Democratic legislative leaders and Gov. Tim Walz accomplished a lot this spring, including legalizing marijuana, establishing a paid family leave fund, and aiming for carbon-free energy by 2040. However, they also significantly increased state government spending, which grew at a faster rate than the state economy.
While some level of government growth is natural, the size of Minnesota’s government relative to its economic growth saw the largest increase since the 1960s. Although Democratic leaders have claimed that Minnesota can handle the higher government spending, it is important to consider the state’s current economic position. The population is growing more slowly than ever before, the workforce is smaller than it was in 2020, and the state’s economy is only growing at a rate of around 3% per year, which is much slower than the 1970s.
Minnesota is one of the first states in the country to face the question of whether it can stay wealthy despite a lack of growth. This situation puts the state in new economic territory, and few economists study slow-growth economies, but it is a place to watch. While policymakers have room to make mistakes, the decision to significantly increase government spending affects private sector spending and investment, which could lead to new economic challenges.
Despite the immense increase in state budget expenditure, Democrats have only responded with generalities when questioned by Republicans and reporters. They posit that larger government spending is due to the law of large numbers and that it’s beneficial for government to spend more in times of economic slowdown. However, they have yet to answer important questions or make a coherent argument.
As of the publication deadline, spending in the government’s two-year budget cycle that starts on July 1 is expected to increase by 20%-30% compared to the previous two years. This means that state government will grow seven to ten times faster than Minnesota’s overall economic growth, which averaged at 3% over the past three years. The last time state GDP grew more than 20% was in the 1978-79 cycle when it rose by 26%. It is worth noting that in the 1970s, 3M was twice the size of Minnesota’s government in terms of sales, compared to the current figure of 1.5 times larger.