Deficits: $426 million now, $4.8 billion soon and $4.6 billion later

Well, now we know what we are facing…lots and lots of red ink. Minnesota Management and Budget (formerly known as the Department of Finance) announced the bad news at a press conference late this morning.

  • For the current biennium (FY 2008-09, which ends June 30, 2009) the deficit is $426 million (that’s about half the size of the deficit we already closed during the 2008 Legislative Session).
  • For the next biennium (FY 2010-11) the deficit is $4.8 billion (add another $650 million for inflation).  That deficit amounts to about 13% of our budget. That’s a lot. State Economist Tom Stinson says this recession is expected to last 24 months – which would be the longest recession since WWII.
  • For the biennium after that (FY 2012-13) the planning estimate predicts a $4.6 billion deficit (add another $1.5 billion for inflation).

By the way, in case you are confused by the $5.2 billion deficit announced in the media – that adds the FY 2008-09 and FY 2010-11 deficits together.

So, how will we solve this deficit? You are going to hear again and again that we need to tighten the belt on state (and local) government. Sure, spending cuts are one of the tools we are going to need to conquer this mammoth problem. But, here are two things to keep in mind during this initial frenzy (more information is also in our press release):

1. We have been tightening our belt since 2003…and it shows. The Minnesota Budget Project is releasing a report next week talking about what has happened to the state’s investment in critical services over the last decade. Let’s just say the report is called “The Lost Decade.” We’ll announce the report’s release on the blog next week.

2. Raising taxes should be on the table. And here’s just one of many reasons why that’s true: We’ve said it before, and we’ll say it again (and again) - huge spending cuts can be more of a drain on the state’s economy than making targeted tax increases. Nobel-prize winning economist Joseph Stiglitz and Congressional Budget Office director Peter Orszag wrote during the last recession that government spending cuts take money directly out of the state economy. But a focused tax increase on high-income earners is less likely to have a drag on the state’s economy because those individuals are likely to maintain their levels of consumption, but compensate for the tax by saving less. Plus, the state is more likely to spend money in Minnesota, while high income earners are more likely to spend money outside of the state (or even outside of the country).

If you find this stuff totally fascinating, you should also look at an editorial by Dane Smith, President of Growth and Justice, in today’s Star Tribune talking about how “Governments shrank, the top got more and paid less, and the economy is underperforming.”

-Christina Wessel

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