Legislature should be cautious with Minnesota's skinny surplus

The smiles were restrained at the State Capitol Wednesday upon word that $329 million is forecast to appear on the state's general-fund bottom line by mid-2019. State government is in the black, but it's not as far into positive fiscal territory as many in both parties had expected.

The new numbers assure Minnesotans that they won't be hearing about a state money crisis in the next three months. But neither can Minnesotans expect much new spending or tax relief. And there's little extra cash available to ease the challenge of conforming to the new federal tax law without burdening Minnesotans with higher state taxes.

The economic jolt supplied by the huge federal tax reduction Congress delivered two months ago is being felt in Minnesota, state officials reported, and wage income is finally climbing after many years of stagnation. The state is also benefiting from January's federal reauthorization of CHIP, the Children's Health Insurance Program, which relieved the 2018-19 state budget of a previously forecast $178 million burden.

Those changes more than erased the $188 million state budget deficit through mid-2019 that was projected only three months ago. But they don't leave the state flush with excess funds. The forecast surplus amounts to a skinny 0.7 percent of the current biennial budget. The budget looks tighter still in 2020-21. A starting balance of $313 million is foreseen — but add inflation to the spending side of the ledger, and nearly $900 million in red ink appears on the mid-2021 bottom line.

That's why "prudence" and "caution" were the watchwords Wednesday from DFL Gov. Mark Dayton and his party's minority leaders. Dayton, serving his last year as governor, emphasizes that he's keen to avoid leaving his successor a deficit. That's more than a matter of gubernatorial pride. Stability in government services is an asset as Minnesota seeks to attract talent and business investment, and a fiscally healthy state government is able to command lower interest rates in the bond market, saving taxpayers money.

Leaders of the Republican majorities were more bullish on the state's fiscal position. GOP House Speaker Kurt Daudt said he deemed the forecast too pessimistic. He and Senate Majority Leader Paul Gazelka claimed that the tax cuts the GOP majority passed in 2017 were in part responsible for the forecast surplus and that they could further boost state economic growth.

We hope legislators aren't tempted to bet on the come as they adjust the state budget this session. To be sure, state economist Laura Kalambokidis and the state and national analysts with whom she works aren't clairvoyants. But they aren't engaging in guesswork. Sophisticated economic modeling shows that Minnesota and the nation are due for slower economic growth in 2020-21 after a two-year spurt that can be explained almost entirely by federal tax and spending moves. In Minnesota, a tight labor market isn't easing and stands to squeeze growth for some years to come.

Legislators can hope for better economic performance. But they should base this year's state budget decisions on Wednesday's forecast, not hope.