The Minnesota budget has a structural problem

The Legislature is currently on break for Easter week. Meetings will resume next week, on Monday, at which point discussions on the budget will continue. While the session adjourns on May 19, by law, legislators have until June 30 to pass a budget.

The good news is, work on the budget has already started. The Governor, Senate, and House have all released budget proposals, suggesting spending cuts. Unfortunately, as American Experiment noted, these proposals do not balance the budget. Under all three proposals, spending will continue to grow, albeit at a slightly lower pace.

So, what must legislators do about the state budget? American Experiment’s most recent report offers a way forward.

A structural problem

To effectively address Minnesota’s budget problem, lawmakers need to first accept that the $6 billion deficit is merely part of a broader fiscal issue.

While the state is expected to spend $71 billion between July 2023 and June 2025, it will collect only $62 billion in revenue. This leaves a gap of over $9 billion that is being covered by part of the $18 billion COVID-19-driven surplus.

Similarly, in the upcoming 2026-27 biennium, estimated spending exceeds revenues by over $3 billion, despite the state ending that budgeting period with a surplus. This structural deficit reaches $6.5 billion in the 2028-29 biennium.

With the $18 billion surplus depleted and unable to cover extra spending, Minnesota ends the 2028-29 biennium with a $6 billion deficit — or $2.4 billion after excluding inflation.

Table 1: February 2025 Forecast

Since this is not a deficit caused by temporary fluctuations, it means that the state budget is in a particularly vulnerable position. As the report notes:

Already, the Minnesota state budget has no room to handle unexpected crises, such as pandemics and recessions. If the February 2025 forecast is any indication, without any changes, maintaining Minnesota’s current spending trajectory will become progressively more challenging as costs — especially on long-term care services — continue to rise amid a worsening economic outlook.

Trump’s tariffs, tax cuts, and uncertainty over federal policy

The state deficit has grown since the November 2024 forecast. Minnesota Management and Budget (MMB) credited this mainly to policy changes under the Trump administration. Specifically, tariffs, tax cuts, and deportations are expected to raise inflation, slow anticipated interest rate cuts, and, consequently, slow the economy. Policy uncertainty also adds another layer of complication to the budgeting process.

Still, Minnesota would have been dealing with a $5 billion deficit even without the Trump administration, which underscores the structural nature of the deficit. Even with the favorable economic assumptions used in the November 2024 forecast, MMB expected revenues to outpace spending for the entire period between 2024 and 2029.

It’s not a revenue problem

While MMB estimated a $1 billion decline in the November 2024 forecast compared to 2024 end-of-session estimates, revenues are on a consistent upward trend for the period between 2024 and 2029.

In the February 2025 forecast, revenues are expected to grow by $2.8 billion in the 2026-27 biennium compared to the 2024-25 biennium and by over $3 billion between the 2026-27 biennium and 2028-29 biennium. Only that spending grows faster than revenue.

As MMB succinctly put it:

Biennial spending growth is currently forecast to exceed biennial revenue growth throughout the FY 2026-29 budget planning horizon. Revenue growth is expected to average 2.3 percent annually, while spending growth is expected to average 3.8 percent annually before inclusion of discretionary inflation, and 4.7 percent per year with discretionary inflation.
Spending has exceeded revenue since FY 2024 while large balances left from the FY 2020-23 period partially supported the budget set for FY 2024-25. Spending growth exceeding revenue growth has resulted in the structural deficit growing from $3.286 billion in FY 2026-27 to a projected $6.450 billion in FY 2028-29.

Structural problems require structural solutions

So far, the state budget deficit has been treated as a one-off problem, with lawmakers focusing on the budget’s ending balance. Minnesota’s long-term fiscal challenge, however, is much deeper than the $6 billion deficit.

According to MMB, spending will exceed revenues every year between 2024 and 2029. Between 2024 and 2027, that imbalance has been masked by the $18 billion surplus, which gets depleted in the 2026-27 biennium, revealing that the state budget is unsustainable.

Tinkering at the edges of the growing state budget will not address Minnesota’s long-term fiscal challenge. If lawmakers fail to rein in the budget in the 2025 session and align spending with revenues, they will lock Minnesota into a future of persistent deficits.

The $6 billion budget deficit is a structural problem, and it requires structural reform.