DC fight clouds Minn. budget forecast

Published 9:37 am Monday, December 3, 2012

ST. PAUL — Deliberations over a long-term debt fix in Washington are casting an enormous cloud of doubt over the economic forecast in Minnesota, which in turn complicates Gov. Mark Dayton’s task of assembling a two-year budget proposal.

A fresh analysis of the state budget outlook is due Wednesday, but Minnesota finance officials acknowledge their economic forecast will have a shorter shelf life than usual because the federal outcome of fiscal cliff negotiations will determine whether things here are likely to improve or deteriorate. At last check, another state deficit loomed but it was modest by recent standards.

Democratic President Barack Obama and a divided Congress have until month’s end to reach a deal to avert across-the-board tax increases and spending cuts that would kick in automatically. Failure to reach accord, by most accounts, would plunge the country back into recession. Many economists predict a Washington agreement could accelerate economic growth because businesses want certainty before making hiring decisions and equipment upgrades. There’s also the possibility that federal leaders make a temporary pact that leaves things in limbo longer.

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All of it puts the state’s money minders in a bind. They are obligated to release their report, which forms the foundation of a Dayton budget due to the Legislature by Jan. 22. They know their projections will be severely outdated by then.

“We always have economic uncertainty but this forecast adds to it,” Minnesota Management and Budget Commissioner Jim Schowalter said. “These aren’t things that can be set into a model.”

State economist Tom Stinson said forecast preparers will include a doomsday scenario for Minnesota if the federal debt talks crumble. But there are too many unknowns about what a possible deal would look like to game out that end, Stinson said.

Typically, there isn’t dramatic movement between the fall forecast and one done in late February, which becomes the final marker for end-of-session budget negotiations between the governor and lawmakers. The fluctuation is probably going to be more dramatic this time, which would force Dayton to make substantial changes to his budget proposal and slow the budget-setting process in general.

The always-cautious Stinson said he will be preaching extra prudence this time when he briefs state lawmakers on Wednesday.

“I’ll certainly be telling them that in economist terms the confidence interval around this estimate is much larger than usual,” Stinson said. “In non-economist terms, I guess what I’d be saying is the forecast is more uncertain than usual.”

The last time Minnesota took comprehensive stock of revenue and spending projections was in February. That forecast predicted the 2013 Legislature would need to confront a $1.1 billion shortfall.

Incoming Senate Majority Leader Tom Bakk said the ground beneath this forecast is “pretty squishy” given the situation in Washington and mixed expectations about consumer spending on closely watched holiday shopping.

“This isn’t the one we’ll build a budget off of,” Bakk said.

The state’s forecasts are based on a battery of data from near and far. For instance, the outlook weighs local hiring patterns, average wages and home foreclosure trends coupled with economic conditions in key export markets, the anticipated cost of oil and budget decisions coming out of Washington.

A status report issued earlier this fall offered a conflicted picture. State revenue was comfortably exceeding expectations, driven by strong income and corporate tax receipts. But it also warned that U.S. growth rates remained a disappointment. Authors of the Department of Minnesota Management and Budget report said the “downward spiral” was over but “we have not, as yet, been able to shake off the economic inertia produced by the longest and deepest recession in the post-war period.”

One big concern is the shape of economies in European nations, many of which have lurched from recession to recession. European Union countries accounted for nearly a quarter of the state’s exported goods in 2010, so lagging demand abroad can affect manufacturing output back home.

On the flip side, Stinson said strong parts of the state economy shouldn’t be discounted. As the housing market rebounds, demand for construction supplies such as wood products and Minnesota-made windows has grown.