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Cutting spending worse for economy than raising taxes

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The state's updated economic forecast was released last week. Since November, the current budget deficit has improved slightly by about $209 million, to $994 million. However, the long-term outlook has worsened. The 2012-13 deficit now hovers between $6 billion and $8 billion, depending on whether inflation and other factors are counted.

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Minnesota State Economist Tom Stinson testified before the Taxes Committee this week and talked about these numbers, and he gave members good insight on how to approach solutions that address the state's ongoing budget problems. He said that based on a macroeconomics formula, "Cutting government spending is more detrimental to the economy than raising taxes."

Stinson was addressing Sen. Steve Dille's question about jobs, acknowledging that cutting government spending ultimately results in job cuts. He said this is why cutting spending actually is seen as a lesser alternative to balancing budgets: When spending is reduced, the sectors that are cut immediately reduce their economic activity and often cut jobs, creating a vast impact on the state's overall economy. Tax increases are more easily absorbed and have typically created new, ongoing revenue streams that support new economic activity in the future.

As a state facing multi-billion dollar budget deficits far into the future, it's important to take heed in this advice. While most lawmakers understand revenue increases carry their own benefits and consequences and must be carefully considered, Stinson's comments are a reminder of how they can also play an important role in economic recovery.

His words also are an important indicator of why the state's budget solution must be balanced. We cannot move forward with a cuts-only plan because cuts alone will not solve our problems; in fact, that approach likely will create bigger problems. The state also needs new revenue to help spur new economic activity. The Senate will be spending considerable time talking about revenue options to help balance the state's long-term budget as this session continues.

The immediate, $994 million budget deficit remains our top priority of this session, however. The good news in the economic forecast is that the deficit is better than originally anticipated in November, mostly because of spending cuts the state has been able to implement since last fall. The economy is beginning to show modest signs of improvement as well, which also has contributed to the improved forecast. There is definitely hope that the national and state economies are beginning to recover. If the state can create a balanced, responsible budget, we will hopefully be in a position to take advantage of that economic recovery.

Additional government reforms and spending reductions will be a major part of the solution to balance the immediate budget deficit before session ends. Senate committees are finalizing initial spending-reduction proposals this week, and we hope to vote on those cuts in the next several days. The bonding bill still is outstanding, as is a jobs package that creates incentives and support for new and expanding businesses in Minnesota. Those bills will be a big factor in creating a healthy economic environment that can help address the larger budget problems facing the state in the next two years.

Rod Skoe, DFL-Clearbrook, is a member of the Minnesota Senate and vice chairman of the Senate Taxes Committee.

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