Minnesota's budget outlook worsens in both near, long term

— UPDATED at 2:41 p.m.

It looks as if those calling for less state spending could get their wish, judging from Thursday’s release of the February 2025 Budget and Economic Forecast.

A state surplus for the 2026-27 fiscal biennium that was predicted to be $616 million in November is now at $456 million, meaning that the Legislature and Gov. Tim Walz will not have as much money over which to argue.

But at least it’s better news than found in the long-range forecast, where spending growth is expected to outpace revenue growth through fiscal year 2029. The projected General Fund shortfall for the fiscal 2028-29 biennium that was forecast to be $5.1 billion in November is now seen as just short of $6 billion.

Minnesota Management and Budget said in its initial forecast summary that higher inflation is expected to result in increases in both projected revenues and expenditures. It also said, “Shifting policies at the federal level introduce significant uncertainty to the projections.”

But forecasters said Minnesota’s economy is strong in the near term.

The forecast provides a detailed update of the state's financial health that sets the stage for the upcoming legislative session by providing lawmakers preliminary numbers needed to create Minnesota’s budget for the next two fiscal years.

But how detailed it can be is tempered by uncertainty about changes in federal policies and possibly significant changes in federal funding coming the state’s way. For example, the U.S. House of Representatives is currently debating a very large cut in Medicaid funding that could shift more costs onto the state.

And the forecast doesn’t take into account economic changes that could be caused by retaliatory tariffs from Canada, China and Mexico, or any federal government changes that have occurred since Feb. 10, including changes in the workforce.

Thursday’s forecast noted that both revenues and spending are up from the November forecast. But spending is expected to exceed revenues by $3.3 billion in the 2026-27 biennium, the “structural balance” between them growing to $6.4 billion in the following biennium.

On the revenue side, sales tax collections are expected to exceed levels forecast in November by $209 million, while individual income tax collections are up $178 million over November.

As for spending during the 2026-27 biennium, it’s expected to increase by $790 million over November’s numbers, the largest increases coming in the areas of health and human services ($338 million) and E-12 education ($198 million). Discretionary inflation plays a large role in those projections, growing by $219 million. 

The forecasters expect the labor market to remain tight, leading to wage growth, in part due to baby boomers leaving the workforce and fewer international workers.

As for how the forecast will shape legislation this session, leaders from both parties weighed in.

“While revenue continues to grow, spending is growing even faster,” said House Speaker Lisa Demuth (R-Cold Spring) in a statement. “We cannot and will not raise taxes to fill this gap, especially after Democrats raised taxes on Minnesota families by more than $10 billion over the last two years. My expectation is that Democrats will come to the table with savings and cuts, not tax increases, to fix the mess they created.”

“The state continues to have our highest budget reserve fund ever,” House Speaker Emerita and DFL Leader Melissa Hortman DFL Leader Melissa Hortman (DFL-Brooklyn Park) said in a statement. “But when the federal government walks away from its obligations, the state has to step in, and we simply won’t have the resources to keep up. This will have dire consequences for the people of Minnesota and our state budget.”

Hortman said that she expects House leadership to agree upon budget targets by April 1.

Walz responded to the budget presentation by criticizing the unpredictability of the Trump administration’s policies and how they affect the state. He expressed admiration for the state’s House and Senate Republicans who sent a letter to the president describing how Medicaid cuts would impact Minnesota’s residents.

Walz also spoke of meeting with officials from Manitoba and Ontario and discussing how tariffs on energy imported from Canada are going to raise prices in Minnesota.

“The only thing that’s changed since November is Donald Trump and what he’s done to our economy,” Walz said. “We are one of the least dependent upon the federal government of any state, and these changes will still affect us a lot.”

— Session Daily writer Margaret Stevens contributed to this story.