State revenue and cash flow steady, but economic worries remain

October 12, 2011

First the good news. The State of Minnesota started out the first quarter of the FY 2012-13 biennium with higher-than-expected revenue. From July through September, the state collected $59 million above estimates, up about two percent from earlier projections, according to the state’s October 2011 Economic Update. Corporate income tax, individual income tax and sales tax receipts all exceeded forecasted levels.

While revenue is up slightly, Minnesota’s cash reserves remain low. Still, state financial experts reported at a legislative hearing last week that they do not expect that it will be necessary to take any administrative actions or turn to short-term borrowing in order to cover our bills during the current fiscal year. (State leaders took out a line of credit in 2010, just in case.)

The national economy continues to be the problem. The October Update reiterated concerns raised earlier this summer:

While most economists expect the U.S. to avoid a recession, real GDP growth over the next six to nine months is expected to be very slow…Forecasters’ major concern is that the tepid growth rate now seen likely through at least mid-2012 leaves the expansion dependent on the absence of extraordinary events and the avoidance of policy errors both in the U.S. and in the Eurozone.

State economist Tom Stinson says Minnesota will likely face a new deficit for the current biennium, MPR reported. When Governor Dayton and the Legislature made FY 2012-13 budget decisions, the national economy was expected to grow at a somewhat respectable pace – 3.2 percent growth in GDP in 2011 and 2.9 percent in 2012. The latest GDP growth estimates have been cut by about half, to 1.7 percent for 2011 and 1.4 percent for 2012. The steep drop in economic growth means a decline in state revenues, which increases the likelihood that a deficit will open up within the current biennium.

Federal and state leaders need to steer a careful course. This subdued level of economic growth assumes Congress will extend the expiring employee payroll tax cut into 2012, a proposal that is part of President Obama’s jobs bill. Stinson said last week that if Congress fails to extend the payroll tax cut, it would further reduce GDP growth expectations by one percent in 2012, resulting in a virtually no-growth scenario nationally.

We’ll know whether the state will face a deficit in the current biennium – and the size – when Minnesota Management and Budget releases the November Forecast. And on January 24, the Minnesota Legislature will reconvene. Given the current fiscal instability, policymakers need to focus on supporting Minnesota families struggling in the slow economy, and investing in the future economic health of the state.

-Scott Russell

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April update: State revenues down a tick, economy still on recovery track

April 19, 2010

Minnesota state revenues were $41 million below forecasted levels in February and March, or two percent below projections, according to Management & Budget’s (MMB’s) April 2010 Economic Update. The numbers do not seem to reflect a weakening economy, it said. The shortfalls appear to result from payment timing changes.

The Update acknowledged the federal government’s actions in heading off worse economic problems, and indicated again that the worst seemed to be behind us. The forecast said it appears that:

absent an unforeseen geo-political or international financial shock, the threat of a double dip recession has passed. The federal stimulus package and the Federal Reserve’s aggressive actions to restore credit market liquidity are generally credited by economists as playing  a major role in averting a much longer and deeper recession. And, while many believe that the stimulus could have been better targeted, few forecasters doubt that the extraordinary actions taken in late 2008 and early 2009 were instrumental in returning the U.S. economy to a path of growth.

The state’s February economic forecast is still the official measuring stick for state budget proposals. The April Update does not change the state’s projected $1 billion deficit for the current biennium, but it is one more indicator that Minnesota’s economy is recovering. The April Update measures whether state revenues are following the forecast’s projections. It said the state’s two largest classes of revenue – withholding tax receipts and gross sales tax receipts – are generally on track for February and March.

Minnesota’s macroeconomic consultant, Global Insight, has not materially changed its projections. It still assigns a 65 percent probability of a slow economic recovery, no different than in February. It still assigns a 15 percent probability of a pessimistic double-dip recession and a 20 percent probability of a more optimistic “V-shaped” recovery.

Global Insight’s April projections are slightly more optimistic than in February.  It predicts the U.S.’s Gross Domestic Product will grow 3.0 percent in 2011, up from 2.8 percent it projected earlier. Meanwhile, it expects inflation to remain under control through 2011, growing by 1.9 percent in 2010 and 2.0 percent in 2011.

-Scott Russell

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