A new economic forecast shows Minnesota’s budget surplus hitting $1.23 billion, a dramatic jump from just a few months ago, thanks to increasing strength in nearly every aspect of the state economy.

The projected surplus is the freshest sign that the state’s economic recovery is robust. The extra money is also intensifying the budget fight as state legislators face the possibilities that come with an even larger windfall heading into an election year.

“This is the best set of numbers we have seen in a while,” said Minnesota Management and Budget Commissioner Jim Schowalter. “It is like having shock absorbers in the car again. When you do hit a bump, you don’t feel it as badly.”

Gov. Mark Dayton said the good economic news means legislators can be more aggressive with tax relief this year. He called a House proposal for more than $500 million in tax breaks the new “floor” for the legislative session.

“We have thus proven that there is a positive role for government to play in our state’s economic progress,” Dayton said during a conference call with reporters. “Now we have the responsibility and the opportunity to extend our contribution to our state’s continuing improvement.”

The new forecast is an improvement by $408 million since the most recent one in November. That assessment already figured in anticipated revenue from earlier tax hikes, making the larger surplus almost entirely the result of economic growth.

State budget officials now expect sustainable growth in nearly every sector, except manufacturing and the number of federal workers here. Economists say they are even beginning to see improvement in manufacturing.

Job creation up

At 4.6 percent, Minnesota has one of the lowest jobless rates in the country. Nearly 46,000 jobs have been created in the last year, one of the fastest growth rates in the country. First-time jobless benefit claims have fallen to their lowest level in more than a decade. Other key indicators, such as temporary employment, average hours worked and job vacancies remain strong.

Schowalter said the state’s economy is benefiting from the new, two-year federal budget deal, which has given consumers and business owners a jolt of confidence. Recent years of back-to-back budget standoffs in Washington created instability and a lasting drag on the economy.

“Federal policymakers appear to have lost their appetite for economically destabilizing, budget showdowns,” budget analysts noted in their report.

Minnesota’s economy continues to outpace the nation, Schowalter said, and “there doesn’t seem to be any signs of that slowing down.”

The state’s economic consultant, IHS Global Insight Inc., also confirmed what many have suspected: Minnesota is in the midst of a long-awaited housing recovery, with low housing inventories that analysts said “are fueling more competition among buyers and pushing up home prices.”

Budget officials also say consumers have made considerable gains in rebuilding wealth in the wake of the worst recession since the Great Depression. Consumers are taking on more debt for cars and other big-ticket items while at the same time they have dramatically beat down credit card debt.

Minnesota State Economist Laura Kalambokidis said state officials have seen a smattering of upbeat news on several fronts, but lagging consumer confidence has been the missing ingredient to bind it all together. Budget officials now believe consumer confidence will break free and roar back to levels not seen since the Great Recession.

“We have been waiting for this lift,” Kalambokidis said.

Global Insight analysts say business owners appear cautiously optimistic, noting that factory orders for capital goods have increased.

So confident are Minnesota budget officials that they are estimating a $2.59 billion surplus in the 2016-17 budget cycle.

“That is a good place to be,” Minnesota Budget Director Margaret Kelly said.

Any new spending or tax relief this session would likely lower that number, however.

Global Insight said there are still potential risks that could drag down the state’s economy. Weak growth from trading partners in Europe and China could hurt growth, along with financial and health care reforms coming online early this year.

Kalambokidis said economists believe that a punishing winter has slowed the economic momentum a bit, but would be remedied by a spring thaw that would bring out shoppers and spur business. There is a small chance the sluggishness could continue, she said, possibly signaling a larger economic slowdown.

Legislators eyeing the new windfall are already sizing up the best ways to spend it.

House leaders want to quickly set aside more than $500 million for tax relief, some of it retroactive to 2013. That would have to be booked as spending in state budgets. The tax relief targets middle-class families and small collections of businesses that got socked with new sales taxes on warehousing services and telecommunications equipment and repair. A coalition of Democrats and Republicans want to use a significant share of the money to bulk up the state’s budget reserves as a bulwark against future downturns. Some legislators are looking to bolster transportation spending, or increase state borrowing for construction projects around the state.

Who gets credit?

That fight will largely define the next two months of the legislative session and stretch through the campaign season.

Republicans, who are in the minority in both the House and Senate, favor returning the money to taxpayers. They say the surplus proves that Democrats muscled through too many tax increases last year and now are attempting to get credit for giving it back.

“This money does not belong to the Minnesota government, it belongs to Minnesota taxpayers,” said House Minority Leader Kurt Daudt, R-Crown.

“I think it’s ridiculous to assume the budget that was passed six months ago is responsible for the positive forecast today,” said Senate Minority Leader David Hann, R-Eden Prairie. Repealing tax laws, he said, “is not enough to correct the mistakes that were made last year.”

House Speaker Paul Thissen said the strong forecast has soundly debunked GOP claims the tax hikes would sink the economy.

“They’re wrong,” said Thissen, DFL-Minneapolis. “This budget surplus shows it’s time for the Minnesota Republicans to stop rooting against Minnesotans and rooting against our economy.”


Staff writers Abby Simons and Jim Ragsdale contributed to this report.