State’s revenues on track, but forecast looks grim

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The odds are increasing that Minnesota state government will face a new revenue shortfall when the Legislature reconvenes in February. This July, the Governor and Legislature passed a balanced budget for the FY 2012-13 cycle, which runs through June 30, 2013. But a weakening economic outlook raises the prospects that a mid-biennium shortfall will open up.

Minnesota Management & Budget (MMB) recently released its July/August Economic Update, providing current state revenue numbers and a look at economic trends. Minnesota closed FY 2011, which ended on June 30, 2011, $355 million, or 2.3 percent, above what was projected in the February Forecast. However, this is not a sign of an economic turnaround. More than 60 percent of that increase came by collecting Wisconsin income tax reciprocity payments earlier than expected (in FY 2011 instead of FY 2012.)

For July and August, the first two months of FY 2012, MMB said revenues “appear on track.” Although revenues are down $93 million, or 4.4 percent below the February Forecast, part of that resulted from collecting Wisconsin income tax reciprocity payments in FY 2011. Further, the state government shutdown in the first half of July slowed tax collections.

The big concern is for the future. Global Insight, Minnesota’s macroeconomic consultant, has downgraded its economic forecast. Its September baseline forecast predicts that the nation’s economy, as measured by GDP, will grow 1.5 percent in 2011 and 1.8 percent in 2012. That is down from its February baseline forecast that anticipated GDP growth of 3.2 percent in 2011 and 2.9 percent in 2012. Such an economic slowdown would mean that more Minnesotans will be struggling, and the State of Minnesota would collect less revenue than it budgeted for in the coming months.

Global Insight gives a 50 percent probability that its baseline forecast is correct. It gives a 40 percent probability that a recession will start this fall, saying the U.S. economy is “dangerously close to stall speed.” According to the July/August Update:

Global Insight’s concern is that in its current weakened state the U.S. economy is unlikely to be able to withstand a policy mistake in either Washington or the Eurozone. And, given the counterproductive political stalemates observed in both Europe and the U.S. in recent months, the risk that policy adjustments will not be made quickly enough to avert another economic downturn is high.

Minnesota faces a potentially weakened economy in a tenuous situation, the result of both economic forces and political choices. Minnesota came through very difficult budget negotiations this year without finding a long-term solution to funding our state’s priorities. Further, Congress spent months stuck on what should have been a routine vote on the debt ceiling and did not move a jobs agenda.

MMB will issue another Economic Update in October, with new revenue numbers. Its November Forecast will provide a more comprehensive picture based on a more current economic forecast and updated revenues and spending estimates, and determine if the Governor and Legislature will need to act in 2012 to bring the budget back into balance. If so, policymakers will have the opportunity to take a balanced approach, including raising revenues, that prevents deeper job losses, maintains the services that Minnesotans are turning to during these tough times, and lays the groundwork for our future prosperity.

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