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State finance officials are set to release a new economic forecast Wednesday that will help set the stage for the coming budget discussions at the Capitol.


The outlook is especially important for Gov. Mark Dayton, who will use it to put the final touches on the two-year spending proposal he will unveil next month.


But this forecast has even more uncertainty than usual due to the fiscal crisis that looms in Washington. Unless Republicans and Democrats in Congress can agree on tax and spending policies, early next year the nation will fall down a "fiscal cliff" that trigger automatic spending cuts and rising tax rates that economists fear will plunge the nation into another recession.

In Minnesota, state number crunchers have relied on the firm Global Insights for the broad, national economic assumptions that form the foundation of their state-specific forecast.


But those assumptions did not include the big federal tax increases and spending cuts that would come with the fiscal cliff, said Tom Stinson, Minnesota's state economist.


Stinson said Global Insights economists believe President Barack Obama and Congress will at least reach a temporary agreement that gives them more time to find a budget solution. If they don't, Stinson cautioned that this forecast will be quickly outdated.


"If we've gone full speed over the edge of the fiscal cliff in Wile E. Coyote style, in February the forecast will be less optimistic than this one," Stinson said.


After a White House meeting with President Obama and several other governors, Dayton conceded that the impasse in Washington makes it difficult to plan for Minnesota's future.


"I'll have to present a budget to the Legislature in January based on this forecast, knowing that the one at the end of February is going to be probably quite a bit different," Dayton said.


State officials are not offering any early clues about the forecast. But last March they predicted a $1.1 billion deficit ahead for the next two-year budget period.


Senate Majority Leader-designate Tom Bakk said he thinks the shortfall will likely be $2 billion when inflation is factored in. Bakk, DFL-Cook, said he wants to end the cycle of recurring deficits, as well as the recent trend of using accounting gimmicks, shifts and one-time money to balance the books.


Bakk also wants to find a way to begin deliver more than $2 billion in delayed payments to schools.


"We've been kicking this can down the road for my entire tenure in the Senate after I came over here from the House, Bakk said. "I mean, that's 10 years of really misleading the public about the state's budget. So, it's nothing that we're going to be able to fix in a biennium or two. It's going to take several biennia to get the fiscal house back in order."


Republican leaders are trying to paint a more positive budget picture ahead of the forecast.


State Rep. Kurt Daudt, the soon-to-be House minority leader, said he expects the forecast to show the budget gap narrowing due to increased state revenues during the past two years his party controlled the Legislature. Daudt, R-Crown, said he thinks Democrats are using inflation to increase the size of the budget problem as an excuse to raise taxes.


"Minnesotans are struggling in their lives and in their families and in their job situations," Daudt said. "Our job is to make their life easier, not more difficult. So, if we do hit that fiscal cliff on the federal level and we double down and increase taxes on top of that, that's only going to have a detrimental impact on our economy here in Minnesota, and it's just going to make things more difficult for families here in Minnesota."


But House Speaker-designate Paul Thissen countered that even families need to account for inflation as part of prudent budgeting. No matter what the forecast shows, lawmakers must come up with more than another temporary fix, said Thissen, DFL-Minneapolis.


"My hope is that we're not just budgeting to the forecast, but we're stepping back and actually creating a budget that's going to work for the long-term stability of the state," Thissen said.


Dayton's budget plan, which is due by Jan. 22, will start the budget discussion. Legislative leaders will wait until the release of the next economic forecast in early March before making any of their final tax and spending decisions.

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