SACRAMENTO — California is expected to run a $25 billion budget deficit next year, state officials announced Wednesday, ending a string of historic surpluses and warning other states of a possible recession.
The deficit will likely lead to some painful spending decisions in the nation’s most populous state. But it probably won’t affect the state’s biggest 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 permission.
Revenue in California has steadily increased over the past decade. This year, a $72.4 billion surplus pushed total government spending above $300 billion for the first time.
But tax collections have slowed significantly since Democratic Gov. Gavin Newsom enacted that budget. Revenue this year will come in $41 billion short of expectations, according to a forecast released Wednesday by the bipartisan Legislative Analyst’s Office.
Democratic-controlled California taxes rich people more than other states, and most of the drop in income is because the super-rich aren’t making as much money as they used to. The S&P 500, a key indicator of stock market health that drives incomes for the super-rich, has fallen more than 17% from 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. Rising inflation has made everything more expensive. The Federal Reserve has attempted to curb inflation by raising interest rates. A higher interest rate makes it more expensive to borrow money, which ultimately causes people to spend less. While this would control price increases, it also reduces demand for goods and services. That leads to layoffs, which means people pay less in 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.”
Although California employment remains strong — September’s unemployment rate of 3.9% is the lowest since 1976 — the high-wage tech industry has been rocked by a spate of recent job cuts. Facebook parent Meta announced last week that it would lay off 11,000 employees, or 13% of its workforce.
Soaring California revenues have fueled a major expansion of government services, including providing free 4-year kindergarten for all and paying for health care for low-income immigrants living in the country without a legal permit.
But California is in a much better position to weather a potential recession than it has been in the past. The state has more than $37.2 billion saved in its various savings accounts. And the state has plenty of money this year to meet its obligations.
The Legislative Analyst’s Office did not recommend that lawmakers cut current spending on things like kindergartens or expanding health care. Instead, they have asked lawmakers to withdraw some planned one-off increases in spending this year. Lawmakers approved $75 billion in one-time spending over the past two years.
“To address the budget problem for the coming year, these cases could provide areas for the Legislature to pause, delay or reassess,” the LAO wrote.
Democratic Assembly Speaker Anthony Rendon said Democrats have worked with Newsom to increase the state’s savings accounts for the past several years.
“We can and will protect the progress of budgets over the last few years,” Rendon said. “In particular, the assembly will protect California’s historic school funding gains as districts must continue to invest in retaining and recruiting staff to help children thrive and recover from the pandemic.”