Minnesotans and the nation are facing one of the worst recessions in decades. And that means two things for government: falling revenues and higher spending.

Revenues go down for obvious reasons. Wages, corporate profits, and sales all go down, and with them the taxes the government collects on them.

And spending goes up because the government safety net, especially health care, expands to cover more and more people as their economic situation deteriorates. Add to the larger number of people needing assistance the high growth rate of health care expenditures and you have a recipe for much higher spending.

Taken together these forces are projected to increase the already projected $1 billion budget deficit for next year (the legislature’s budget for this year left that big a hole for the next) to a staggering $4.8 billion. Add to that the more than $400 million hole that has opened up for the current budget and the State Legislature will be faced with closing a $5.2 billion gap in the State’s finances when it returns in January.

By any measure, those numbers are scary. State spending for the next budget cycle (Minnesota budgets for 2 years at a time) is projected to be $36.7 billion, making the deficit equal to 14% of the budget.  The size of the shortfall is equivalent to over $2000 for every Minnesota taxpayer.

Minnesota faced deficits about that large in 2003, but with a major difference: after years of flush years in the late 90’s there was a lot of money in various State accounts to tap in order to close the budget gap.

This time the cupboards are bare. There simply is no more money to tap into, leaving lawmakers with only two places to go in order to solve the problem: cutting spending and raising taxes.

So what does that mean for the average Minnesotan?

Well, no matter who wins the upcoming budget battle next year, projected State spending will take a hit. Even Democrats admit that raising taxes won’t be able to plug the huge hole in the budget. For instance, raising the top tier of the income tax from 7.8% to 8.8% would only generate about $250 million.

Raising taxes on the “rich” just isn’t going to cut it with a deficit this large. Spending cuts—and pretty big ones at that—are going to have to make up the bulk of the budget solution.

Governor Pawlenty has ruled out tax increases as part of the solution, although he left some wiggle room for compromise by allowing that some “non-tax” revenues might be part of the solution. Expect to see an increase in the “health impact fee” on tobacco, for instance. Expect the Democrats to push some form of sales tax increase or expansion of the sales tax to other items.

So what programs might be facing the budget axe? With education taking up the lion’s share of the budget, it is hard to imagine a solution that doesn’t include some cuts there. K-12 alone makes up 40% of the budget, and if you add in higher ed spending fully 50% of State spending goes to education.

Health care takes up another 28% of the budget, and is by far the fastest-growing part of the budget. It was projected to grow by over 21% in the next 2 years, and will certainly take the brunt of the cuts. Health care spending has been going up by double digits for years, making it both the fastest growing part of the budget and the ripest area for spending cuts.

Conservative legislators, while seemingly marginalized by their small numbers this year, may just have a disproportionate impact on the eventual budget solution. State Senator Geoff Michel and State Rep. Laura Brod have proposed privatizing some State Government functions, such as running the airport and the lottery. Leasing the airport alone could raise billions of dollars (Chicago leased Midway airport for $2.5 billion and most airports in Europe are run by private operators).

Since 1960 in only three years has Minnesota’s State budget actually shrunk (1983, 1986 and 2004), while in 18 of those years the budget increased by double digits in a single year. With belts being tightened by families across the State it makes sense that next year’s budget should be the fourth in 40 years to actually decline.