State's economic forecast will shape budget plans

The incoming administration of Democratic Gov.-elect Tim Walz and state legislators will learn Thursday whether their spending priorities will get an early boost or if they face a more sobering financial reality.

State budget officials forecast Minnesota's economic outlook twice a year. This week's prediction comes as a new governor and new Democratic House majority are transitioning into power and will influence their work as they begin to develop the state's budget for the next two years.

"It will set the stage whether we're able to address, or to the extent we're able to address, new initiatives or provide improved funding," said Rep. Lyndon Carlson, DFL-Crystal, who will be the next chairman of the House Ways and Means Committee.

What they will be able to do in areas like K-12 and higher education and health care depends on what the forecast shows, Carlson said, but he is "quite optimistic" the state will have additional money to spend.

The forecast was originally planned for Wednesday, but state officials shifted it back a day due to the funeral and national day of mourning for former President George H.W. Bush.

The state budget forecast tries to encapsulate anticipated tax collections, state government spending, national policy changes and even international economic factors that could affect Minnesota.

The last forecast, in February, showed the state had a projected surplus of $329 million, about 1 percent of the state's total budget. Economists noted at the time that the 2017 federal tax law changes were partly responsible for the jump from a budget deficit to surplus, but said the stimulus was short-term.

Senate Majority Leader Paul Gazelka, R-Nisswa, said he believes the federal tax measure could have a longer-term impact. It was a significant package of tax reductions that "unleashed" the business community so they could create more jobs, he said.

The strong economy will give legislators some flexibility in the upcoming session, he said. For Senate Republicans, one of the top priorities is making the state's tax code conform with federal changes while making sure people are not forced to pay more in taxes, Gazelka said. A surplus would help achieve that.

He would not estimate what the surplus might be, but said he hopes the state had not collected too much in taxes from Minnesotans.

Minnesota Management and Budget Commissioner Myron Frans struck a more cautious tone as he considered the years ahead, into 2023. The expanding federal budget deficit, rising interest rates and tariffs are going to slow down nation's strong economic growth, said Frans, who will take the lead in releasing the forecast Thursday.

"People don't think it's going to get better. They think, if anything, it's going to get worse," he said.

"They think this is like money in the bank. And it's not. It's what we think is going to happen, but any one of these things on this risk list could blow it up," he said.

Frans and other state budget officials are always careful not to "forecast the forecast" or give any hint of what the numbers may be. Whatever they project this week will help with initial spending plans, as Walz needs to propose a budget outline by Feb. 19.

"We are eager to see the budget forecast, and for it to help inform our policy priorities and agenda as we put together our first state budget proposal," Walz said in a statement.

Walz is certain to start his term better than outgoing Gov. Mark Dayton did eight years ago, when the state faced a multibillion-dollar budget deficit after the Great Recession. Since then, Dayton and legislators enacted new budget measures that ushered in years of budget surpluses and refilled reserves to their highest levels in history.

While Thursday's forecast will offer a revealing economic snapshot, the governor and Legislature will receive an updated set of numbers in February, which they will use to finalize the next two-year budget by the end of this legislative session in May.

Gazelka said GOP senators have a retreat scheduled for next week and the forecast will be discussed.