Despite the gloomy outlook, California is in a better position to weather an economic downturn than it has been in the past.
Alexander Spatari via Getty Imageswill likely have a $25 billion budget deficit next year, state officials announced Wednesday, ending a run of historic surpluses and acting as a warning to other states about a potential recession.
Democratic-controlled California taxes rich people more than other states, meaning most of its drop in revenue is because the uber-wealthy aren’t making as much money as they used to. That’s why California is often one of the first states to have budget problems when the economy starts to falter.The S&P 500, a key indicator of the health of the stock market that drives the income of the superrich, has fallen more than 17% since its peak in January. State revenues are now $41 billion below expectations, according to an outlook published Wednesday by the nonpartisan Legislative Analyst’s Office. The estimated deficit is lower because some of those revenue losses were offset by lower spending in other parts of the budget. The shortfall won’t endanger some of California’s major expansions of government services, including free kindergarten for 4-year-olds and free health care for low-income immigrants living in the country without legal permission. But it will force some painful spending decisions, Democratic Gov. Gavin Newsom’s administration said. “While we’re in fact better prepared, that doesn’t mean that the decisions to close the coming budget gap won’t be difficult — particularly if the economic conditions that have slowed the economy continue, or get worse,” California Department of Finance spokesman H.D. Palmer said.And it has plenty of cash available to meet its obligations this year. “It’s not insignificant, but it’s also manageable,” Legislative Analyst Gabriel Petek said of the deficit. “We don’t think of this as a budget crisis.” California’s revenues are famous for their volatility, peaking and plummeting quickly at the whims of the stock market. Just two years ago, state officials predicted a $54 billion deficit because of the pandemic — a shortfall that never happened because the economy remained strong. But this latest deficit prediction is more likely to stick. Soaring inflation has made everything more expensive. The Federal Reserve has tried to rein in inflation by. A higher interest rate makes it more expensive to borrow money, which eventually causes people to spend less. Although that would control price increases, it also cuts demand for goods and services. That leads to layoffs, meaning people pay less in taxes. “The chances that the Federal Reserve can tame inflation without inducing a recession are narrow,” the LAO said in its report.
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