Minnesota’s economic prospects got an upgrade in the state’s January 2011 Economic Update, released by Minnesota Management and Budget on Tuesday.
The change in the economic projection is a result of the December federal tax compromise, which provided more economic stimulus than forecasters had anticipated. Most economists had already assumed the deal would include extensions of the Bush-era tax cuts and Unemployment Insurance benefits and had factored those into their forecasts. However, they had not expected the 2 percentage point reduction in workers’ Social Security payroll tax (on the first $106,800 of wages).
This payroll tax reduction will add $120 billion to workers’ take home pay in 2011, the Center on Budget and Policy Priorities said. It gets money into the economy quickly by putting it in the hands of those most likely to spend it right away. Forecasters anticipate that this will create a “substantial boost” in consumer spending.
The result is a slightly more optimistic economic outlook for 2011. The estimated Gross Domestic Product growth for FY 2011 is now projected to be 3.1 percent, up from the 2.5 percent forecasted in November, according to Global Insight, the state’s national economic consultant. The GDP growth for FY 2012-13 is estimated at 3.0 percent, up from 2.7 percent.
As a result of the projected economic growth, Global Insight has removed the prospect of a second recession from its economic projection. In November, Global Insight said there was a 20 percent chance of a double-dip recession. Now it projects that, at worst, there is a 15 percent chance of one negative quarter in 2011.
The January Economic Update provided additional information on state revenue trends for November and December. Although state job growth numbers have been disappointing, state revenues still came in $28 million above forecast, a one percent increase. Both income and corporate taxes were three percent above expectations, while sales tax collections were down slightly.
Governor Dayton will base his budget proposal on the November Forecast, which remains the official yardstick. It projects a $6.2 billion deficit for FY 2012-13. The next official forecast, which will reflect these improvements in national economic projects, will be released later in February. If the economy follows the forecast and revenues improve, it could translate into a lower projected deficit for FY 2012-13.
It’s important to remember that these revenue estimates are preliminary.