Minnesota continues to expect budget surpluses in the short term but a significant shortfall in the future, and the state budget situation has become more challenging, according to the state’s February 2025 Budget and Economic Forecast released on March 6. The forecast’s figures largely do not reflect the likely harm to public services and the state budget from potential federal actions.
The February forecast gives policymakers, advocates, and the public an updated look at the budget challenges Minnesota is facing moving into the heart of state budget negotiation season. Those challenges include:
- Minnesota policymakers will need to pass a balanced budget in 2025 that meets the needs of Minnesotans in a more difficult budget environment.
- In the longer term, the state is not projected to raise enough revenues to sustainably fund its commitments to the public services Minnesotans count on.
- State policymakers need to prepare to respond to likely substantial federal budget cuts that further threaten Minnesotans’ health care, food security, and economic well-being.
In the near term, Minnesota is showing projected surpluses for the current and upcoming budget cycles, but a substantial budget shortfall in the future. All of these budget figures have worsened compared to the November 2024 Budget Forecast, with higher expectations for inflation being a major driver.
| Budget Cycle | Forecasted Balance |
| FY 2024-25 | $3.7 billion |
| FY 2026-27 | $456 million |
| FY 2028-29 | -$6.0 billion |
The state’s budget and economic forecasts estimate expected revenues and spending in the state’s general fund if current budget and tax decisions are left unchanged. The spending figures include what it would take for existing services to keep up with inflation. The forecast also accounts for expected economic conditions.
The state’s budget forecast is based on existing law. That means that the severe damage to the state budget from likely upcoming federal tax and budget decisions are mostly not reflected in this forecast.
Key data from the February Budget Forecast
1. The current budget cycle (FY 2024-25) is projected to end with a $3.7 billion surplus.
The November forecast projected this surplus would be $10 million larger, a difference of less than a fraction of a percent. The projected general fund surplus is $451 million higher than estimated at the end of the 2024 Legislative Session, with higher revenues contributing to the improvement. The forecast assumes this $3.7 billion surplus will carry forward and fund public services in FY 2026-27.
2. A smaller surplus of $456 million is projected for the upcoming FY 2026-27 budget cycle.
This surplus projection is $160 million less than in the November Budget Forecast, and includes an estimate of $1.1 billion for discretionary inflation.
“Discretionary inflation” is the amount of funding that would be needed for certain public services to keep up with inflation – specifically, those services that don’t have provisions in current law to increase with inflation or changes in the number of people to be served. The discretionary inflation amount does not automatically go toward inflationary increases; policymakers must decide how to allocate those dollars and can use them for other priorities. Using the prior method of calculating state budget balances without discretionary inflation, the surplus would be $1.6 billion.
In FY 2026-27, general fund revenues are forecasted to be 4.5 percent higher than in FY 2024-25. Expectations for both individual income tax and sales tax revenues are higher than projected in November, and non-tax revenues are substantially lower.
General fund expenditures for FY 2026-27 are projected to be $3.2 billion lower than in FY 2024-25, a reduction of 4.5 percent. Projected expenditures for FY 2026-27 have continued to grow between this forecast and the previous forecast, and are projected to be 1.2 percent higher than estimated in November 2024. Higher expectations for inflation is a driver of change in the spending projections.
3. The forecast shows a nearly $6 billion deficit for FY 2028-29.
Minnesota is somewhat unusual among states in how many years our state budget forecasts cover. While this gives a better sense of long-term trends, these figures tend to be more uncertain because of the difficulty of accurately predicting this far into the future.
The February forecast projects a $6 billion deficit for FY 2028-29, $852 million larger than in the November forecast. Factors contributing to this deficit include that revenues are growing but spending is projected to grow faster. This figure includes an estimate for discretionary inflation of $2.5 billion.
4. The forecast’s underlying economic projections largely do not include the potential impact of federal economic policy changes.
The national economic growth predictions (as measured by U.S. GDP growth) that underlie this forecast are stronger in the 2024 and 2025 calendar years than in the November forecast, but then are expected to be worse throughout 2026 to 2029.
While GDP is the starting point of the forecast’s description of expected growth and the health of the economy, the forecast’s observations of inflation and the labor market are more evocative of the way most Minnesotans can expect to experience the economy.
Digging deeper into the forecast, the two main measures of inflation are either higher than in the November forecast or are no longer consistently improving toward the Federal Reserve’s goal of bringing inflation down to an annual rate of 2 percent. Consumers are anticipating the strain on their budgets that higher prices will bring; the Michigan index of consumer sentiment, a widely watched indicator of how Americans are feeling about the economy, fell steeply in February 2025.
Other data in the forecast suggest that a cooling labor market, with fewer jobs added by employers and fewer opportunities per job seeker, appears to be on the horizon. Employment growth is projected to be weaker, with current and projected job losses in manufacturing, professional and business services, financial services, retail trade, and wholesale trade. The share of workers facing long-term unemployment (unemployment lasting 27 weeks or longer) or what’s called “part-time employment for economic reasons” (a measure of workers who are working part time but would prefer full-time roles) are both increasing in Minnesota.
The economic projections that underlie the forecast include the anticipated impact of some past federal actions as well as some that are anticipated. These include some new tariffs and that policymakers will pass legislation to cut individual income taxes, including by extending provisions of the TCJA, cut the federal corporate tax rate, and address the debt ceiling. However, it does not include the impact of additional large layoffs of public employees that have occurred in the last month, or the potentially severe fallout of additional tariffs, whether implemented or simply threatened by the Trump administration.
While these projections for the economy should be taken seriously, the timing and limitations of what can be included in the forecast make them a less useful tool. The state’s economic forecaster (SPGMI) assigned a probability of 50 percent to their baseline projections. Already, some federal policy actions have gone beyond the assumptions included in their forecast scenarios.
Our takeaways about the budget decisions ahead
This February Budget Forecast serves as the foundation for negotiations as the Legislature and Governor Tim Walz seek to reach agreement on the next two-year budget (FY 2026-27). However, given the significant impact that federal tax and spending decisions could have on the state’s budget, they will need to use additional information to inform their decisions.
Policymakers will need to pass a balanced budget for FY 2026-27. While they do not need to balance the budget for FY 2028-29, Walz’s budget proposal as well as the recently released Senate and House budget targets all indicate that policymakers plan to take action to partially address the $6.0 billion projected shortfall.
Ahead, we are facing probable monumental federal changes that will harm Minnesotans and the state budget. Federal policymakers are moving budget plans that would cut Medicaid and SNAP and other elements of the safety net by hundreds of billions of dollars over ten years. These cuts in crucial services would pay for tax cuts that primarily benefit the wealthiest Americans and profitable corporations, and fund mass deportations of immigrants that will hurt the economy. Federal policymakers would likely shift responsibility for meeting the health and economic security needs of their residents to states while cutting the federal funding that states receive. But states cannot independently fully fund the public services their residents want and expect, especially during times of economic hardship.
The Trump administration’s policy choices have already sent shockwaves through the national economy, creating chaos, uncertainty, and financial loses for both markets and everyday folks. These will make everyday life harder for everyone who needs to do things like look for work, grocery shop for their family, or plan ahead for their business or retirement.
In their tax and budget decisions ahead, Minnesota policymakers must prioritize everyday Minnesotans and protecting the public services needed to make our state a place where everyone can thrive. Raising revenues should be part of the picture, in order to maintain transformational investments made in 2023 and protect Minnesotans from the harm of federal decisions.
Policymakers will need to determine what is the best use of the dollars available to them to improve the lives of Minnesotans and their families. They will need to determine whether to provide continued funding for ongoing needs that got temporary funding increases in the 2023 budget choices – such as affordable child care through Early Learning Scholarships – and which services will receive funding increases to keep up with inflationary pressures and which will not.
While the state’s budget reserve is $3.2 billion, it is not on its own a solution to our future budget shortfall or federal disruption. It is designed for short-term use to protect essential services in response to an unexpected economic downturn, for example. But it is not a tool for sustainable funding for essential services.
While these budget decisions are daunting, policymakers should construct a budget that protects Minnesotans’ health, well-being, and economic security in the face of harmful federal cuts.