3 takeaways from the IFO’s new Pennsylvania budget projections

Roughly a week after Gov. Josh Shapiro outlined his budget proposal for the next fiscal year, the state’s Independent Fiscal Office has released new fiscal projections for Pennsylvania that show a growing structural deficit and a potential depletion of the state’s Rainy Day Fund, which contains budgetary reserves for emergency purposes. 

Shapiro’s $51.5 billion budget proposal includes the legalization of recreational cannabis, a tax on currently unregulated skill gaming machines and several changes to the state’s corporate tax laws, as well as an expedited phasing out of the corporate tax cut and closing a loophole that critics say allows companies to dodge taxes. 

Below, City & State examines three major findings from the IFO’s most recent budget brief on Pennsylvania’s fiscal landscape.

IFO updates 2025-26 budget deficit projection from $4.5B to $6BBefore this week, the IFO’s most recent projections on Pennsylvania’s structural budget deficit – a term that describes when the state is spending more money than it is bringing in – showed that deficit reaching $4.467 billion in the 2025-26 fiscal year. However, the IFO’s new budget brief provides an updated figure that factors in new projections in Shapiro’s executive budget proposal. 

The IFO projects that the 2025-26 budget deficit will now hit $6.01 billion, which the office says is “largely due to updated projections for Department of Human Services (DHS) programs” included in Shapiro’s budget plan. Under the IFO’s projection, the state’s budget deficit could grow to as much as $7.61 billion by the 2027-28 fiscal year. 

IFO predicts depletion of state’s Rainy Day Fund

With the state in need of cash, the IFO estimates that it will be forced to deplete its $2.9 billion General Fund surplus by the end of Fiscal Year 2024-25. 

The office’s baseline executive budget projection, which removes proposed revenue and spending initiatives from Shapiro’s budget, suggests that the state’s Rainy Day Fund could be depleted early on in the 2027-28 fiscal year if state lawmakers decide to use that money to balance the budget.

Another projection, which uses executive budget spending levels and IFO spending growth rates, estimates that the state could exhaust the Rainy Day Fund during the 2026-27 fiscal year. 

Skill games, cannabis and corporate tax changes could reduce deficit

The IFO’s baseline executive budget projection, which uses data from Shapiro’s executive budget, also shows that several of the governor’s revenue-generating mechanisms – like legalizing recreational cannabis, taxing and regulating skill-based gaming machines, and making changes to the state’s corporate tax structure – could reduce the size of the state’s budget deficit. 

Each policy change would require approval from the General Assembly, but if lawmakers ultimately choose to approve them, according to IFO projections, the state’s budget deficit could shrink from a projected $4.43 billion in the 2027-28 fiscal year to $2.1 billion.