California officials announced Wednesday that the state will likely suffer a deficit of $25 billion next year. This is a significant change from previous surpluses. It also serves as a warning to other states regarding a possible recession.
Democratic-controlled California taxes rich people more than other states, meaning most of its drop in revenue is because the uber-wealthy aren’t making as much money as they used to. California is often the first state to experience budget problems as the economy falters.
Since its January peak, the S&P 500 has dropped more than 17%. According to Wednesday’s outlook by the nonpartisan Legislative Analyst’s Office, state revenues are currently $41 billion lower than expected. Because some revenue losses were offset with lower spending in other areas of the budget, the deficit estimate is lower.
California’s government’s major expansions will not be affected by the shortfall. This includes free kindergarten for 4-year-olds and free healthcare for low-income immigrants who have been living in the country illegally.
However, it will require some difficult spending decisions to be made by Democratic Gov. Gavin Newsom’s administration stated.
H.D. Palmer, spokesperson for the California Department of Finance, said that while we are better prepared, it doesn’t mean the decisions to close this budget gap won’t prove difficult. This is especially true if the economic conditions which have slowed the Economy continue or get worse. Palmer stated.
California, despite its gloomy outlook is better equipped to weather economic downturns than in the past. The state has $37.2 million in savings accounts. It also has ample cash to pay its obligations for this year.
Gabriel Petek, Legislative Analyst, said that the deficit is not insignificant but also manageable. “We don’t consider this a budget crise.”
California’s revenues are known for being volatile, with their fluctuating peak and lows changing quickly according to the stock market. Two years ago, officials in California predicted that the pandemic would lead to a $54 billion deficit. However, this shortfall was never realized because the economy remained strong.
This latest deficit prediction seems more likely to be true. Everything has become more expensive due to the soaring inflation. The Federal Reserve tried to control inflation by increasing the key interest rate. Higher interest rates make it more costly to borrow money. This eventually leads to people spending less. While this would reduce price rises, it also decreases demand for goods or services. This results in layoffs which means that people pay less tax.
According to the LAO’s report, “The odds that the Federal Reserve can tame inflation without inducing recession are slim.”
While California’s employment is strong, the September unemployment rate of 3.9% was the lowest since 1976. However, the tech industry has seen a string of job cuts in recent years. Last week, Facebook parent Meta announced that it would be laying off 11,000 workers or 13%.
It was not surprising that Republicans found the report to be alarming. They have warned against California’s huge increase in public spending since years. Vince Fong, a Republican Assembly member, called it “unsustainable.”
“Today’s Report is another reminder of those warnings. Fong, vice-chair of the Assembly Budget Committee, stated that we must refocus our fiscal responsibility.
Democratic Governor Gavin Newsom’s administration was not surprised at the $25 billion deficit estimate, calling it “realistic” and “reasonable”.
“The good news, however, is that the state, as we prepare for closing a budget deficit, is in its best-ever place to manage a downturn by having built strong reserve and focusing only on one-time obligations,” Palmer, a spokesperson for the Department of Finance, stated.
California legislators could cover the entire deficit using the money in its savings accounts. But the Legislative Analyst’s Office cautioned them against that. Their outlook for the future predicts deficits, not only for this year but also the next three years. However, the size of each year’s deficit decreases.
The Legislative Analyst’s Office suggests that lawmakers delay some of the $75 Billion in one-time spending they approved during the past two years. They cited as an example a $500 million program for cleaning up homeless camps across the state.
Petek stated, “That’s an excellent example of the type pause we were trying to achieve.”
Palmer stated that the Newsom administration would begin to make budget decisions next month. Given Newsom’s resolve to address the problem, it seems unlikely that there will be any change in state homelessness funding. Newsom did suspend $1 billion of homelessness spending earlier in the month, but this was not related to sinking revenue.
Toni Atkins is the Democratic pro tempore president of the California Senate. She said that she was confident that the state will pass a budget without continuing cuts to schools, other core programs, or taxing middle-class families.
Anthony Rendon, Democratic Assembly Speaker, stated that lawmakers can and will “protect the progress of budgets in recent years.”
Rendon stated that the Assembly would protect California’s historic school funding gains. However, districts must continue investing in staff retention and recruitment to help children advance and recover from this pandemic.