State likely to face another deficit

State shutdown
The grounds of the Minnesota State Capitol in St. Paul remain quiet on July 11, 2011, as the state government shutdown continues.
MPR Photo/Nikki Tundel

Economic growth in Minnesota is slowing to the point that Gov. Mark Dayton and the Legislature will likely have to overcome another budget deficit, state economist Tom Stinson told lawmakers on Thursday.

Making matters worse, the state's economy could slow even more if Congress fails to pass an extension of the federal payroll tax cut, Stinson warned.

The prediction comes just three months after Dayton and the Republican-controlled Legislature forced a three-week state government shutdown over how to erase a $5 billion projected budget deficit. When Dayton and the Legislature crafted their budget agreement, they based their numbers on a forecast that projected economic growth of 3.2 percent this year.

It turns out that projection was too ambitious.

Stinson said national forecasting firms now predict state growth of 1.5 percent — less than half of initial projections. He said the news will be a problem for the state's number crunchers and policy makers.

"We had a little more money than we thought we would at the end of fiscal 2011," Stinson said. "That provides a cushion. But it's going to be difficult, maybe even impossible, for us to not have a shortfall in November."

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Stinson said higher gas prices, the natural disasters on the east coast and the long-running deficit battle in Washington, D.C. have chilled consumer spending. He also told state lawmakers that national forecasters say the chance of another recession is now as high as 50 percent.

A recession could be even more likely if Congress declines to extend the federal payroll tax cut. President Obama has advocated for the tax cut, but Republicans in the U.S. House have been reluctant to adopt it. Stinson said the economic growth rate would be less than 1 percent if the tax cut isn't extended.

"Of course, a half a percent growth is subject to all kinds of errors," he said. "That's no growth at all."

Stinson was careful to mention that things could improve between now and when the state releases its next economic forecast in late November. He also noted that Minnesota's unemployment rate of 7.2 percent in August was better than the national rate of 9.1 percent but said the state's economic engine is in part hitched to the national economy.

Stinson's analysis is sobering news for Dayton and the Republican-controlled Legislature. The two sides spent the first seven months of the year arguing over the best way to erase the state's $5 billion projected budget deficit.

After a three-week government shutdown, the two sides agreed on a mix of spending cuts, borrowing against future tobacco payments and delaying payments to schools. Now, they'll be forced to make another round of hard choices.

"It will be very difficult," said state Sen. Claire Robling, R-Jordan. "The tools are limited."

Robling, chairwoman of the Senate Finance Committee, said in the face of a deficit it's likely Republicans would consider another round of budget cuts.

"We would probably look at some additional cuts because that was what we originally intended," she said. "Whether or not the governor would agree to that is to be seen."

Robling said it would be difficult to manage a budget deficit that is $1 billion or more.

A spokesman for Dayton said the governor will assess the forecast when it's released, but said Dayton has made it clear that he supports an income tax hike on top earners to solve the state's fiscal problems.