February Forecast has good news for the state, but proceed with caution

The state’s February 2014 Economic Forecast released today brought good news for Minnesota. The state projects a $1.2 billion positive balance for the current budget cycle, the FY 2014-15 biennium, which is $408 million higher than the November Forecast projected.

How did this happen? Minnesota’s economy is faring much better than U.S. economy. The state had one of the six fastest-growing economies in 2012, and the good news continues. At the end of 2013, unemployment in Minnesota was at the lowest level since just before the recession, and was two percentage points below the U.S. rate. Minnesota had stronger job growth than the rest of the nation in 2013, and job numbers have climbed above pre-recession levels.

This strong economic growth means the February forecast projects lower state spending and higher revenue collections than in the November forecast, giving the $1.2 billion positive balance in FY 2014-15. The forecast also shows a $2.6 billion positive balance in the next budget cycle (FY 2016-17), which decreases to $1.5 billion after taking into account the impact of inflation on expenditures.

This is welcome news, but policymakers should act cautiously. The 2013 tax bill put our state on more stable financial ground. We should continue to make progress on making our tax system more fair, including updating the state’s Working Family Credit to include recent federal improvements. Policymakers should not make excessive tax cuts that would put at risk the state’s ability to sustainably fund quality education, make college more affordable, and otherwise invest in our future economic growth. Too much tax cutting would also harm the state’s ability to weather the next economic downturn.

This positive balance is a sign that our state has more funds than expected, not necessarily more than it needs. Policymakers should use some of the surplus to invest in a future of opportunity for all Minnesotans, including those left out of the economic recovery.

While the state has filled its budget reserves to the level required by law, we should prepare for the next economic downturn by building them up further. The state’s Council of Economic Advisors has long recommended reserves equal to 5 percent of the state’s general fund biennial budget, which is $2.0 billion for the current budget cycle. Our current budget reserves of $661 million and cash flow account of $350 million only amount to half of this figure.

The forecast documents and related materials are on the Minnesota Management and Budget website.

-Caitlin Biegler

About Clark Biegler

Clark Biegler is the Minnesota Budget Project’s policy analyst. She researches and writes about state tax and budget issues. Clark holds a Master of Public Policy degree from George Washington University in Washington, DC; and a Bachelor of Science degree in Public Health from Tulane University in New Orleans, LA. She interned at the DC Fiscal Policy Institute in Washington, DC, Third Way in Washington, DC, Lutheran Social Services, and the Alabama State Office of Primary Care and Rural Health.
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