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Economists project budget surplus, but future deficits loom

Peter Callaghan, MinnPost
Posted 12/6/24

ST. PAUL—Minnesota state economists Wednesday projected that the surplus for the next state budget will be $616 million, far less than legislators have become accustomed to and signaling a …

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Economists project budget surplus, but future deficits loom

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ST. PAUL—Minnesota state economists Wednesday projected that the surplus for the next state budget will be $616 million, far less than legislators have become accustomed to and signaling a less-ambitious budget when the Legislature convenes in January.
Minnesota Management and Budget released the basic numbers Wednesday morning and will release a more-detailed account of its projections for the state economy and how current state taxes will perform.
If lawmakers stay with current taxes – a likelihood with a politically divided state House – and add only the required spending increases in health programs and education, the budget would have $616 million left in reserve.
That would be $1.1 billion less than what was projected for the 2025-26 budget period at the end of the 2024 legislative session. 
“Projected reductions in income and sales tax revenues and higher spending for long-term care and special education = growing structural imbalance throughout the forecast period,” the agency stated on social media.
“Structural imbalance” is budget speak for projected spending exceeding project revenue. That is, they aren’t called deficits by budgeters until an actual budget is adopted that spends more than the state will bring in.
A House GOP staffer put a slide on social media that appears to be from MMB’s presentation that showed the “structural imbalance” for the budget following the next one — that is the budget that would start July 1, 2027 — at $5.1 billion.
The outlook led House Republican Speaker-designate, Rep. Lisa Demuth of Cold Spring, to warn that budget cuts will be needed to make sure future budgets stay in balance.
“While the budget is stable in this biennium, it’s obvious that spending reductions are needed to prevent a deficit down the road,” said the lawmaker who will share control over the House next session. “House Republicans are putting state agencies on notice: the times of automatic budget increases and dramatic government employee growth are over, and we expect you to join us in working to find savings and root out waste and fraud.” 
The numbers released Wednesday morning give an indication of what state lawmakers will have to spend when a final, two-year, budget is approved next spring. But the official revenue numbers for that process will come from another economic and revenue forecast due in February.
While it is possible economic conditions could change between now and February, the state and national economic models that helped craft this week’s forecast do look into the future to assess risks.
Since the February 2024 forecast was released, economic predictions and actual tax collections have been somewhat rosier. Monthly tax collections have exceeded projections each month since February and were $642 million above what was projected by revenue forecasters at the time of the November collections report.
But the scant numbers posted Wednesday indicate that the economic forecast is causing the economists to reduce what is expected from existing taxes going forward.
Whatever happens next spring when a final 2025-2026 budget is approved by the DFL Senate and the equally divided House, legislators will likely brag about cutting the state budget. The current two-year plan spends $71 billion, and existing taxes won’t support a budget that large. That is due to the fact that $5 billion or so of the current budget is going toward one-time spending. Such a cautious move was driven by knowledge that surpluses of the last several budget cycles were driven by one-time federal pandemic relief and tax collections goosed by federal spending on jobless pay, business grants, and federal and state rebate checks.