Tuesday, December 5, 2017

The Entirely Unsurprising New Minnesota Budget Deficit

So yet again the Minnesota State budget is in the red.  The fiscal forecast projects a $186 million
deficit for the remainder  of the biennium, exploding to $586 million for the 2020-21 cycle. If the state is lucky it will only be that amount, but the possibility is far more.  How did this happen again that Minnesota is facing a deficit.
There are three forces driving the new deficit in Minnesota: state policy, the state and national economy, and federal policy.  Only the first is within control of the state, the other–to use the language of economics–are exogenous.
State policy is the first problem.  Simply stated, there has been bipartisan fiscal irresponsibility.  When the budget surplus grew to well in excess of a $1.65 billion earlier this year the Republicans thought the solution was to cut taxes, the Democrats to increase spending.  We did  both.  What was ignored were all the structural problems in the budget and budget process such as counting inflation for revenues for revenues and not obligations.  There was ignoring commitments to K-12, to pensions, and local governments.  There was funny number budgeting when it came to  infrastructure and other projects.  The budget was simply not honest.  But in addition, when there was a surplus no one wanted to say “Save for a rainy day,” thinking that the economy would continue to grow and perform well (generating continued and growing tax revenues) and that the federal government would continue to subsidize the state’s programs.  Instead, the political horizon was the next election cycle and not the long-term fiscal health of the state.
But all good things come to an end.  Since 2009 the US has been in an economic recovery and growth.  Economic fortunes have improved for many but no economic expansion lasts forever and there are signs of a slowing US economy.  A slower state or federal (or even international in a global economy) means less tax revenues for the state.  Uneven growth in Minnesota may mean 2.3% unemployment for the Twin Cities but it is not so good in greater Minnesota.    Minnesota’s politicians premised spending on an infinitely growing economy and that is not happening and the fiscal forecast notes that.  The economic slowdown is largely beyond control of state policy makers, and it is the second driver of the deficit.
Third, the big imponderable is whether Congress and the president agree to a tax reform bill.  Depending on what is in it, it could have huge implications for the state.  One proposal would reduce or eliminate the federal for state and local taxes.  For big spending and social welfare states like Minnesota that could be a big hit.  Elimination of the Obamacare individual mandate, or elimination of health and medical deductions, or doubling the standard deductions (which affect non-profits) could impact the state.  Additionally, while a few tooth-fairy believing supply-side trickle down economists believe the tax cuts will boost the economy, most disagree and thing it is more possible that it throws the economy into reverse and slows it down more.  On top of which, if the federal government needs to make more  cuts to make up for the projected budget hemorrhage, they may come from federal health care spending and money transferred to states such as Minnesota.
What most people and many legislators fail to grasp is that nearly $46 billion budget for Minnesota only represents the State’s part of its fiscal obligations.  Minnesota is actually obligated to spend billions more than that, with that money coming from the federal government.  Cut federal government spending and Minnesota will still have the obligations but not the revenues.
Thus, a slowing economy and federal tax reform and budget cuts could thus transform the not so rosy Minnesota  budget deficit into an ever greater one.  Had the governor and legislature thought through this when they rushed to spend and cut taxes they might have been able to plan and cushion for it.  But alas, they did not do this...yet again, leading to the entirely unsurprising new Minnesota budget deficit.

Addendum:  Recently someone questioned my expertise on budgets and economics and asserted  I was "merely a dumb political scientist."  Perhaps I am but lets think about this.  In graduate school I amassed nearly enough credits to have a masters in economics.  At Hamline for 15 years I taught in the business school, teaching graduate (masters and doctoral level) classes in economic policy, and I taught local economic development at the HHH school at the UMN.  Oh, and I worked as a housing and economic planner for several years and also was a researcher at the UMN Institute on Race and Poverty doing work on racial and economic segregation and policy.

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