Tuesday, March 03, 2009

Two bits from the new budget forecast 

State and local governments in Minnesota are expected to be eligible to receive nearly $4.6 billion in assistance under the ARRA. At this time, however, the forecast impact of the additional federal spending on the state�s budget outlook is much smaller than that amount. Much of the spending authorized by the ARRA is dedicated to specific purposes and projects so it will have no direct impact on Minnesota�s general fund outlook. For example, Minnesota is expected to be eligible to receive about $450 million in additional funds for highway and bridge construction projects. When received those funds will be directed into dedicated highway construction funds and not comingled with general fund revenues, leaving the state�s general fund budget outlook unchanged.

This forecast includes only one direct ARRA related budget adjustment, the change in the Federal Medical Assistance Percentage (FMAP). Unlike other federal funds, Minnesota can recognize and spend these funds within current law and without additional review. In fact, the state is already preparing to receive the retroactive portion of the FMAP increase. The change in FMAP is expected to provide Minnesota with an additional $464 million in FY 2009 and $1.359 billion in FY 2010-11.
That $464 million alleviates any additional unallotment that might have happened in FY 2009 and in fact some of it carries over to FY 2010-11, if the Legislature and Pawlenty don't get itchy to spend it. I recall from the original Obama transition plan for what became ARRA that we would get more direct spending than offset of tax cuts ($.60 increase in G and $.30 decrease in T.) Since most of the FMAP money will reduce the deficit and (one hopes) reduce any potential state tax increase, it seems like this fits right. It's fairly close to what the Pawlenty budget projected, too.
February�s baseline economic forecast from Global Insight (GII), Minnesota�s national macro-economic consultant, calls for real GDP to decline at a 2.7 percent annual rate in 2009. The recession extends into early fall, with the economy growing at below trend rates through mid 2010. The unemployment rate reaches 9.4 percent in early 2010 and remains at that level until the fall of that year. By the end of 2009 U.S. payroll employment is expected to be 6 million below its fourth quarter 2007 peak, it then recovers very slowly. It is not until mid-2012 that the number of U.S. jobs exceeds the 2007 high. In GII�s February baseline real GDP grows at a 2.0 percent annual rate in 2010 and at a 3.5 percent annual rate in 2011.
Hmmm. The new Obama budget calls for growth in 2010 of 3.2% in 2010 and 4% in 2011. OMB has gotten a bit tetchy about this; they rely on comparison to a forecast where borrowing trillions of dollars has no effect on private sector investment, and where the productivity of whatever government buys is equivalent to the productivity of private investment. So who do you believe -- the Obama Administration, or Global Insights and the MN Dept. of Finance?

I'll have to read the rest later -- busy until late this PM.

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