Minnesota starts budget year with good news

Minnesota is starting the current budget year stronger than expected, according to Minnesota Management & Budget (MMB).

MMB’s October Revenue and Economic Update finds that state revenues have come in above expectations. The state’s 2016 fiscal year began on July 1, and revenues from July to September came in $136 million, or 3.2 percent, higher than projected in the February Forecast. About 20 percent of these better than expected revenues are likely due to timing of income tax payments rather than an improved economy, so we shouldn’t expect revenues to consistently exceed projections by this wide margin.

The national economy continues to improve, but the Update highlights concerns. The good news is that unemployment continues to decline, and low gas prices are giving people extra spending money. However, wage growth has remained low, several factors have had a negative effect on U.S. manufacturing this summer, and U.S. job growth has unexpectedly declined in the past two months. National economic growth for 2015 is expected to be 2.5 percent, which is lower than projected in February. But looking ahead to 2016 and 2017, the economy is expected to pick up, growing annually by 2.9 and 3.0 percent, respectively.

The economic forecasters are fairly confident in their projections, and assign a 65 percent probability to their baseline economic forecast. They give a 20 percent chance for a more pessimistic scenario in which global markets decline; and a 15 percent chance that the economy will be stronger than the baseline prediction, due to better than anticipated productivity, household formation and foreign growth early next year.

The 2015 Legislative Session ended in June with $865 million of the state’s projected $1.9 billion FY 2016-17 surplus unspent. The next update on that available balance, taking into account both revenues and expenditures, will come out in the state’s November economic forecast. The current trend of higher than expected revenues indicates that the available balance will likely grow. However, predictions of slower economic growth could dampen the projected balance.

Up to one-third of any positive balance for FY 2016-17 measured in the November Forecast will go into the state’s budget reserve, further building up the state’s “rainy day fund” so that the state will be better prepared to meet the needs of Minnesotans during the next economic downturn.

Due to the late start to the 2016 Legislative Session, policymakers will also have the numbers from the February 2016 Forecast when they convene. At this point, it looks like policymakers will have a surplus to work with, and 2016 will present another opportunity to invest in the strong workforce and ladders into the middle class that are essential for more Minnesotans to participate in the economic recovery.

-Clark Biegler

About Clark Biegler

Clark Biegler is the Minnesota Budget Project's policy analyst.
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