Leave the Economic Forecast Alone

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“For every action there is an equal and opposite reaction”

Newton’s Third Law of Political Responses to State Economic Forecasts

“Home field advantage” is the competitive edge obtained over an opponent that would not otherwise exist if competing on a neutral playing field.  For many years the DFL has been trying to reestablish something like home field advantage in the budget development process by seeking to have expenditure inflation formally included in the economic forecast (this year the bill is SF 507).  Now Republican leadership in the Senate is taking a page from the same playbook and is looking to tweak the economic forecast in the other direction in a way that’s more supportive of its budget objectives.

We have frequently discussed the rationale for our concerns over formally including expenditure inflation in the economic forecast in the past, but it can be summed up thusly:

  • The concern is not whether to recognize inflation in the forecast (it’s real, should be, and is recognized), it’s how we recognize it.
  • Formal inclusion of inflation in expenditure estimates transforms the forecast from “just” a planning tool into a potential budget assembly tool by giving brand new or expanded government spending “cover” in the state budget since the new program costs would already be prebooked.  One case study from a 2002 House Fiscal Analysis Department issue brief, Planning Estimate Inflation in State Budget Forecasts states it this way: “For example, in the November 1998 forecast for fiscal years 2000-01, almost $800 million was set aside as planning estimate inflation. That amount allowed the Governor to make budget recommendations for $800 million of spending above the base level budget that did not count as new spending relative to the budget forecast. The Governor recommended just under $100 million for various inflation related base adjustments, mostly salary adjustments, in state agency appropriations. The remaining $700 million was available for adjustments to other budget areas.”
  • Any dollars then supporting new programming, rather than covering the higher costs of existing programming, would themselves have spending tails that then boost inflationary projections going forward.
  • It also serves to help fiscally indemnify how we currently deliver services.

Adjusting forecasted expenditures for inflation would not commit the state to additional spending in the next biennium, nor would it commit the state to holding all existing government spending harmless from inflationary effects.  But it would create a bias in what should be a neutral budgeting process.

Similarly, Senate File 3, which just passed Senate Government Finance on a party line vote, creates a different bias by injecting policy into the forecast from the other direction.  It directs the MMB Commissioner to reduce general fund administrative expense planning estimates for all state agencies and boards (except for DHS and Veterans affairs) by 5% each year for fiscal years 2022 through 2025.  

Forecast spending estimates are based on current law meaning the administrative planning estimate is current law spending on agency administrative operations.  A 5% reduction amounts to a 5% cut from the current base spending which would then become current law spending for FY 23.   That base would then be subject to another 5% reduction and so on for three more years.  It creates a compounding ratchet effect resulting in a 21.5% reduction from the current base by 2025.  Depending on your point of view that would appear to be either a damaging, if not dangerous, threat to the state’s ability to deliver government services or just the type of kick in the pants state government needs to get serious about improving its administrative cost structures.

But appearances can be deceiving. The impact would only alter the playing field by moving the economic forecast’s “goal posts.”  Lawmakers would still have to make budget decisions on whatever the changed shortfall or surplus numbers look like.  In other words, just as including expenditure inflation doesn’t actually commit the state to additional spending, this change wouldn’t require the state to cut spending or require government to find these administrative savings in its operations.   It would reduce forecasted spending making any deficits seem smaller and any surpluses seem larger – and introduce a different bias.

All this suggests what this battle over home field advantage really is about: public perception and talking points.  As our budget debates show again and again, agreement on the appropriate frame of reference for presenting budget information is just as contentious as budget decisions themselves.  Spending increases get portrayed as budget cuts; level funding gets portrayed as spending increases.  Republicans believe available revenue should frame the budget debate; DFLers argue it’s current spending.  Both sides have valid, albeit largely irreconcilable, arguments resulting in an ongoing battle of public perception.

That battle will continue.   But we should refrain from weaponizing the economic forecast by incorporating various policy assumptions to tilt the playing field in one direction or another.