December 02, 2020

Minnesota Legislative Update: November Update and Economic Forecast

Minnesota’s economic and budget outlook has improved since last May when the Minnesota Office of Management and Budget (MMB) projected significant budget deficits for the remainder of this biennium and the next. In a forecast released December 1, MMB projected a $641 million surplus for the remainder of the current biennium, up from the $2.43 billion deficit MMB projected in May of this year. For the FY 2022-23 biennium, MMB projects a $1.27 billion deficit, a marked improvement from the $4.54 billion deficit projected in May. This improved forecast is due to higher consumer spending and business investment this year than had been expected in April. Total tax revenue for the remainder of this biennium is estimated to be four percent higher than the prior estimate — with forecasts for all major tax types higher than in May. In addition, overall spending is down, particularly in the areas of health and human services and education. The improved revenue outlook and lower spending estimates carry through into the next biennium, resulting in a reduced deficit projection.

The budget reserve, which currently stands as $2.377 billion, is not factored into MMB’s current projections, and the full amount remains as an option to deal with next biennium’s deficit. The forecast also only factored in the current four-week restrictions placed on businesses under Executive Order 20-99. In presenting this forecast, MMB noted that a high degree of uncertainty in these projections remains due to the continued path of the COVID-19 pandemic, the timing of a vaccine, the pace of lifting current state restrictions, business survival, and federal fiscal policy. The Executive Summary of MMB’s presentation can be found here.

In response to the forecast, DFL leaders acknowledged that the budget and economic update is good news and demonstrates that Minnesota is in a stronger financial position than what was thought in May. However, they cautioned there is still a long way to go. They also raised concerns that when inflation is included into the budget forecast for FY2022-23, the deficit grows to over $2 billion. They do not feel that draining the budget reserve is something to be considered.

Republican leaders agreed that the budget forecast was good news and is a testament to Minnesotans’ resilience. They believe that with the projected surplus, they do not need to raise taxes and should instead tighten their belts and reduce wasteful government spending. They also stated that in order to address the deficit in FY2022-23, the legislature should look at ways to open up the economy and allow it to grow.

Leaders from both parties agreed that with the positive news, priority should be given to those hit the hardest by COVID-19. They also agreed that the budget surplus can provide immediate economic and business relief to address recent restrictions during the upcoming special session.

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