Dark clouds on the fiscal horizon


The October Economic Update from the Minnesota Department of Finance bodes ill for the state’s budget in the upcoming 2010-2011 biennium. While state tax collections during the months of July, August, and September exceeded projections by $58 million (1.7 percent), this good news was swamped by gloomy predictions for 2009.

Global Insight Inc, the national economic consultant for the state, forecasts that real gross domestic product (GDP) will increase by just 0.2 percent, 2.0 percent less than the baseline estimated in the February 2008 forecast. A decline in anticipated GDP growth is generally followed by a decline in anticipated tax collections. If that turns out to be the case, higher than anticipated revenue collections during the first half of 2008 may be overwhelmed by lower than anticipated collections during the rest of 2008 and into 2009.

Additional cause for concern comes from the fact that Global Insight’s projections as outlined in the October update were formulated prior to the turmoil in the financial markets that gripped the nation last week. Even with the partial rebound in stock prices currently occurring, the current uncertain economic situation is likely to bode ill for near-term GDP growth and tax collections.

As noted in the October update:

The problems facing the U.S. economy have intensified since early July. Global credit markets have seized up, the U.S. unemployment rate is now 6.1 percent, payroll employment is down an additional 300,000, and consumer spending has fallen. There is now little doubt that the U.S. economy is in a recession. The only debate is over how long the recession will last and how deep it will be.

State Economist Tom Stinson, quoted in the Star Tribune, stated “This is all very troubling, and we’re really in uncharted territory.” Stinson said that the current recession could be the “most severe recession in a quarter century” and could even be as bad as the recession of the early 1980s, when the national unemployment rate exceeded ten percent for ten consecutive months.

Based on May 2008 end-of-session projections, the state’s budget deficit for the FY 2010-11 biennium was projected to be $2.1 billion after taking into account inflation. With the current economic uncertainties, this deficit could turn out to be significantly worse than what was anticipated in May.

To make matters even worse yet, the Governor and legislature drained $500 million dollars from the state budget reserve during the 2008 legislative session in order to balance the state’s budget within the current FY 2008-09 biennium. The state’s total reserves are now at less than one-third the level recommended by the state’s Council of Economic Advisors. By depleting the budget reserves, state policymakers have compounded the state’s budget problems during the upcoming biennium.

The Finance Department’s November forecast will contain the state’s official projection of state revenues and expenditures for the upcoming biennium. The November forecast should be released on or around December 1.

In light the impending budget problems, anti-investment advocates will likely resort to their familiar mantra, “We don’t have a revenue problem, we have a spending problem.” The fact that real per capita state general fund spending has declined by nearly eight percent since Governor Pawlenty took office proves this claim to be false.

With a projected budget deficit of more than $2 billion, spending cuts will have to be on the table as policymakers consider budget solutions during the 2009 legislative session. However, spending cuts must not be the only recourse. Continued large cuts in state funding for education and local services will only shift the state’s budget problems on to the backs of local governments and property taxpayers. In 2009, the legislature and Governor must consider an appropriate balance between spending reductions and revenue increases.