“Last year was really fun being in Sacramento,” Christopher Thornberg, a forecasting expert who advised the state comptroller’s and treasurer’s offices, said in an interview. “Everyone was trying to figure out how much money they could spend. This year, not so much.
Warning signs flashed During months. Tax revenue has been lower than projected every month this fiscal year, and layoffs at big-name tech companies like Lyft, Meta and Twitter have heightened economic pessimism across the state. Several economists have said that contractions in technology, while unlikely to have an outsized effect on California’s economy, it could signal an impending downturn.
On Wednesday, Democratic lawmakers and aides sought to downplay the problem highlighted by the Office of the Legislative Analyst, pointing to the state’s deep reservoir of reserves and pledging to protect programs from cuts.
“We are confident that we can protect our progress and craft a state budget without continued cuts to schools and other basic programs or taxing middle-class families,” said pro Tempore Senate Speaker Toni G. Atkins (D-San Diego) in a statement. Assembly Budget Advisor Jason Sisney tweeted that the 3.6% deficit over three years is “quite manageable in historical terms”.
But the projected budget shortfall is worrisome to advocates like David Weiskopf, senior policy adviser for environmental issues at NextGen Policy. Historically, climate spending has been the first to disappear in an economic downturn, Weiskopf said. And much of the $54 billion the state has invested in funding climate projects, such as electric vehicle charging stations, was one-time money.
“Relying on excess dollars and one-time spending is great when there’s a budget surplus and that one-time budget is available, but it’s not going to be enough in terms of strategy on how California spends its budget, if we really want to achieve our short-term or long-term climate goals,” he said.
Analysts stopped short of projecting a “sharp recession” – the projections do not reflect a recession scenario – but noted that the risk of a recession is heightened by rising interest rates and persistent inflation.
“The odds that the Federal Reserve can bring inflation under control without triggering a recession are slim,” the analysts wrote.
They also recommended cutting spending rather than dipping into reserves to balance the budget — “something we’re going to consider,” Assembly Budget Chairman Phil Ting (D-San Francisco) said in an interview. Wednesday.
“But at the end of the day,” he said, “if we feel like we’re going into a tougher economic climate, that’s what the reserve is for.”
Economists have warned for months of a slowdown, but said record unemployment, the Biden administration’s infrastructure bill and a possible pause in interest rates should help the economy to bounce back.
“If you’re talking about 2023, we expect the US economy to slow down,” Jerry Nickelsburg, an analyst with UCLA’s Anderson Forecast, said in an interview last week. “We could have a mild recession. We don’t expect that to continue into 2024.”
Newsom’s administration has warned of declining revenue since at least May, and the governor launched a well-documented veto streak over the summer, rejecting the legislation at its ongoing costs to the state. Still, the start of his second term could prove more painful than the end of his first, given LAO’s prospects. The state is required to pass a balanced budget every June.
HD Palmer, a spokesman for Newsom’s Department of Finance, called the deficit projections “realistic” in an email and said “the state is in its best position to manage a downturn, having built up strong reserves and focusing on one-time spending”. commitments. »
But he acknowledged that “that does not mean that decisions to close the budget gap ahead will not be difficult”.
The state’s Republican minority pointed to the report as further evidence of overspending in a Democratic-dominated state. Assembly Deputy Budget Chairman Vince Fong (R-Bakersfield) called it “a new wake-up call” in a statement slamming Democrats for continuing to “expand government programs without accountability.”
“We need to refocus on fiscal responsibility,” Fong said.
LAO projects the deficit will shrink to $8 billion by the 2026-2027 fiscal year as revenues recover.