When is a surplus not a surplus?
When the total amount of projected windfall in one budget cycle is wiped out by the projected deficit in the next budget cycle.
On December 6, our state’s economic experts unveiled the latest state budget projections. Nearly every headline referenced the short-term budget surplus, misleading most readers to believe that Minnesota’s economy remains in great shape.
But a deeper dive into the details finds that by the end of the biennium state spending will soon outpace expected revenue collections, which, if not properly addressed, could lead to a substantial budget deficit.
Last session, budget spending that some labeled as outrageous was approved by the Democrats who control both houses of the legislature and Governor Walz. You’ll recall that Minnesota had a nearly $20 billion budget surplus before they chose to automatically bake inflation into our state’s future budget forecast projections. Not only did they choose to spend this amount, but also chose to raise Minnesotans taxes by an additional $10 billion.
When the dust had settled, Minnesota’s budget spending grew by a whopping 40% when compared to the spending in the previous budget cycle.
So how has this impacted Minnesota’s fiscal outlook?
For the 2024-25 biennium, the Minnesota Management and Budget (MMB) Office says Minnesota is now projected to see a budget surplus of $2.4 billion, which is up $808 million from the end-of-session estimate. Taxes on the higher-than-expected consumer spending and corporate profit growth are the main reasons for the tax revenue forecast. The near-term U.S. economic outlook has improved since February, driven by stronger than expected consumer spending, business investment, and employment.
However, higher estimates in health and human services and education raise the total amount of spending, which MMB believes will create a negative structural balance in the next biennium. According to the data, Minnesota is now projected to see a $2.3 billion budget deficit in Fiscal Year 2026-27.
This news should not come as a surprise. After all, the legislature spent $20 billion in one time money from the surplus in the form of increased spending, but over half of that growth will continue without any corresponding new revenue.
The expectation that incoming tax revenue will keep pace with spending that is now basically on autopilot is not responsible. We are now in a situation where our projected surplus will be needed nearly in its entirety to cover the projected deficit in the next biennium. This means if the Democrat majority chooses to spend any of this surplus in this biennium, it will only increase the financial problems faced by the incoming 2025 legislature.
The legislature won’t need to act on any surplus until the final projection is issued at the end of February. Let’s hope the Democratic majority will show restraint when considering any future spending this session, as the current surplus that’s being touted in all the legislative headlines really doesn’t exist.