Predictions of a $4 billion state budget deficit

The Minnesota Budget Project team was out at a conference during the week of November 17, and one thing I was very sorry to miss was the meeting of the Legislative Commission on Planning and Fiscal Policy on Friday, November 21.

Minnesota Public Radio and other news outlets have reported that information presented this meeting suggest that the state’s budget deficit may be around $4 billion for the next biennium. That seems consistent with the $4 to $6 billion going around the rumor mill.  We will have more precise figures when the official forecast is released on this Thursday, December 4.

$4 billion is about 11% of the state’s general fund budget for FY 2010-11. Clearly big challenges are ahead. We recommend that policymakers keep the following principles in mind as they consider the deficit:

  • A balanced approach is needed. With a deficit of this size, we cannot afford to take any of the primary budget-balancing tools – raising revenue, using reserves and other one-time measures, and cutting spending – off the table.
  • The state needs to respond to the economic downturn and help build a stronger economy in the long run. Services that help people get and keep jobs, and that help families make ends meet must be allowed to work during these tough times. Budget-balancing choices should not make the impact of the recession worse for those least able to weather the economic downturn, including low-income families, laid-off workers and other vulnerable populations.
  • We must understand the impact of state budget decisions on the economy. Joseph Stiglitz (a Nobel Prize-winning economist) and Peter Orszag (currently director of the Congressional Budget Office) have argued that spending cuts can be a bigger drag on a state’s economy than a targeted tax increase. As Christina has stated in a previous blog entry, cutting state spending takes dollars out of Minnesota’s economy. A targeted tax increase on high-income earners is likely to have less of a drag on the state’s economy, because those individuals are likely to maintain their levels of consumption, but compensate for the tax increase by saving less. That maximizes the amount of money moving in the state’s economy.

And if you missed it, the Star Tribune had an interesting story this week-end that looked behind the scenes at how the forecast is developed. It covers the art and science of forecasting, but also confirms that we are going to hear some very bad news on Thursday when the forecast is released.

-Nan Madden

About Nan Madden

Nan Madden is director of the Minnesota Budget Project.
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