State economists project a modest budget surplus, but future deficits loom

Minnesota state economists projected Wednesday 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. (Slides from the presentation are here.)

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 projected 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.

So, what is the significance of the numbers released this week? They provide a strong indication of the direction of the state economy and its effect on state tax sources. 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.

In 2020, Minnesota’s fiscal situation lurched from a $1.51 billion surplus before the pandemic was declared to a $2.42 billion deficit two months later and then a $641 million surplus by year’s end.

But then tax surpluses ballooned, starting with a $7.75 billion projected surplus in November 2021, $9.25 billion in February of 2022, $17.6 billion in November of 2022 and $19 billion in February of 2023, though that number was officially set at $17.5 billion only because inflationary increases in spending were automatically taken out, not because of any slowing in tax collections.

Those numbers may have conditioned legislators and those with an interest in state budgets to view any surpluses lower than that as a disappointment or a sign of a looming recession. While recessions always seem to be looming, a healthier revenue situation comes from accurate forecasting and collections that are close to what was expected.

Editor’s note: Peter Callaghan wrote this story for MinnPost.com. Callaghan covers state government for MinnPost. 

This article first appeared on MinnPost and is republished here under a Creative Commons license.

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