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What will Minnesota’s fiscal forecast say?

By the end of this month Minnesota Management and Budget should have released their new Budget and Economic ForecastThis is being more keenly awaited than such releases usually are. If you recall, back in December, when the last forecast was released, it touched off a mini-firestorm.

Black to red

The fuss stemmed from the fact that a fiscal surplus for the state government for 2018/2019 of $163 million forecast in June had turned into a deficit of $188 million. Minnesota’s Senate Democrats were in no doubt what the culprit was

This was pretty bizarre on two counts.

First, as we pointed out, there hadn’t actually been any tax cuts which could have been responsible for this.

Second, if they had actually read the report before tweeting, they would have found that the reason for this change was explicitly explained. In short, the state’s economic consultants, Markit, use a projection of national economic growth to derive their estimates for Minnesota’s tax revenue. Federal tax reform, according to Markit, would boost US economic growth and, hence, tax receipts in Minnesota. But, when they made their forecasts, this was looking like a long shot so they stripped out the stimulus effect of tax reform, got lower national growth, and reduced tax receipts stemmed from that.

All of this was in the report in black and white. The Minnesota Senate Democrats could have read it before commenting just as we did. They chose not to and tweeted something false instead.

Back in black?

Between the forecast being done and the report being released, the prospect for federal tax reform improved considerably. As a result, the report commented that the next forecast would have the stimulus effects of the federal tax cut put back in. This would generate higher economic growth nationally, increased tax receipts for the state government, and-probably-eliminate the deficit. That forecast is the one due by the end of this month.

What next?

There would seem to be three things to take away from all this.

First, don’t take what politicians say about these matters at face value. Always check for yourself.

Second, the state’s own economic consultants work on a model that tax cuts such as those passed in December have a stimulating effect on the economy. Considering how high taxes in Minnesota currently are, that should tell our state policymakers something.

And, third, don’t forget spending. Deficits are a function of expenditures as well as revenues.

Now, lets see what the February forecast says.

John Phelan is an economist at the Center of the American Experiment. 

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