State's February budget forecast confirms opportunity to make transformational investments

Clark Goldenrod
Feb 27, 2023
The State of Minnesota is projected to have budget surpluses over the next four years, according to the February 2023 Budget and Economic Forecast released today. These resources present an historic opportunity to build a more equitable recovery in which all Minnesotans are healthy, safe, and economically secure. 

The forecast shows a $17.5 billion projected surplus for FY 2024-25, roughly the same surplus projected in the November forecast, followed by a $5.4 billion structural balance in FY 2026-27.   

This forecast looks a little different than usual though, most notably because it now more clearly includes the impact of inflation in its projections. Since 2003, the state’s forecasts have understated the amount of funding that would be needed to maintain most current public services because they did not take inflation into account. However, in this forecast, the likely impact of inflation on current services is included when calculating the state’s budget surpluses.  

Compared to the November forecast, this forecast also reflects the impact of bills that have already been enacted. Policymakers have been hard at work in the 2023 session and have passed a few pieces of legislation that impact the state’s budget, the largest of which was a federal tax conformity bill that reduces revenues by $103 million in the FY 2024-25 biennium.  

Some of the key data in the forecast include:    
1.  A $17.5 billion projected surplus in FY 2024-25. A substantial portion, $12.5 billion, of this figure comes from the carryforward of a projected surplus in the current FY 2022-23 biennium. Revenues for the FY 2024-25 biennium also expected to come in about $600 million higher than projected in the November forecast, reflecting higher expectations for income and corporate tax collections. Projected expenditures in FY 2024-25 also increased by $113 million compared to the November forecast. For the first time in 20 years, the calculations to determine the surplus figure include an estimate of the funding needed for existing public services to keep up with inflation in this biennium – which is $1.4 billion.

2.  A $5.4 billion positive structural balance for FY 2026-27, which also has been calculated taking into account the $3.1 billion it would take for current public services to keep up with inflation through 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.  This forecast includes a slightly better outlook for the U.S. economy than the November forecast showed. Forecasters still predict a mild recession that will start this year, but now expect it to be shorter and give a smaller hit to national GDP and unemployment rates than previously predicted. In 2024 and beyond, national economic growth is expected to remain between 1.6 percent and 2.0 percent annually.

4.  Forecasters are somewhat confident in their projections, assigning a 55 percent chance that their baseline economic scenario is correct. They assign a 25 percent probability to a more pessimistic scenario, driven by weaker consumer spending and a deeper recession. They also assign a 20 percent probability to a more optimistic scenario in which the federal Infrastructure, Investment, and Jobs Act has a greater economic impact, and consumer spending, productivity, and business investment are stronger than expected. 

What does this forecast mean?  

The February forecast gives policymakers the numbers they’ll use to craft the state’s FY 2024-25 budget this session. 

As a reminder, projected budget surpluses are not a measure of whether the state is successfully addressing the challenges Minnesotans face or investing in the future they want. The forecast simply compares projected revenues to expected spending under prior budget decisions. The forecast now better represents what it would take for current services to keep up with inflation; any inflationary funding increases would need to be passed into law through budget legislation – funding does not automatically increase because of this change.  

The figures in the forecast make clear that our state has the resources to build a stronger, more equitable future for all of us. That can happen through transformational investments in affordable health care, child care, paid family and medical leave, 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 will need to build the revenue system that will sustain those investments after the significant short-term surplus has ended. We would go backwards in our ability to sustainably fund those crucial investments, however, if policymakers enact large tax cuts for those who are already doing very well – such as by replacing our state’s existing targeted Social Security income tax exemption that prioritizes modest-income seniors with an unlimited exemption that would give the biggest tax cuts to high-income seniors. A better approach is to enact high-impact tax policies focusing on everyday Minnesotans, such as creating a state Child Tax Credit (CTC) that builds on the federal CTC’s historic success in reducing child poverty.