California has a huge $68 billion budget gap, which was announced by state officials Thursday. This means that Democratic Gov. Gavin Newsom has to make tough decisions as he raises awareness of a possible presidential run in 2024.
The deficit is the biggest dollar-value deficit in the history of the state. It threatens to cut funding for Newsom’s most important achievements, like free school meals and health care for low-income newcomers. It also makes it harder for him to deliver on his big progressive goals.
“We warned that spending would make deficits bigger.”
The bad news about the budget comes just over a month into Newsom’s last term as governor, at a time when he is becoming seen as a contrast to Florida Gov. Ron DeSantis by Democrats across the country. It could hurt his attempts to push controversial policies on homelessness, climate change, access to abortion, and other issues that have kept California at the center of the ideological fights that define both parties.
Democratic leaders in the legislature promised to take things slowly. Assembly Speaker Anthony Rendon said they would “maintain fiscal responsibility.”
But Republicans said they knew the budget gaps would happen. As a warning, we said that this amount of spending would make deficits bigger, and it would be smarter to be careful, said GOP state Sen. Roger Niello, who is vice chair of the budget committee.
Costly Disasters, Tax Miscalculations Drive Shortfall
The $68 billion gap through 2025 is the difference between what is expected to come in from taxes and what is needed to keep services running. It comes to more than $8,500 per Californian, but the state has enough money saved to cover a big chunk of that.
The head of the neutral Legislative Analyst’s Office, Gabriel Petek, said that the huge deficit was caused by two main things:
- Revenue from taxes has fallen short of projections, falling $41 billion since January alone. It was estimated that this year’s taxes will be $26 billion lower than expected, according to Petek.
- We pledge to increase funding, with a focus on expanding Medicaid to include all low-income immigrants, regardless of their legal status. The current rate of expenditure is “unsustainable,” according to Petek’s warning.
Other factors include compensation for damages caused by storms and wildfires in the past year, such as the bomb cyclone that flooded roads, uprooted trees, and caused catastrophic landslides. In the past two years alone, fourteen disasters have been designated by the federal government in California, according to Newsom.
During the summer, when the state’s coffers were full, the governor approved the current $308 billion budget. A lot of gloom has settled over the economy since then.
Paying Down Deficits While Advancing National Profile
The predicted annual deficits for Newsom’s second term will reach $25 billion until 2025. Although substantial, the deficits are less in relation to California’s enormous budget compared to previous deficits.
Still, priority will have to be postponed or politically unpalatable cuts will have to be made. As Newsom campaigns for governor by sparring with Republicans like Ron DeSantis and others over controversial issues like abortion, LGBTQ rights, voting rights, and more, they could limit his capacity to push controversial measures.
A representative for the governor assured the public, “We will manage this responsibly.” In January, the governor will publish his preliminary plan.
Preliminary data suggests that $25 billion in high-speed rail, a controversial project, and free school lunches would be in jeopardy, along with one-time large-ticket items like additional payments on pension bills. They would safeguard “middle class taxpayers,” said to Democratic Senate leader Toni Atkins.
Reserves Offer Buffer But Could Quickly Dry Up
Governor Newsom and state legislators will have some breathing room next year thanks to California’s projected $37 billion in reserves. Given the state’s structural revenue-to-deficit ratio, the legislative analyst warned that even if all reserves were to be drained within a few years, deficits would still persist.
A call for fiscal restraint from minority Republicans may put Newsom at conflict with activists and Democratic legislative leaders, each of whom have their own agendas.
Niello, the Republican head of the budget, expressed regret that his party had disregarded the warnings.
Economic Downturn Hammers Country’s Tech, Real Estate Hubs
One state that has taken a disproportionately hard hit from the economic downturn is California, which is home to Silicon Valley and other startup hotspots. A total of over 200,000 jobs have been lost to unemployment since last year, according to officials.
The tech industry, which boosted California’s economy and tax income during the pandemic, has taken a disproportionately hard hit by layoffs. Economist Sung Won Sohn of Loyola Marymount University has stated that many businesses are cutting jobs because they overexpanded during COVID.
A monthly mortgage payment of $5,500—more than $1,800 more than two years ago—has also contributed to the housing market’s downturn. The California Association of Realtors reports that home sales have dropped by almost half, cutting off a significant source of income.
According to the group’s economist Oscar Wei, the interest rates that the Federal Reserve plans to implement next year would not have the desired effect of making housing more affordable. “Many of the homebuyers will still have to deal with higher mortgage payments,” he declared.
Unclear How Cuts Might Impact Progressive Priorities
We don’t yet know how the anticipated deficits will influence policymaking. Climate change is making California more vulnerable to natural catastrophes, such as wildfires and droughts, and conservation groups are requesting $5 billion to fund preparedness and resilience programs. After public health services were already overburdened by the pandemic, health care activists are demanding billions more.
Advocates will keep pressing for reforms that they believe would save money in the long run, even while the government is facing budgetary challenges.
Health care restrictions, according to California Immigrant Policy Center’s Cody Sibulo, would lead to unnecessary and expensive trips to the emergency department. Health care budget cuts, he warned, will exacerbate health inequalities and raise public health concerns for everyone.
Among Newsom’s stated goals are the elimination of homelessness and the expansion of access to child care. The next few months, meanwhile, will be crucial as he compares those initiatives to others.