Thursday, February 28, 2008

Now about that MN budget forecast appears that we are going to be headed for a showdown between the governor and legislature again, because this deficit is too big to fix with reserve funds and other legeredemain. You either have to cut spending or raise taxes, and the battle will be for probably $500 million or so between the two.

From the summary document, a couple of interesting points relating to the discussion just below on the possibility of recession in the state:
Projected individual income tax receipts fell by $313 million from November�s estimates. The decline in the personal income tax is due to slower growth in wages and declines in non-wage income. The forecast includes a small decrease in capital gains realizations in 2008. Declines in portfolio income, which includes interest and dividends as well as capital gains, explain about 75 percent of the decline in projected individual income tax receipts since the November forecast.
So most of this is because of stock market concerns. The forecasting firm Global Insights not only is calling therefore for a lower stock market, but it is also imputing a larger decline in Minnesota for key driver variables -- the forecasts that are used to generate the revenue figures -- than is expected for the country. They forecast employment to shrink -0.5% in 2008, which is a slump, not a pause. The detailed report has a projection of a 23,400 job loss 2007:III to 2008:III (see p. 23). Wage and salary income rise 2.5% for MN in 2008 versus 3.6% in the nation; any reasonable guess for inflation would lead you to conclude that real wage income in Minnesota is expected to decline. I think the forecast is a driven very much by the housing situation,
Housing is critical to the Minnesota outlook. Construction is expected to lose approximately 13,500 jobs in 2008. This forecast assumes housing permits bottom out in the second and third quarter of 2008. In 2007 it appears that job losses in construction lagged the decline in building permits up to 3 months, thus a �catch up� period is anticipated in the forecast. If the housing slump continues to deepen, however, it is unlikely that Minnesota�s economy will perform as expected. (p. 28)
...and I wonder if this is perhaps a bit too pessimistic. Total MN employment in construction was 112,432 in December 2007, down almost 6,400 from that time in 2006. You are telling me that you expect the rate of decline in the housing sector to more than double?? I sincerely doubt that, as it would drive down the level of employment in construction to 1997 levels. Tom Stinson said last week at the St. Cloud Economic Outlook that he thought prices in housing had to come down another 20% to reach equilibrium. Again, I'm not seeing why this figure is enough to lead to a double digit decline in construction, which has already shrunk.

Regardless of whether this figure is a little too high, it's unlikely we get to mid May without some adjustment of taxes (who knows, maybe they will tax clothes now.) Governor Pawlenty says he will use spending cuts but not in K-12 education. Expect the Legislature to talk more about tax loopholes (that's a technical term for "income the government doesn't currently tax but wants to".)

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