Last week, Minnesota Management and Budget announced that our state government will run a forecast budget surplus of $1.3 billion. At the end of the 2019 legislative special session, the state government’s budget balance for the fiscal year 2020-21 was forecast to be $242 million. Now, it is up to $1.3 billion, a 450 percent increase.

It is worth noting that this is a forecast surplus; the money isn’t in the bank yet. When you’re driving to the casino, it might be fun to daydream about what you’ll spend your winnings on. You’d be rather a fool if you committed to spending them.

Even before this announcement, politicians in St. Paul were debating what to do with it. As this discussion progresses, it might be useful to keep the following points in mind.

1 – This is a one-off windfall

One option is for the state government to spend the money. As MinnPost reports, “(Gov.) Walz said lawmakers could use some of the money to ensure a pair of tribal governments do not have to cover excess payments the Department of Human Services sent to them for addiction treatment drugs. And Sen. Ann Rest, a DFLer from New Hope, said some of the money could be spent on grants for affordable housing.”

Others suggested that the surplus could help with racial disparities or more spending on schools. Added together, the various spending plans probably come to a good deal more than the forecast surplus.

But this is a one-off windfall. These funds — assuming they materialize as expected — will not materialize again next year or the year after that.

2 – The surplus is money the government didn’t think it needed

The state government set a budget for fiscal year 2020-2021 at $48.4 billion. If the government, having judged what it needs and wants, now thinks it will take in more than it needs to cover them, why not give it back to the hard-working Minnesotans it is set to be taken from? I’m sure they have needs and wants of their own which they would like to spend their hard-earned money on.

Caution here though; the same concerns about hiking spending based on a one-off surplus apply to cutting taxes based on one. The difference is that there is some evidence that this surplus was the result of lower taxes. As MinnPost put it, “(Laura Kalambokidis, the state’s top economist) noted the Trump administration’s Tax Cuts and Jobs Act ‘fueled’ above average national GDP growth in 2018. ‘When wealth grows,’ Kalambokidis said, ‘consumers tend to spend more.’”

The US economy is performing well at present, but there are “downside risks,” notably from the administration’s misguided trade policies.

The state government might do well to be a little circumspect when it comes to money it doesn’t yet have.

John Phelan is a graduate of Birkbeck College, University of London, where he earned a bachelor’s degree in economics, and of the London School of Economics where he earned a master’s. He worked in finance for 10 years before becoming a professional economist. He worked at Capital Economics in London, where he wrote reports ranging from the impact of Brexit on the British economy to the effect of government regulation on cell phone coverage. He has written for City Am in London and for the Wall Street Journal in both Europe and the United States. He has also been published in the journal Economic Affairs.

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