The boom-bust cycle in California is back to bust again. Governor Newsom faces some tough economic and political choices. 
My, How Things Change
As California’s state budget morphs from a $97.5 billion surplus to a multi-billion-dollar deficit, it’s another reminder about the volatility of the state’s revenue system.
Gov. Gavin Newsom’s penchant for braggadocio was in full flower eight months ago when he declared that California had a $97.5 billion budget surplus and boasted that “no other state in American history has ever experienced a surplus as large as this.”
A more subdued Newsom acknowledged that the projected surplus had morphed into a $22.5 billion shortfall. He proposed a $297 billion 2023-24 budget that throttles back some of the additional spending and indirectly borrows billions of dollars to close the gap.
Gotta love the borrowing to close the gap, idea. But why can’t we all borrow our way to to fiscal health?
California’s Legislative Analyst’s Office projects a 2024-25 budget deficit twice as large as 2023-24. It says the state could dip into reserves and cut some one-time spending.
With tax revenues in a free fall comparable to the Great Recession and the dot-com bust, California faces a projected $68 billion budget deficit next year that will require spending cuts and reserve funds to close, state finance officials said today.
The new estimate from the nonpartisan Legislative Analyst’s Office, released as Gov. Gavin Newsom finalizes his January budget proposal, reflects a substantially delayed tax-filing period this fall where collections came in far below what lawmakers expected when they adopted a spending plan over the summer.
Legislative analyst Gabriel Petek cautioned that California is better prepared to respond to the situation than during the economic recession 15 years ago, because it has since built several multibillion-dollar rainy-day funds, though the state is also looking at a structural deficit of about $30 billion annually going forward.
“I go with the word ‘serious.’ A serious budget problem,” Petek said during a briefing with journalists. “I would stop short of calling it a crisis.”
California’s Tax Revenue Falls
Politico reports California’s Budget Deficit Swells to Record $68B as Tax Revenue Falls
The latest deficit figure — calculated by the nonpartisan Legislative Analyst’s Office and released Thursday — far exceeds the $14.3 billion estimate from June. The shortfall, which is the highest in dollar terms but not as a percentage of overall spending, threatens to upend the upcoming legislative year by forcing Gov. Gavin Newsom and lawmakers to make spending cuts on a scale few term-limited elected officials in Sacramento have faced.
“The state remains in a good cash position, and that really wasn’t the case back at the start of the Great Recession,” Legislative Analyst Gabriel Petek told reporters. “We don’t face the same kind of liquidity challenges that we had at that time, and so I would stop short of describing it as a crisis.”
Newsom’s Department of Finance earlier this year warned California would continue to face a revenue downturn due to stock market declines, interest rate hikes and inflation.
A smaller deficit last year forced the governor to make the largest cuts of his tenure after years of massive surpluses. The state avoided deeper reductions by delaying spending and shifting money between the state’s general and special funds.
Did Democrats think near-zero interest rates would last forever, asks the Wall Street Journal. Do they think at all is a better question in my estimation.
The Legislative Analyst blames California’s plunging revenue on the Federal Reserve’s interest-rate increases, which it says have resulted in 80% fewer companies going public in 2022 and 2023 compared with 2021. “Home sales are down by about half, largely because the monthly mortgage to purchase a typical California home has gone from $3,500 to $5,400,” the analyst adds. Tech layoffs have also contributed to lower tax payroll withholding this year.
The real culprit for California’s budget shortfall, as ever, is its progressive tax system and how the politicians exploit it. The top 1% of taxpayers in California pay 50% of state income tax, and the top 0.1% pay a third. During the fat years, the state’s 13.3% top income-tax rate throws off enormous revenue that Sacramento proceeds to spend with new commitments that can’t easily be withdrawn when the lean years arrive.
Democrats don’t prepare for droughts because they assume they can always raise taxes on the wealthy when revenues dry up. That will be harder this time because so many of the wealthy have left the state.
Not a Crisis Yet
Don’t worry, it’s not a crisis yet. But it soon will be.
How long will $30 billion in reserves and budget shenanigans last when the deficit is $68 billion?
How long will the top 1 percent be willing to put up with paying 50 percent of the state income tax?
Newsom says the cutbacks will be “temporary”. Tax hikes are not temporary. Expect more of them.
By the way, Florida has a budget surplus, no state income tax, and it does not have huge smash and grab looting problem or a mass of businesses fleeing the state.
Meanwhile, at the Federal level the picture is even more dire.
When Does US Federal Debt Reach an Unsustainable Level?
An interesting article by Penn Wharton, University of Pennsylvania, says the limit of debt as a percentage of GDP is about 200 percent, When does that happen?
For discussion, please see When Does US Federal Debt Reach an Unsustainable Level?
Newsom says the cutbacks will be “temporary”
Why on earth do you suppose. Hiring unproductive people that does not encourage increasing returns of revenue?
Usually these cycles happen when a recession hits but there are no signs of recession anywhere in the country. The country and all its states are in serious trouble if that happens.
“Do they think at all is a better question in my estimation.”
And, I think that the better question is:
“CAN they think at all is a better question in my estimation.”
Clearly, Politicians are not suited to self-control and Simple Mathematical equations, such as DEBT to REVENUE ratios and spending controls.
THEY ALL KNOW that they can deficit spend, while we, the PLEBS are expected to be angelic in our spending and income ratios.
This debt proves why Newsom is the best candidate to replace Biden as president. He is experienced at running up a huge budget debt and deficit and that will come in handy at making the federal mess even worse. I hope I don’t need a sarc tag.
Newsom’s got Governor and presidential looks and that is what is important!
He has an amazing resemblance to Vlad the Impaler, this Newsom gruesome character.
Hey Mish how are you doing little buddy? Anyway Mish I’ve been with you more than 20 years, more than anyone else truthfully are not? So anyway good grief, so as successfully as you’ve become, nothing wrong with success, though it seems like to me you continue to try not to offend the huge woke, even evil at least in my opinion, the majority these days, so as not to offend most woke advertisers who are really assholes taking down America, who mostly reject godly traditional values do they not? Come on Mish get off your ass and besides giving great economic commentary more than anyone else with financial success, start fighting for the TRUTH! Come on!
I think mish is doing well by sticking to his lane. Getting into the woke debacle is a no win situation; although he could have mentioned something about how defunding the police and soft on crime is chasing away all the business owners.
Btw the “woke” are a minority, it’s just they are very vocal and very violent so they have an outsized influence, specially with the MSM and tiktok giving them a huge megaphone
“godly traditional values”..I believe you mean “your values”…I think Mish does a good job bashing libs…but he may also be aware that one side has chosen to ignore 70 court case election losses..70..and he seems keenly aware that both sides are absolutely full of S— and his ripping of both sides IS “fighting for the truth”- enjoy 🙂
Truthseeker you need to adjust your algorithm as the current one is producing almost incoherent text.
Seems unfair that when the country finally splits up, these idiots get one of the most beautiful places on the planet.
What makes you think New Jersey is going to split up?
The state deficit was $32 billion last fiscal year. Newsom and the supermajority Democrats in the Legislature couldn’t stomach the necessary cutbacks that would be required (especially in our continually failing education industry) so they used some of the rainy day fund and borrowed or pushed off expenditures to achieve the legally required balance budget.
They can only play these games so long before there is no money left in the rainy day fund and nothing can be pushed off.
And the dems are wanting to run this guy instead of Biden. They already had him in china over climate agreements on our behalf. What a joke.
California’s fiscal situation is going to be a disaster for decades. The situation is now comparable to the DotCom Bust and Great Recession. Wealthy people and companies have started moving out of the state, so less money will step in to rebuilt California’s crash.
CA gets a very high percentage of its revenues from the taxes of billionaires. When SV is going bang busters and the wealthy are making billions hand over fist, CA has boom times.
Don’t worry, CA, FJB is going to throw money at your deficit. He’s got your back and doesn’t give a damn about the Mish’s question. He won’t be around to deal with the consequences from the worst administration EVER!
When Does US Federal Debt Reach an Unsustainable Level?
The Federal debts become unsustainable when the pool of bond buyers dries up.
Jerry Powell & Company look like shriveled prunes.
A 97.5B surplus mathematically cannot morph into a 30B deficit, unless the original projection was reached by throwing darts blindfolded.
Or…was it done by alumni of progressive studies where math is highly optional?
Solution is clearly to secede. Then they could copy Canada and print money until their little noses bleed. Trudeau and Newsom would get on like a house on fire.
What an absolutely precious thought – California seceding.
Funny thing is, they couldn’t afford to…
No. Lets throw them out.
Well, CA does represent 15% of the US GDP and are probably the fifth largest economy in the world, just behind Germany. If they were a Country with a deficit that was 15% of what the US is running that would be what- 300 billion ? It seems like they would be in pretty good shape @ 68 Billion
Interesting. It appears Canada’s Federal deficit will be similar to California’s 68 billion at around $40 billion Canadian. And both Canada and California have population’s of 40 million. However, California GDP is around 3.6 trillion while Canada’s is only around $2 trillion US.
Although the Canada deficit doesn’t sound so bad at 40 billion when compared to the US Federal deficit of 1.4 trillion. The US has 9x the population of Canada, and 12x the GDP, but we run a deficit that is 35x.
And some people will be surprised when taxes spike upwards…
P.S. Take a peek at the Tax Structure of Canada
How about we merge with Canada?
Oh god please no. As bad as it is up here, we still havent reached Cali bad (although Trudeau and TPTB are trying hard)
I like the idea of Canada separating from Turdo, and California from Newsom.
It’s coming. Current projections have Trudeau losing an election by the biggest landslide in history.
He pushed the overton window so far left most canadians are now conservative.