New budget forecast continues to show resources available to build an equitable recovery

Clark Goldenrod
Mar 01, 2022
The State of Minnesota is expected to see unprecedented levels of resources, including a strong boost in the short-term numbers, according to the February 2022 Budget and Economic Forecast released yesterday.  

The forecast projects a $9.3 billion general fund surplus for the current FY 2022-23 budget cycle. The positive picture continues into the future but at a smaller scale. There is a $6.3 billion structural balance in FY 2024-25, which drops further to $5.2 billion when the impact of inflation is included. Higher incomes, consumer spending, and corporate profits contribute to these stronger budget numbers than in the November forecast

These figures underscore that we have 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 latest news is welcome, keep in mind that the forecast simply measures projected revenues and spending against the budget decisions reached in June 2021. While that budget took important steps forward, 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. 

There is a greater level of uncertainty about the numbers in this forecast, given that it was put together before the Russian invasion of Ukraine. In this environment, it is even more important that policymakers make wise budget decisions, and prioritize targeted support for everyday folks who are struggling.  
Some of the key data in the forecast include:   
1. A $9.3 billion positive balance in FY 2022-23, about $3.7 billion of which is one-time money. Revenues for the biennium are expected to come in $1.3 billion higher than projected in the November forecast, reflecting higher expectations for income, sales, and corporate tax collections. Spending is expected to be 0.5 percent lower than in November.  
2.  A $6.3 billion positive structural balance for FY 2024-25, which falls to $5.2 billion when taking into account what it would take for all current public services to keep up with inflation in that biennium. 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. The economic recovery is expected to continue and the labor market is improving. National GDP growth was stronger in 2021 than predicted in November, and the economy is expected to grow in 2022 and beyond, although at a slower pace than projected in November. Growth projections for 2022 have especially been dialed back compared to November. One impact of the Omicron COVID surge this winter was lower consumer spending, resulting in near-term lower economic growth. As of December, Minnesota’s employment rate fell to 3.1 percent, reaching pre-pandemic levels. However, that low unemployment measure does not include Minnesotans who left the workforce during the pandemic and have yet to return, perhaps for lack of child care and health-related reasons.  

chart showing expected national gdp growth from february 2022 budget forecast

4. Additional uncertainty. The economic projections underlying this forecast are based on assumptions including that the disrupting impacts of COVID-19 will decline, the Federal Reserve raises interest rates to respond to rising inflation, and global oil prices decline. However, the forecast was put together prior to the Russian invasion of Ukraine; at that time, forecasters assigned a 50 percent probability to the economic projections underlying the forecast. They gave a 30 percent probability to a more pessimistic scenario characterized by a slower decline in COVID-19 and intensified supply chain problems. Alternatively, they gave a 20 probability to a more optimistic economic landscape with stronger economic growth derived from a more rapid decline in COVID-19 cases, higher consumer spending and business investments, and a greater economic impact from the federal infrastructure bill passed late last year. 

In addition to the positive general fund numbers reported in this forecast, policymakers will also decide how to distribute $1.2 billion in remaining American Rescue Plan (ARP) funds in the 2022 Legislative Session, $250 million of which they have already agreed should to go to frontline workers.  

One factor underlying today’s numbers is the success that federal policy decisions, such as the CARES Act and ARP, had in blunting some of the worst potential economic impacts of the pandemic and in improving the state’s budget situation. These include an increase in federal funding for affordable health care through Medicaid (also called Medical Assistance), which contributes to some of the state general fund savings in this forecast, as well as the $1.2 billion in flexible ARP dollars that replaced state revenues to fund services in this budget cycle and the next.  

But that means that some things driving the economy and state budget picture are temporary. The additional federal aid to states is coming to an end, and families across the nation have already seen their buying power drop because Congress allowed the federal Child Tax Credit expansion to expire. 

Policy action successfully averting a more severe recession isn’t the same as everyone having what they need. This winter, 148,000 Minnesota adults said they couldn’t afford to give their kids enough to eat, 130,000 Minnesotans were behind on rent, and 920,000 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.    

Minnesota has long been home to deep divides in opportunity across lines of race, income, and geography. We can’t return to a status quo budget that left too many Minnesotans behind. The forecast doesn’t take into account what it would take to 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.  

The resources measured in this forecast create a real opportunity to address those things that keep everyday folks from thriving. Policymakers should focus on Black, Indigenous, and People of Color and lower-income Minnesotans who struggled disproportionately during the 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 high-quality standard of living.  

Policymakers should not waste this opportunity by instead enacting large tax cuts for those already doing well on top of the over $1 billion in tax cuts that have already happened as a result of last year’s budget decisions. Too many of the tax cut proposals put on the table this session provide tax cuts to the largest, most profitable corporations and highest income households, instead of focusing on strengthening the Minnesota individuals, families, and communities that were severely harmed by the pandemic and the status quo that preceded it. 

Instead, it’s time to make the transformative changes in our state and communities that will build a more equitable economy and future.