This week’s July Revenue and Economic Update gave us mixed news about the state’s economic and budget landscape. The quarterly report from Minnesota Management and Budget (MMB) showed that state revenues have come in slightly below projections but national economic growth is expected to be on track with earlier projections for the next few years.
Some of the top takeaways from the Update include:
1. FY 2017 revenues just below projections. The state’s 2017 fiscal year ended on June 30, and revenues for the year came in $104 million below projections; that’s 0.5 percent less than projected in the state’s February 2017 Economic Forecast. This is due primarily to lower than expected income tax receipts and higher than expected income tax refunds. These are only preliminary numbers, and the final FY 2017 revenues will be included in the October economic update. However, the lower income tax revenues are consistent with other data that suggest that wage and salary income is growing more slowly than earlier projections. Another factor that could be influencing the lower income tax payments noted in the Update is that some taxpayers may have held off on realizing capital gains in 2016, anticipating potential federal tax cuts.
2. Continued national economic growth projected for 2017 and onward. The national economic forecasters continue to predict 2.3 percent national economic growth for 2017 and for growth to jump to 2.7 percent in 2018; these are the same economic predictions as in the February forecast. However, the state’s economic forecasters note that this projected growth is based on the assumption that federal policymakers will enact tax reductions and increase infrastructure spending. Without these federal policy changes, growth in 2018 is expected to be around 2.3 percent.
3. The national unemployment rate is expected to fall further. Despite a slight recent uptick in the national unemployment rate, it has decreased by 0.4 percentage points this year to date. The national unemployment rate is expected to fall to 3.9 percent by 2019.
4. Despite uncertainty around federal policy changes, forecasters are fairly confident in their projections. The forecasters assign a 60 percent chance to their baseline forecast. They also give a 25 percent chance for a more pessimistic scenario and assign a 15 percent probability to a more optimistic scenario.
This week’s Update brings us relatively good news on the national economy, but reason for caution. These numbers don’t measure the impact on Minnesota of potential serious federal funding cuts. President Donald Trump has proposed, and the U.S. House and Senate have considered, deep cuts to federal funding to the states. For example, the Senate’s health care bill would cut health care funding to Minnesota by about $2 billion over 18 months, and threaten the health care of about 1 million Minnesotans. In addition, Trump’s budget proposes about $18 billion in cuts to grants to states and local governments that support critical services, such as housing and poverty-reduction efforts.
The budget that Minnesota policymakers passed in the the 2017 Legislative Session left very little of the projected surpluses on the bottom line. As a result, the responsibility of meeting the needs of Minnesotans in the face of uncertainty has gotten tougher.