Looming state budget deficit’s cause is somewhere in between Trump’s ‘destructive chaos’ and DFL trifecta’s ‘irresponsible spending spree’

How can Republicans and DFLers agree on a budget that resolves a looming budget deficit if they can’t agree on what is causing the looming budget deficit?

Gov. Tim Walz and legislative leaders from both parties had the same numbers in front of them: The next two-year budget is in OK shape, but the one after that, the one that begins in the summer of 2027, will have a gap between what taxes bring in and what spending might be.

The so-called February forecast that was released in March this year was similar, though slightly worse, than a previous projection released in December. On a base budget that spends around $67 billion every two years, the projected surplus in 2026-27 fell from $616 million to $456 million, while the projected deficit for fiscal years 2028-29 grew from $5.1 billion to $6 billion.

While a lot of those changes since December are due to new expectations for higher inflation, the basic numbers embedded in the forecast are the result of a slightly slackening economy, high growth in elder care and special education, and the budgets adopted over the last two years. While both are true, DFLers and Republicans divided the talking points evenly, with Democrats blaming Trump and Republicans blaming the budgets passed by the DFL trifecta.

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Related: Minnesota budget forecast: worsening tax revenue, bigger deficits in coming years

“What’s clear is there’s a storm at the federal level and that storm is Donald Trump,” Walz said, citing uncertainty and “destructive chaos.” “That’s the thing that’s changed between now and the December forecast.”

When her turn at the podium came, GOP House Speaker Lisa Demuth had a different take.

“Two years ago we had an $18 billion surplus,” the Cold Spring Republican said. “We are now looking at a $6 billion deficit. Democrats want to blame anyone else for the damage that has happened to our state budget, but this was an irresponsible spending spree.”

Actions of the Trump administration did contribute to the inflation forecast — mostly from tariffs that had been announced by Feb. 10 when the model was built and the assumption that it will reduce the odds for interest rate cuts. Not factored in are:

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• Any additional tariffs
• The impact on the economy of increased federal job cuts 
• The impact on the state budget of any cuts in money the feds send to states, especially for Medicaid

“Tariffs have the potential of causing additional inflation and will likely trigger a response by the Federal Reserve in the form of higher interest rates to to delay lower interest rates,” said state economist Anthony Becker. Higher interest rates could suppress business investment and consumer purchases.

But the word “recession” is not contained in the current forecast, even when the national economic forecast describes its more pessimistic scenarios.

Minnesota Management and Budget Commissioner Erin Campbell said during the forecast presentation that her agency is watching federal spending decisions with some worry. A U.S. House budget resolution calls for significant cuts in the budget area that includes Medicaid, with Medicaid being by far the largest spending pot. If cuts at that level should happen, Minnesota would lose between $1.2 billion and $1.6 billion a year.

“Federal funding is critical to the state of Minnesota, with one-third of our budget coming from federal funds,” Campbell said. “At this point it is our hope that Medicaid is not cut or that reductions are minimized. But we want to appropriately set expectations as it relates to the forecast.”

DFLers called any future budget actions by the Trump administration an assault on the economy and the state budget; Republicans dismissed them as speculative. Either way, they will have to adopt a balanced budget no later than June 30, while the federal budget will become more clear in the fall.

“But never in our history have we had to do that work up against a president who seems hell bent on crashing the American economy,” said Senate Majority Leader Erin Murphy. “Only one thing has changed since the December forecast and that is the inauguration of Donald Trump.”

“We can’t take time blaming a new administration for problems that were caused over the last two years under one-party Democrat control,” Demuth said. And House Republican Leader Harry Niska said the DFL is trying to divert attention.

“They want to talk about everything else than what’s happening in our Minnesota budget and in our Minnesota policies,” Niska said.

Senate Minority Leader Mark Johnson said tariff talk is meant to win better trade deals and other policy changes, saying both could help the economy eventually.

Walz in January presented a budget plan based on the December forecast and will update it with Thursday’s number in mind. It included a net increase in sales tax collections and cuts in spending to make the following budget easier. Some of his largest reductions were actually moves to reduce the cost increases in long-term care and special education transportation. The House and Senate sets what lawmakers term budget targets — the spending total that will be allowed for each area of state spending — in early April.

But as Republicans blamed the large spending increases in the 2023 budget that grew the state budget by 37% percent, Walz and DFLers defended those budgets, noting that much of the increase was in one-time spending, and said they would manage the budget without cutting programs.

“Minnesotans put our money into things that invested to improve people’s lives: public education, tax cuts for the middle class, feeding our kids, education and innovation in our business community,” Walz said.

“We have a solid budget, we have surpluses now, but we have some cost drivers over the horizon,” he said. Walz said it is not time to dip into the state’s $3.2 billion Rainy Day fund.

Becker said that the changes since December combine increased inflation as well as increased expectations for wages that can also be attributed to inflation as well as a shrinking worker pool caused by Baby Boomer retirements and a slowing of immigration.

The national economy will grow slightly faster than expected this year but then grow slower in 2026, 2027, 2028, and 2029. However, inflation will reach 3% next year compared to previous estimates of 2.4%.

“Minnesota’s economy is predicted to remain strong in the near term with a continued tight labor market, low unemployment and rising real wages,” Becker said. But there are uncertainties around trade, fiscal and immigration policies.

“These uncertainties contribute to substantial downside risks through all the years of the forecast,” he said.

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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