California’s Fiscal Surpluses Lasted Years. The Deficit Might Reach $25 Billion

Despite two consecutive record budget surpluses, researchers in California predicted on Wednesday that Governor Gavin Newsom and state lawmakers will face a $25 billion budget shortfall in 2020.

A new assessment from the state’s independent Legislative Analyst’s Office predicts yearly fiscal shortfalls between $17 billion and $8 billion over the succeeding three years, once the initial shortfall is covered.

California's Fiscal Surpluses Lasted Years. The Deficit Might Reach $25 Billion
California’s Fiscal Surpluses Lasted Years. The Deficit Might Reach $25 Billion

If this trend continues until June, when the next state budget must be enacted, Newsom and lawmakers may be forced to make some difficult choices. There are a number of options to consider, such as how far to delve into state reserves, where to potentially reduce expenditure, and which projects and programs to halt. Fortunately, the state has been diligently saving billions of dollars in recent years to prepare for just such an emergency.

A slowdown in state income growth relative to state expenditure seems to be the root cause of the slump, as shown by the research. If these projections for revenue are correct, California’s economy will have performed worse than at any time since the Great Recession of 2007–2009.

Negative forecasts come after almost a decade of expansion, which includes the COVID-19 pandemic. The state’s coffers were bulging after a record year of income, sales, and corporate tax revenue.

High interest rates and worldwide stock market difficulties are only two of the economic challenges the state now confronts. The governor and legislators may use the estimate issued on Wednesday as a starting point for their budget plans for the next fiscal year.

Signs of Economic Peril

The foresight backs up prior concerns. One was voiced in September, when Governor Gavin Newsom highlighted fiscal restraint in his veto messages. The state Department of Finance then reported last month that cash receipts into the general fund were much lower than expected.

Some of California’s computer companies have recently announced layoffs in the double digits, citing excessive recruiting spurred by the recent pandemic, a slowdown in online business, and a weaker economy as reasons.

Given the disproportionate weight that taxes from the state’s richest inhabitants have on the state’s budget, California’s economy is particularly vulnerable to fluctuations in the stock market. According to data provided by the California Franchise Tax Board, the top one percent of earners in the state account for approximately half of all income taxes collected in California.

State Department of Finance spokesman H.D. Palmer described the analyst’s prediction as “a fair and reasonable appraisal of the work that remains ahead” on Wednesday.

The state is well-equipped to weather the economic slump, but Governor Palmer warned that “that doesn’t imply that the choices to address the approaching budget shortfall won’t be tough — especially if the economic circumstances that have slowed the economy remain, or grow worse.”

Newsom has, in recent years, refrained from making many of these controversial budgetary calls. As the state of California prepares for a possible economic downturn in 2020 due to a global pandemic, Governor Newsom has ordered statewide salary cutbacks of up to 9.23%. However, the state’s finances turned out better than expected, and the governor was spared the need of making more cutbacks.

Newsom and legislative leaders have been hesitant to use the state’s unexpected windfall of billions of dollars to fund continuing initiatives out of concern about a potential economic slump. They have instead attempted to utilize the surpluses for one-time expenditures like inflation relief checks and infrastructure development.

Nonetheless, Newsom and the Legislature have allocated resources to maintain the state’s status quo goals. Among them include increasing access to early childhood education and Medi-Cal health care for undocumented Californians, as well as creating new programs for the homeless and housing them.


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