Minnesota legislators are bracing for another projected budget deficit as the state’s wobbly economic recovery fails to outpace the political uncertainty in Washington.
State budget officials will release a new economic forecast Thursday, which will firm up budget numbers as legislators craft their two-year budget plans. In November, state officials projected a $1.1 billion deficit over the next two years, prompting DFL Gov. Mark Dayton to offer a budget proposal that included a menu of tax increases and new spending.
The new number, which will be at the center of the budget fight for the remainder of the legislative session, remains a closely held secret until Thursday’s release.
Minnesota Management and Budget Commissioner Jim Schowalter said many economic and budget indicators are largely unchanged from the last economic snapshot.
“It’s unlikely you will see a big change in this forecast,” he said.
The state’s slow economic recovery remains stronger than many states, but bruising and destabilizing political fights in Washington over the so-called fiscal cliff, automatic budget reductions and the debt ceiling continue to weigh on the economic outlook.
“I see an economy that is slowly growing, that’s gotten some of the questions answered by Washington, but not all of them,” Schowalter said.
The federal government has locked in its contribution for medical assistance, which Schowalter said helps tame some of the uncertainty etched into the last forecast. The state’s health care costs consume a giant share of the state budget and are largely to blame for the continued increase in state spending.
Another upside: Minnesotans have been paying in more in tax revenue than predicted the past few months. But Schowalter and other budget experts said they are not sure whether that is an indication of a strengthening economy or that consumers cashed in investments for one-time gains before federal tax increases kicked in.
“There’s cash in the bank, but does it mean there will be cash in the bank for tomorrow, or did we just take it from another pocket?” Schowalter asked.
Minnesota State Economist Tom Stinson said he expects an increase in construction activity and a boost in the production of building materials. He said the health care industry continues to be among the state’s most robust sectors.
Minnesota’s 5.5 percent unemployment rate is more than 2 percentage points better than the national average.
“We are recovering, but we still have a ways to go,” Stinson said. “Nobody can be satisfied with 5.5 percent unemployment.”
Republicans and DFLers alike see little to give them hope for a sizable budget improvement.
Several Republicans predicted that Dayton’s tax plan, if implemented, would clip the state’s fragile economic recovery.
“There’s a little bit of a foreboding spirit,” state Sen. Warren Limmer, R-Maple Grove. “If the economy isn’t getting better, the governor’s tax proposal is going to be dragging that down even more.”
Some DFLers, who control both chambers in the Legislature, are hopeful the news will be rosier. An improved budget forecast would smooth out some of the rough spots in budget negotiations.
“Early projections are that revenues are a little better than we thought, so that could give us a little breathing room,” said Sen. Scott Dibble, DFL-Minneapolis.