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Minnesota’s budget outlook has taken a hit, with the state now projecting a smaller surplus in the near term and a growing deficit in the years ahead, according to the latest economic forecast released yesterday by Minnesota Management and Budget (MMB).
The forecast shows a projected balance of $456 million for the FY 2026-27 biennium, which is $160 million lower than previously estimated. Looking ahead to FY 2028-29, Minnesota now faces a projected general fund shortfall of nearly $6 billion ($5.995 billion), which is $852 million worse than forecasted in November. According to MMB, adding to budget uncertainty, shifting federal policies could further impact the state’s financial projections, making it more difficult to predict long-term economic conditions.
The bright spot in the forecast may be sales tax revenues, which continue to be a significant component of Minnesota’s general fund and are projected to account for approximately 25 percent of general fund income through the 2028-2029 biennium. Sales tax collections are projected to increase about 12.5 percent in to 2029:
- 2024-2025: $15.1 billion;
- 2026-2027: $16.05 billion;
- 2028-2029: $16.96 billion.
A projected 12.5% increase in Minnesota's sales tax collections by 2029 suggests that consumer spending is expected to grow over the period. Since sales tax revenue is directly linked to taxable sales, an uptick in collections typically reflects higher consumer expenditures on goods and services. This projection aligns with expectations of economic growth, wage increases, or population growth, all of which can boost consumer spending.
However, it's important to consider other factors that might influence these projections:
- Inflation: Higher inflation can lead to increased prices, which in turn raises sales tax collections even if the actual quantity of goods and services purchased remains constant. MMB noted that higher inflation is expected to result in increases in both projected revenues and expenditures.
- Policy Changes: Adjustments in tax policies, such as changes to the sales tax rate or the tax base, can impact revenue projections. MMB also said shifting policies at the federal level introduce significant uncertainty to the projections.
Therefore, while a 12.5% increase in projected sales tax collections indicates anticipated growth in consumer spending, it's essential to account for factors like inflation and policy changes when interpreting these projections.
See the full MMB forecast at https://mn.gov/mmb/budget/state-budget-overview/.
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