California officials announced Wednesday that a budget deficit is likely to be $25 billion next year, ending a string of historic surpluses and serving as a warning to other states about a potential recession.
The deficit is likely to lead to some painful spending decisions in the nation’s most populous state. But it likely won’t affect the state’s largest expansions in government services — including free kindergarten for 4-year-olds and free health care for low-income immigrants living in the country without legal leave.
Revenue has increased steadily in California over the past decade. This year, a surplus of $72.4 billion pushed total government spending above $300 billion for the first time.
But tax collections have slowed significantly since Democratic Gov. Gavin Newsom signed that bill into law. This year, revenue was $41 billion below expectations, according to the outlook Published Wednesday by the Office of the Neutral Legislative Analyst.
Democratic-controlled California taxes the rich more than other states, and most of the drop in revenue is due to the rich not making as much money as they used to. The S&P 500, a leading indicator of stock market health that drives the incomes of the wealthy, has fallen more than 17% since its peak in January.
“Our revenue estimates represent the weakest performance the state has seen since the Great Recession,” the LAO report said.
The future looks bleak. High inflation made everything more expensive. The Federal Reserve tried to rein in inflation by raising the key interest rate. A higher interest rate makes it more expensive to borrow money, which ultimately causes people to spend less. Although this would control the rise in prices, it also reduces the demand for goods and services. This leads to layoffs, which means people pay less taxes.
“The longer inflation persists and the more the Federal Reserve raises interest rates in response, the greater the risks to the economy,” the LAO said. “The chances of the Fed taming inflation without causing a recession are narrow.”
Although employment in California remains strong, 3.9% unemployment rate for the month of September Tied to its lowest level since 1976 — the high-paying tech industry has been thrown into turmoil by a series of recent job cuts. Meta, Facebook’s parent company, announced last week that it would Lay off 11,000 peopleor 13% of its workforce.
California’s surging revenues have fueled a major expansion of government services, including making kindergarten for 4-year-olds free for all and paying for health care for low-income immigrants who live in the country without legal authorization.
But ca in Much better situation To overcome a potential recession than in the past. The state has more than $37.2 billion stored in various savings accounts. And the state has plenty of funds available to meet its obligations this year.
The legislative analyst’s office did not recommend that lawmakers eliminate running spending on things like preschool or expanding health care. Instead, they urged lawmakers to roll back some of the planned one-time spending increases this year. Lawmakers have approved $75 billion in one-time spending over the past two years.
“To address the budget problem for next year, these issues may provide the legislature with areas to pause, delay, or reassess,” the LAO wrote.
Democratic Caucus Chairman Anthony Rendon said Democrats have worked extensively in Newsom to increase savings accounts in the state over the past few years.
“We can and will protect the progress made in recent years’ budgets,” Rendon said. “In particular, the association will protect funding gains for California’s historic schools, as districts must continue to invest in retaining and hiring staff to help children progress and recover from the pandemic.”