On December 4, 2025, Minnesota Management and Budget (MMB) released the November 2025 Budget and Economic Forecast, one of two comprehensive reports released every year on the state’s budget and economic outlook.
The forecast report and commentary from MMB staff, the state economist, and policymakers all highlight how uncertainty, limited information, and a slowing economy are putting pressure on Minnesota’s long-term budget outlook. Various challenges mean the forecast is less complete than in more normal times.
In the near term, Minnesota is showing a projected general fund surplus of $2.5 billion for the current budget cycle (FY 2026-27). The forecast also predicts a $3.0 billion shortfall for the following biennium, FY 2028-29. The projected deficit takes into account the estimated costs for current services to keep up with inflation.
The good news of a near-term state budget surplus is not necessarily tied to better well-being for everyday Minnesotans. When the forecast was released, we were already navigating a worsening and long-lasting affordability crisis driven by policy choices like: federal policymakers’ failure to extend enhanced Premium Tax Credits that bring down the cost of health insurance, higher prices as a result of tariffs, canceled federally funded infrastructure and clean energy projects, and a net-zero immigration policy that stagnates the labor market.
And more recently, Minnesotans have been enduring the extremely steep economic and human costs of Operation Metro Surge, including the killings of Renee Good and Alex Pretti.
The long list of budget pressures and challenges facing state policymakers also includes responding to massive federal changes that require states to take on more responsibility for funding essential services like health care and food assistance, and to implement harsh new policies under impossibly tight time constraints. The potential impact of these federal changes is not fully reflected in this forecast.
In this environment, we call on state-level policymakers to take bold action to prioritize and protect Minnesotans’ health and economic well-being. Accepting the damage that federal actions inflict should not be an option at a time that so many are facing hardship and disruption.
Key data from the forecast
- A $2.5 billion general fund surplus is projected for the state’s current two-year budget cycle (FY 2026-27), which ends on June 30, 2027.
The surplus is higher than projected at the end of the 2025 Legislative Session, with projected higher tax revenues for FY 2026-27 and a better-than-expected close of the previous biennium (FY 2024-25) being the major contributing factors. Revenues outpaced spending in FY 2024-25 to a greater degree than previously estimated, and as a result, an additional $941 million in one-time resources boosted the starting balance for FY 2026-27. For FY 2026-27, the November forecast also predicts higher spending than previously estimated.
The FY 2026-27 baseline budget also includes an unusually large amount of funding moved into the current biennium as “carryforward.” About $1.9 billion in previously appropriated funds that were not spent in FY 2024-25 are available in FY 2026-27 for their original purposes, but do not contribute to creating a larger surplus. - The FY 2028-29 planning estimates project a negative balance (deficit) of $3.0 billion.
Those figures assume that all of the FY 2026-27 surplus remains unspent in this biennium and is used to fund public services in FY 2028-29. Disregarding the positive starting balance for the biennium, the structural imbalance for FY 2028-29 – defined as the gap between expected revenues ($67.8 billion) and expected spending ($73.2 billion, including discretionary inflation) – is projected to be more than $5.4 billion.
Revenues for the biennium are projected to be $570 million lower than end-of-session estimates, and spending is projected to be $1.9 billion higher (including discretionary inflation). Higher state health care costs compared to earlier estimates are described by the forecast as stemming primarily from higher rates for managed care in Medicaid. Increased participation in the Disabled Basic Care and in Families with Children components of Medicaid, and other factors also contribute to higher spending.
The budget calculations for FY 2028-29 include $935 million in “discretionary inflation,” which is the amount of funding that would be needed for certain public services to keep up with inflation – specifically, those services whose spending does not increase with inflation or change in relation to the number of people to be served. The discretionary inflation amount does not automatically go toward inflationary increases of every program; funding increases only occur if policymakers allocate dollars to specific purposes. - Economic projections show slowing growth and other concerning signs, especially for those experiencing the downside of the “split economy.”
In a split economy, upper-income households thrive and spend while low- and middle-income folks struggle to get by. Consumer spending throughout 2025 reflects this dynamic – wealthy Americans are spending more while lower-income Americans are spending less, resulting in overall numbers that look steady but hide inequities.
The state’s economic forecaster, SPGMI, expects national real GDP growth to be 2 percent in 2025, 2.2 percent in 2026, and then below 2 percent through 2029. The forecast describes real GDP growth below 2 percent as “well below historic experience.”
Projected rates of inflation are relatively unchanged from the prior forecast in February 2025 and are expected to remain elevated close to 3 percent through 2026, with tariffs being a contributing factor.
The forecast also is predicting slow job growth. While in the 2010s, U.S. employers added nearly 200,000 jobs every month on average, SPGMI predicts that as soon as 2026 we can expect to see payrolls increase by only 35,000 jobs on average each month. This would mark a structural change in employment growth in the United States at a time when our aging population and lower birth rates are also constraining the number of people available to work and the number of jobs they might fill.
Other observers of the economy have suggested that the Trump Administration’s aggressively punitive immigration policy is creating a “new normal” where job growth is at much lower levels. Entry-level positions that undocumented immigrants often take, in industries like construction and home care, function as compliments to the jobs of U.S.-born workers, meaning that fewer immigrants working in the U.S. also means fewer jobs and lower pay for U.S.-born workers.
Ongoing uncertainty about job security (including future job openings), rising prices for everyday items, and relatively high interest rates, is likely negatively impacting how households are choosing (or choosing not) to spend their money. Consumer spending is the main driver of GDP growth; forecasters have dialed back their expectations for consumer spending compared to the 2025 February forecast, and this contributes to their lower national economic growth projections. - Minnesota’s budget reserve is strengthened.
With the release of this forecast, $236 million was added to the state’s budget reserve, meaning that is “full” up to the current statutory target of $3.4 billion and remains strong for rainy days that might be on the horizon. The state’s cash flow account is unchanged at $350 million. The strength of these accounts is key to the state maintaining a solid AAA credit rating, which keeps the costs of the state borrowing money to fund infrastructure projects, also called bonding, lower. - Uncertainty is the first, middle, and last name of this forecast.
Some key sources of uncertainty:
a. Data limitations presented problems for economists across their roles in preparing the forecast. During last fall’s federal government shutdown, the federal Bureau of Labor Statistics, the Bureau of Economic Analysis, and the Census Bureau suspended collection and distribution of key economic indicators. This means that SPGMI and other forecasters – as well as the Federal Open Market Committee, which sets interest rates and is tasked with lowering inflation and keeping employment up – lost key data points for understanding the country’s economic health.
b. Federal policy uncertainty presents significant risks that the nation’s actual economic performance will be different from what is assumed in the forecast. It is harder to do reliable economic forecasting given that the Trump administration makes frequent shifts in federal policies on trade, tariffs, immigration, and government spending. Other sources of federal policy uncertainty include that, at the time the forecast was released, the federal government had not passed a complete budget for the next year, meaning a partial government shutdown was a real possibility (that briefly occurred) in 2026. And the state is still waiting for detailed information about how multiple major federal policy changes should be implemented.
c. Consumer spending and inflation are also sources of uncertainty that make it harder to develop reliable economic and budget predictions. The forecast notes, “consumers may be less likely to take on debt for big-ticket items without a clearer picture of future inflation.”
SPGMI assigned a 50 percent probability that their baseline economic projections used to create the state’s November forecast were correct. They also assigned a 30 percent probability to their more optimistic scenario in which lower tariffs slow down price increases and the Federal Reserve lowers interest rates to a larger degree than in the baseline scenario, and a 20 percent probability to their more pessimistic scenario in which higher tariffs and international trade retaliation puts even more upward pressure on prices and keeps interest rates higher.
The state’s Council of Economic Advisers, a group of independent economists that reviews the forecast’s assumptions and methodology, disagreed with SPGMI’s risk assessments. They believe that a more negative economic outcome is more likely than a more positive one.
The November Forecast provides an incomplete view of potential federal impacts
H.R. 1 upended the relationship between the states and federal government in delivering key public services, including affordable health care through Medicaid and food assistance through SNAP. Some of the new responsibilities that H.R. 1 transferred to the states include implementing new or expanded work reporting requirements for some folks to maintain their eligibility, new requirements for the state to pick up more of the costs of services, and limits on how states can fund health care for low-income people through Medicaid.
The forecast does not estimate all the impacts from these federal changes that would happen without state action to mitigate the harm, nor does it model what it would take to maintain current services in the new federal environment.
Regarding H.R. 1, the November forecast “only reflects impacts of changes where there is a pre-existing state obligation to provide a benefit,” and does not try to anticipate what changes state policymakers will make in order to conform with the new federal law. Forecasters were also hampered by the fact that they had not received detailed guidance from federal administrators that would allow them to model federal impacts with a reasonable level of confidence. (Readers looking for more details of how H.R. 1 impacts are handled in the forecast can find them on pages 74 and 75 of the November 2025 Budget and Economic Forecast.)
The timelines for states to meet these federal requirements are tight. For example, the federal government expects states to implement brand new Medicaid work reporting requirements by January 1, 2027. This will take significant attention and investment, especially if the goal is to retain health care for as many Minnesotans as possible.
What’s next
The November forecast is a tool for policymakers and the public to understand the state’s current and future budget and economic landscape. This forecast and the updated one that will be released later in February provide critical but incomplete information that will inform the governor and legislators as they act to respond to sweeping federal changes and their impact on the state’s budget, economy, and people.
As they do so, we call on state policymakers to:
- Take bold action to prioritize and protect Minnesotans’ health and economic well-being;
- Ensure Minnesotans can access health care, food support, and other public services, regardless of their immigration status or other identities or circumstances beyond their control; and
- Raise revenues, especially from those with the most resources, in order to replace lost federal funding, protect crucial services, and meet Minnesotans’ needs.
The state needs to step up for Minnesotans that the federal government would leave behind.