Recession alert? California is expected to have a $25 billion budget deficit next year

SACRAMENTO, Calif. — California will likely run a $25 billion budget deficit next year, state officials said Wednesday, ending a streak of historic surpluses and acting as a warning to other states to a possible recession.

Democratic-controlled California taxes the wealthy more than other states, meaning most of its drop in income is because the wealthiest aren’t making as much money as they used to. This is why California is often one of the first states to have budget problems when the economy begins to falter.

The S&P 500 SPX,
-0.83%,
a key indicator of the health of the stock market that fuels the incomes of the super-rich, has fallen more than 17% since its peak in January. State revenues are now $41 billion below expectations, according to an outlook released Wednesday by the Office of the Nonpartisan Legislative Analyst. The estimated deficit is lower because some of these revenue losses have been offset by lower spending in other parts of the budget.

The shortfall won’t jeopardize some of California’s major government service expansions, including free kindergarten for 4-year-olds and free health care for low-income immigrants living in the country without legal permission.

But it will force painful spending decisions, Democratic Gov. Gavin Newsom’s administration said.

“While we’re actually better prepared, that doesn’t mean decisions to close the fiscal gap ahead won’t be difficult, particularly if the economic conditions that have slowed the economy continue or worsen,” the California department said. Finance spokesman HD Palmer said.

Despite the bleak outlook, California is better positioned to weather an economic downturn than it has been in the past. The state has $37.2 billion stored in its various savings accounts. And it has plenty of cash available to meet its obligations this year.

“It’s not negligible, but it’s also manageable,” legislative analyst Gabriel Petek said of the deficit. “We don’t see this as a budget crisis.”

California earnings are notorious for volatility, rising and falling quickly with the vagaries of the stock market. Just two years ago, state officials projected a $54 billion shortfall from the pandemic — a shortfall that never happened as the economy remained strong.

But this latest deficit forecast is more likely to hold. Rampant inflation has made everything more expensive. The Federal Reserve tried to contain inflation by raising a key rate. A higher interest rate makes it more expensive to borrow money, which ultimately makes people spend less. Although this would control price increases, it would also reduce the demand for goods and services. This leads to layoffs, which means people pay less tax.

“The odds that the Federal Reserve can bring inflation under control without causing a recession are slim,” the AJO said in its report.

Although California’s employment remains strong — the unemployment rate of 3.9% for September is the lowest since 1976 — the high-wage tech industry has been rocked by a series of recent job cuts. Facebook’s parent company, Meta, announced last week that it would lay off 11,000 people, or 13% of its workforce.

The report came as no surprise to Republicans, who said they had been warning about California’s massive increase in public spending for years, with Republican Assemblyman Vince Fong calling it ‘unsustainable’. .

“Today’s report is another wake-up call to these warnings. We need to refocus on fiscal responsibility,” said Fong, deputy chairman of the Assembly Budget Committee.

Nor was Democratic Gov. Gavin Newsom’s administration surprised, calling the $25 billion deficit estimate “realistic and reasonable.”

“The good news is that as we prepare to close a budget deficit, the state is in its best position to handle a downturn, having built up strong reserves and focusing on one-time commitments,” Palmer said. , from the Ministry of Finance. spokesperson.

California lawmakers could potentially cover the entire deficit with money he has in his savings accounts, but the Office of the Legislative Analyst has warned them not to. Their outlook projects deficits not just for this year, but for the next three years – although the size of the deficit is shrinking each year.

Instead, the Office of the Legislative Analyst said lawmakers should delay some of the $75 billion in one-time spending they approved over the past two years. As an example, they cited a $500 million program to clean up homeless encampments across the state.

“It’s a really good example of the kind of break we had in mind,” Petek said.

Palmer said the Newsom administration would begin making budget decisions next month. A change in statewide homelessness funding seems unlikely, given Newsom’s commitment to addressing the issue. Newsom suspended $1 billion in homelessness spending earlier this month, but the move was unrelated to falling revenue.

Toni Atkins, acting Democratic president of the California Senate, said she was confident the state could pass a budget this year “without continued cuts to schools and other basic programs or taxing middle-class families.” .

Democratic House Speaker Anthony Rendon said lawmakers “can and will protect the progress of budgets over the past few years.”

“In particular, the Assembly will protect historic funding gains for California schools, as districts must continue to invest in staff retention and recruitment to help children thrive and recover from the pandemic,” said Surrender.

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