California is expected to run a $25 billion deficit

Sonora, California — California could face a $25 billion deficit next year, which would lead to some painful spending decisions.

It’s the fiscal outlook forecast today by the state’s bipartisan Legislative Analyst Office (LAO) that usually signals other states a warning of a possible recession. California’s revenue has been growing steadily over the past decade, including this year’s $72.4 billion surplus, but tax receipts have slowed significantly this year, with revenue falling $41 billion below expectations, according to the LAO lie. The bureau points to a drop in revenue as the very wealthy aren’t making as much money as they used to, and the roller coaster stock market 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.

Other key factors are inflation and higher interest rates, which make borrowing more expensive and cause people to spend less. That could lead to layoffs and lower taxes.

“The longer inflation persists and the more the Federal Reserve raises interest rates in response, the greater the risk to the economy,” the LAO said. “The odds that the Federal Reserve can tame inflation without triggering a recession are slim.”

The Republican response to this new prediction came from vice chairman of the convention’s budget committee, Rep. Vince Fong (R-Central Valley). Noting that leaders need to be fiscally cautious, he said, “As the ruling party continues to issue and expand government programs without accountability, I have repeatedly warned that California’s budget is on an unsustainable path. Today’s report is another wake-up call to those warnings. We need to refocus on fiscal responsibility.”

Currently, employment in California remains strong, with September’s unemployment rate at 3.9%, the lowest since 1976. LAO officials added that California is in a much better position to weather a potential recession than it has been in the past, as the state has more than $37.2 billion stored in its various savings accounts. These revenues have enabled an expansion of government services, including providing a free 4-year kindergarten for all and paying for health care for low-income immigrants living in the country without a legal permit. The Legislative Analyst’s Office has not recommended that lawmakers cancel current spending on these programs. Instead, it’s asking lawmakers to withdraw some planned one-off spending increases this year, adding, “To address the budget issue for the coming year, these cases could offer lawmakers areas for pause, delay or reassessment.”

Find the full LAO Financial Outlook Report here.