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Minnesota budget prediction shows slight increase in surplus

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Commissioner Myron Frans of Minnesota Management and Budget leaves through paperwork on Friday, Dec. 2, 2016, as state officials announce a budget surplus. (Forum News Service photo by Don Davis)2 / 2

ST. PAUL — Bright spots abound in Minnesota's economy: Strong job demand pushes up wages, home sales are increasing, taconite from northeast Minnesota is selling again and people appear to be willing to shop.

But predicting the economy's future, and its impact on state government finances, is rendered impossible given uncertainty about what the president and Congress may do.

An economic and state government budget report released Tuesday, Feb. 28, shows that  thanks to a good economy Minnesota leaders should have slightly more money to spend than expected as they prepare a two-year budget this spring.

Minnesota Management and Budget, the state's finance agency, said that the state surplus in the next two years likely will be $1.65 billion. That compares with $1.4 billion surplus projected in a Dec. 2 report.

However, the agency reported, that "federal policy unknowns create significant risk for this forecast."

New President Donald Trump created many questions because state officials do not know how his actions may affect the state budget. Gov. Mark Dayton and other state officials said because of that uncertainty they need to proceed with caution as they craft a two-year budget that begins July 1.

The Minnesota Council of Economic Advisors released a statement saying that the good news comes in 2018, when the country's economy should grow 2.7 percent, more than the 2.2 percent predicted in the December economic report. The state economy usually follows the countrywide performance.

Some of the best Minnesota economic news is expected in northeastern Minnesota, where for several years iron ore-producing taconite mining has slowed as China dumped cheap steel in the United States.

Ironically, China needs iron ore, the economic report indicates, which boosts ore prices.

Improving home sales were due in a large part to better pay Minnesotans receive. Those higher wages, the report says, came because state employers have plenty of jobs available and many businesses cannot find enough workers.

"Minnesota continues to add jobs at a steady rate, helping keep the unemployment rate low..." the report says. "In this forecast, we expect modestly higher employment growth over the next three years than we had forecast in November."

A dark side of the economy is trade, which already is falling and some fear could tumble more if Trump is successful in his desire to change trade policies. State Economist Laura Kalambokidis said one of the major risks not included in the economic report is the possibility of a "trade war" if retaliation against Trump actions is instituted.

A trade war would especially hurt some Minnesota industries, like agriculture, which depends on exports for  much of its profit.

Tuesday's budget and economy report, despite all the questions, was the eighth straight one to predict a surplus.

The report predicts more state spending in the next two years, but also more tax revenue.

While Dayton has announced his $46 billion, two-year budget plan, he will update it with the newest figures in the next couple of weeks.

The Republican-controlled House and Senate will use the Tuesday report to draft their budget plans.

Commissioner Myron Frans of the management and budget office said more than two dozen states are looking to fill budget deficits and a dozen expect deficits to be forecast for the next year or two.

Minnesota "is a stark contrast to other states," Dayton said.

Minnesota legislative Republicans said the new figures show that the state collects too much, so they will craft tax breaks to return money to taxpayers. They did not say who would get tax cuts.

House Speaker Kurt Daudt of Crown expressed fellow Republicans' concern that state government is expanding too fast, and blamed it on Democrat Dayton. "The governor wants to grow state government faster than the economy is growing."

Senate Majority Leader Paul Gazelka, R-Nisswa, said the new budget surplus projection indicates that lawmakers have enough to spend money on roads and bridges, tax relief and health care. "All of those should be able to be done this year."

Senate Minority Leader Tom Bakk, D-Cook, however, said the state "ought to park" the surplus increase in the state reserve.

Key budget numbers
  • Budget surplus expected in next two years: $1.65 billion
  • Projected surplus for 2020-2021: $2.12 billion
  • 2018-2019 increase in income tax receipts: $274 million
  • Corporate tax increase over next two years: $69 million
  • Expected two-year sales tax increase: $48 million
  • Projected health, human services spending increase: $73 million
  • Expected education spending increase: $95 million
Don Davis
Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.