Minnesota's new budget forecast is not as dark as had been predicted, thanks to a temporary boost from federal stimulus dollars. But look deeper and there are still plenty of worries ahead, virtually guaranteeing hard times for Minnesotans and hard-edged conflict at the State Capitol as leaders attempt to climb out of the deepest fiscal valley in generations.

"We're in the worst recession in the post-war era," said state economist Tom Stinson.

The state's projected budget deficit for fiscal 2010-11 is $4.57 billion, a figure that would be higher if not tempered by a $1.3 billion infusion of federal cash.

Even so, little seems to slow the global economic crisis that has Minnesota in its grip and is projected to cost it another 70,000 jobs in the coming year. Before it's over, Minnesota's job losses could reach 120,000 -- equal to three years' worth of typical job growth -- according to the state's national forecaster, Global Insight Inc.

Unemployment, already at 7.6 percent in Minnesota and nationally, could gallop to 9.4 percent this year and double digits "would not be a surprise," Stinson said.

Tom Hanson, commissioner of Minnesota Management and Budget, said that Tuesday's good news was that the federal cushion offset even deeper deficits. "The bad news is the economy continues to deteriorate," Hanson said. So steep has the slide been that Minnesota lost another $1 billion in projected revenue since the last forecast in November.

Stinson said business receipts across a broad swath of industries are expected to head downward. "Not profits," he noted, "but money across the countertop." The recession will be longer and deeper than expected, Stinson said, and might even require a second stimulus package from a federal government already exploring the outer limits of debt.

Collision on taxes

News of the prolonged recession brought renewed opposition to higher taxes from Republican Gov. Tim Pawlenty.

"State government [should] not add to the burden of families and add to the burden of struggling businesses by raising their taxes," Pawlenty said shortly after the new forecast was released. Asked if he would "absolutely" oppose any increase in taxes, Pawlenty replied flatly, "Yes."

Should the DFL-led Legislature plan on raising taxes, he warned, "we're going to have a collision."

That prompted a tart response from House Speaker Margaret Anderson Kelliher, DFL-Minneapolis. "The collision has happened already in this state," she said. "The accident has happened."

Kelliher said Pawlenty's proposed budget would raise revenue through the sale of government bonds. The need for more revenue is obvious, she said, but Pawlenty was "back to playing word games and word gymnastics on revenue."

However, Kelliher stopped short of explicit support for higher taxes, saying only that "all options are on the table. That includes revenue."

The case for higher taxes may be made more difficult, oddly enough, by the same federal government providing a temporary rescue. Testifying before Congress on Tuesday, U.S. Treasury Secretary Timothy Geithner offered assurances that the administration would not raise taxes before the end of the recession, sometime in 2011.

If DFLers hope to avoid the $983 million in appropriation bonds and $2 billion in cuts that Pawlenty has recommended, they would have to push for tax increases that would kick in far sooner than that.

House Minority Leader Marty Seifert, R-Marshall, vowed that his House GOP caucus would uphold any gubernatorial vetoes on tax increases, with no reprise of the override DFLers pulled off last year on the gasoline tax.

Road to recovery

One of the biggest concerns in the months ahead: About 70 percent of the U.S. economy is consumer-driven, and consumers aren't spending, Stinson said. Continued job losses will exacerbate the urge to hoard money rather than spend it, he said, further slowing recovery.

Markers of an end to the recession to watch for, he said, include rebounds in consumer spending, a stabilized savings rate, improved credit markets and smaller declines in payroll. By 2011 or 2012, he said, the economy should resume growth.

For now, Pawlenty and legislative leaders are left with the task of paring a budget by billions in a fragile economy that has left thousands of Minnesotans looking to government for assistance in hard times.

Pawlenty once again dinged DFL legislative leaders for failing to come up with budget fixes of their own, noting that he had presented his own budget five weeks ago.

He also once again lit into the federal government, saying it was already overextended and was sowing the seeds of a housing collapse-style crisis born of deficit spending. At some point, he said, "the house of cards they've constructed comes tumbling down."

Stinson said that stimulus dollars "may be hiding the long-term problem, but they're certainly helping the state economy in the short term. In the short term, it's welcome relief."

Without federal intervention, he said, the state might have lost another 45,000 jobs.

The annual late winter economic forecast has historically framed the budget debate at the State Capitol, but the federal stimulus package has added a wrinkle to the process.

Federal aid ultimately could pour anywhere from $4.5 billion to $9 billion into federally funded programs in the state, but only $1.8 billion came in time to be counted for the forecast.

State budget director Jim Schowalter said that additional money could come directly to the state or go to school districts or other governmental entities.

Silent protest

As state officials unveiled the budget forecast, protesters plastered signs against the windows of the Capitol meeting room where the presentation was taking place. One said simply: Chop From the Top. Another read: Tax The Rich. "We should tax the rich and have a surplus to make up for the cuts we've had in [the] past," said Deb Konechne, a spokeswoman for the Minnesota Coalition for A People's Bailout.

Staff writer Bob Von Sternberg contributed to this report. Patricia Lopez • 651-222-1288