April 16, 2015

Latest state economic update shows higher revenues but slower economic growth

Minnesota’s spring is arriving with mixed economic news. State revenues have come in higher than expected, but the U.S. economy is not expected to grow as quickly as earlier predicted. That’s according to the April Economic Update from Minnesota Management and Budget.

State revenues in February and March came in $100 million, or 4.6 percent, higher than expected. Most of this is due to higher corporate income tax revenues. However, Minnesota Management and Budget assumes that part of this amount is a one-time occurrence that will not contribute to increased revenues in the future.

The update shows that the U.S. economic outlook for 2015 is weaker than projected in the February forecast. The U.S. economy is now expected to grow at 2.8 percent in 2015 while the February forecast predicted 3.0 percent. The lower growth is due to short-term factors like slower economic activity in early 2015; forecasters continue to expect strong growth this summer. The economy is still expected to grow at 2.7 percent in 2016, but growth in 2017 and beyond is expected to be slightly lower than projected in February.

Forecasters continue to assign a 70 percent probability to their baseline economic scenario, with a 15 percent chance for more optimistic or pessimistic scenarios. In the pessimistic scenario, lower consumer spending and a weaker housing market put a damper on the economy, and in the optimistic scenario, improvements in jobs and incomes spur the stronger economic growth.

The April Economic Update shows the state is on track for revenues. But this update is also a good reminder that forecasts are projections, not guarantees. The February forecast projects a $1.9 billion surplus for the FY 2016-17 biennium, which has yet to begin. The state’s economic picture could swing in a positive or negative direction in the next two years.

That’s a good reason for policymakers to be cautious as they put together the budget this session. Both the House and Senate budget targets put money into the state’s rainy day funds – that’s a smart move. Policymakers also should not pass proposals whose costs grow significantly in future years and may not be sustainable. Unfortunately, several tax proposals under consideration do just that, phasing in tax cuts over many years, which disguises their full cost and divorces decisions made today from the consequences of doing so.

-Minnesota Council of Nonprofits