Budget solutions unlikely to increase employment

Gov. Mark Dayton is set to release his plan to erase Minnesota's projected $6.2 billion budget deficit Tuesday, and he and the Republican-controlled Legislature are both expected to focus on creating jobs.

Given the size of the budget shortfall, however, any solution to the deficit is likely to painful. And economists say the available options -- cutting spending or raising taxes -- likely will cost jobs, not create them.

The problem with that is that no matter what path lawmakers settle on, the solution will hamper Minnesota's economic recovery, said David Wyss, chief economist for Standard and Poor's, a credit-rating and investment research firm.

"Most of government spending is employment, and if state and local governments cut spending that means they're going to be laying off teachers, they're going to be cutting back on Medicaid spending," Wyss said. "All of that means lost jobs. If you raise taxes it means the people in the state cut back on spending which is going to cost jobs too. So either way it is going to hurt."

That's going to hurt so much in Minnesota and the rest of the country that many economists agree fallout from state budget balancing poses the biggest threat to the still ailing economy.

"As the economy starts to heal and we're seeing the private sector come back, the major headwind we face is the government sector," said Diane Swonk, chief economist at Mesirow Financial, a financial services firm.

Swonk said as states right their books -- this time without billions in federal stimulus money to help them -- the results will undermine federal efforts to revive the economy.

"Even though we're seen tax cuts extended and expanded at the federal level, fiscal stimulus at the federal level is playing out and in fact we're seeing it move the other direction at the state and local level," she said.

Some other states are in even worse shape than Minnesota.

According to the Center on Budget and Policy Priorities California faces a $45 billion shortfall. Texas has a $27 billion deficit. The Center's analysis projects 2012 will be states' most difficult budget year on record with 44 states and the District of Columbia projecting budget shortfalls totaling $125 billion for the next fiscal year.

Wyss, of from Standard and Poor's, said a few states -- Michigan and Indiana among them -- got ahead of the downturn and made spending and tax adjustment that have kept their shortfalls relatively manageable.

He and Swonk agree that the best solution to states' budget problems lies in compromise.

"You can't do it from just one side," Wyss said. "I don't think it's either fair or particularly efficient to try to do it all by either cutting spending or by raising taxes."

At a community center in Inver Grove Heights, Dave Swanson said combining tax increases with spending cuts is common sense. He thinks if lawmakers are unable to move beyond ideology toward compromise many of them will be looking for something else to do after the next election.

"They don't have a choice. They're going to have to understand that," Swanson said. "You know, 'I'm a Republican, I'm a Democrat, I'm an independent,' whatever it is it needs to be put off to the side. This is for the state, you know, the people we represent. We've got to fix this."

Even though "fixing" the budget will likely hurt Minnesota's economy even more at least in the short term.