically secure.

While this forecast brings welcome news, it is important to keep in mind that the forecast simply measures projected revenues and spending against the budget decisions reached earlier in 2021. While that budget included some important responses, it fell short of fully responding to the pandemic or the deep disparities in opportunity and areas of disinvestment that were worsened by COVID-19.

Some of the key data in the forecast include:  

  1. The state is projecting a $7.7 billion positive balance in FY 2022-23, which started on July 1 of this year. Revenues for this budget cycle are projected to be 10.1 percent higher than expected earlier this year. Forecasters are projecting particularly strong growth in corporate profits of 19.2 percent in the 2021 calendar year, nearly four times what was forecasted in February. Spending is projected to be 0.7 percent lower than previous estimates.
  2. The forecast predicts a $6.0 billion positive structural balance for FY 2024-25, which falls to $4.8 billion when taking into account what it would take for most current public services to keep up with 2.2 percent annual inflation. The structural balance compares projected revenues to projected spending under the state’s current budget decisions, but does not include any balances carried forward from prior budget cycles.
  3. Some budget actions have already occurred as a result of this positive forecast. As part of the 2021 budget agreement, policymakers committed that a surplus in this forecast would go towards strengthening the budget reserve and changing the timing when some retailers and vendors remit sales taxes to the state. With this forecast, $870 million has gone to the budget reserve to get it to its target amount, which brings the reserve to $2.7 billion, putting Minnesota in a strong position to weather the next economic downturn; $359 million will be used to reverse the “June accelerated sales tax payment.” These and a few smaller fund transfers have already been taken into account to get to the $7.7 billion surplus for FY 2022-23.
  4. Forecasters predict a strong economic recovery to continue. The economic model underlying the state’s budget numbers expects 5.5 percent national GDP growth this year, 4.3 percent in 2022, and an average of 2.7 percent in 2023 through 2025. This is actually lower economic growth for 2021 than predicted in February, but stronger growth for 2022 through 2024. Stronger growth is predicted in employment, consumer spending, wage and salary income, and corporate profits.
  5. The labor market is improving, but many are still out of work. While the labor market is rebounding, the U.S. still had 4.2 million fewer jobs in October 2021 than before the pandemic hit. Folks continue to be out of the labor market for reasons ranging from lack of child care, COVID safety concerns, and early retirement. The recovery continues to be unequal; jobs in lower-wage industries have been slower to rebound than in higher-paying ones.
  6. Minnesota Management and Budget acknowledges the substantial uncertainty inherent in this forecast. The economic projections underlying this forecast are based on assumptions about the economic impact of COVID-19 and success in bringing it under control, as well as supply chain issues being resolved and more workers overcoming current barriers keeping them out of the workplace. It should be noted that the economic projections were developed early in November, before the Omicron variant had been discovered. Forecasters assign a 50 percent probability to the economic projections underlying this forecast. They give a 30 percent probability to a more pessimistic scenario characterized by a resurgence of COVID-19 and ongoing supply chain problems resulting in weaker economic growth than in today’s forecast. Alternatively, they give a 20 percent probability to a more optimistic economic landscape with even stronger economic growth derived from effective efforts to bring COVID under control, and stronger economic response to the federal infrastructure bill.

In addition to today’s positive general fund balance, policymakers will also decide how to distribute $1.2 billion in remaining American Rescue Plan (ARP) funds in the upcoming 2022 Legislative Session, $250 million of which they previously agreed should go to frontline workers.

One factor underlying today’s positive economic and budget numbers is the success that federal policy decisions, such as the CARES and ARP acts, have had in blunting some of the worst potential economic impacts of the pandemic. The economic projections in today’s forecast also include the impact of the federal Infrastructure Investment and Jobs Act passed in November. It does not include any projected effects of the Build Back Better legislation being considered by Congress.

But while policy action helped stave off the worst of the recession, that’s not the same as everyone having what they need. This fall, 132,000 Minnesota adults said they couldn’t afford for the children in their homes to get enough to eat, 115,000 Minnesotans were behind on rent, and 651,000 were having trouble covering basic household expenses. And because of longstanding structural inequities, our Black and brown neighbors are disproportionately likely to be struggling to get by.   

Hardship and inequality didn’t originate with the COVID-19 pandemic. Minnesota has long been home to deep divides in opportunity across lines of race, income, and geography.

The state can’t return to a status quo budget that left too many Minnesotans behind. The forecast doesn’t take into account what it would cost for most of our current public services to keep up with the cost of inflation or respond to current needs. For example, despite the widely recognized shortage in affordable housing, the forecast assumes that spending on housing largely stays the same.

This forecast is a real opportunity to address those things that keep everyday folks from thriving. It is essential that policymakers focus on lower-income and BIPOC Minnesotans who struggled disproportionately during this pandemic and under the status quo that predated it. They should take steps to ensure all Minnesotans have health care, child care, paid family and medical leave, affordable housing, a quality education from the earliest years through college and training, clean air and water, and other building blocks of a quality standard of living.

Policymakers should not waste this opportunity by instead enacting large tax cuts for those who are already doing very well in today’s economy. This year’s budget agreement already made $746 million in tax cuts, and another $359 million in tax changes were triggered in this forecast.  

It is time for policymakers to make the transformative changes in our state and communities that will build a more equitable economy and future.