Ahead Of Recession, California Faces $25 Billion Budget Problem With Ongoing Deficits

Authored by Mike Shedlock via MishTalk.com,

California is spending like the tech boom would last forever. But a tech crunch is underway with huge layoffs everywhere. Now what?

Please consider California’s Fiscal Outlook for 2023-2024.

Executive Summary

• Economic Conditions Weigh on Revenues. Facing rising inflation, the Federal Reserve— tasked with maintaining stable price growth—repeatedly has enacted large interest rate increases throughout 2022 with the aim of cooling the economy and, in turn, slowing inflation. 

• State Faces $25 Billion Budget Problem and Ongoing Deficits. Under our outlook, the Legislature would face a budget problem of $25 billion in 2023-24. (A budget problem—also called a deficit—occurs when resources for the upcoming fiscal year are insufficient to cover the costs of currently authorized services.) The budget problem is mainly attributable to lower revenue estimates, which are lower than budget act projections from 2021-22 through 2023-24 by $41 billion.

• Save Reserves for a Recession. The $25 billion budget problem in 2023-24 is roughly equivalent to the amount of general-purpose reserves that the Legislature could have available to allocate to General Fund programs ($23 billion). While our lower revenue estimates incorporate the risk of a recession, they do not reflect a recession scenario. 

The Budget Problem

Lower revenues are expected to lead to a deficit of $25 billion in the budget window. Over the subsequent years of the forecast, annual deficits decline from $17 billion to $8 billion.  

However, those estimates do not reflect a recession scenario. 

Politicians and the Fed have a 100% track record of never predicting recession until it’s obvious to everyone we are in one. 

LOA Revenue Outlook

Image from California’s Fiscal Outlook, annotations by Mish

The exact path is unpredictable but the direction isn’t. Budget forecasts heading into recession are always overly rosy. 

I suspect the plunge will be steeper and faster than the state expects. 

The state makes “assumptions about how the economy is likely to perform over the coming 20 months and then using those assumptions to project revenue collections.” 

In this case, the state even admits that its budget “does not reflect a recession scenario.” 

Minimum Budget Guarantees

Proposition 98 establishes a “Budget Within a Budget” adjusted for inflation.

A shortfall in the context of the Proposition 98 budget means that funding under the guarantee is insufficient to cover the costs of existing educational programs, as adjusted by changes in student attendance and inflation.

The minimum funding requirement grows by an average of $5.6 billion (4.9 percent) per year over the next four years.

California Heads for a Budget Crunch

The Wall Street Journal provides additional color commentary in California Heads for a Budget Crunch

California’s steeply progressive income tax makes it heavily dependent on the income, and especially the capital gains, of high earners. The top 0.5% of taxpayers pay 40% of state income tax. Tax revenue surged in the pandemic as the Federal Reserve’s loose monetary policies inflated asset values. Many tech workers cashed out stock options.

Surging capital gains and a gusher of federal pandemic relief contributed to a $97 billion budget surplus in this fiscal year and $76 billion a year earlier. As usual, Democrats spent like this would never end. But stock values, especially of high-flying tech companies, have crashed since the Fed began tightening more aggressively this year. Silicon Valley companies are laying off workers.

Don’t Call It a Bribe

Starting in October, about 23 million Californians making less than $250,000 per year will receive a stimulus check ranging from $200 to $1,050, depending on income and the number of dependents. 

The program is expected to cost $10 billion. Yeah, let’s give away free money to people making up to $250,000 a year. That will sure cure inflation.

The WSJ made a sarcastic comment, “don’t call it a bribe.”

Reflections on Fair Share

Progressives will not be happy with the fact that the top 0.5% of taxpayers only pay 40% of state income tax. For them, “fair share” will be somewhere between 70% and 90%. 

Higher taxes will lead to more human and business flight. Good luck with that Governor Gavin Newsom.

Governor Newsom is unofficially running for president in 2024. It will be official the day president Joe Biden announces he will not run for reelection.

Had Democrats retained the House, free money bailouts to California, Illinois, New York, and New Jersey would have been massive.

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