The state budget that Gov. Gavin Newsom signed in June largely uses gimmicks to bridge a big deficit, and hopes increasing revenues in the future will make it work. However, his own administration sees a string of deficits in the future.
The $310.8 billion 2023-24 state budget that Gov. Gavin Newsom signed in June purports to bridge a projected $31.7 billion general fund deficit caused primarily by a downturn in revenues, particularly all-important income taxes.
However, a closer examination of its “solutions” reveals that scarcely a quarter – $8.1 billion – is actual reduction in spending. The remaining $23.6 billion are various accounting maneuvers often used to cover shortfalls, such as shifting expenditures from the general fund to other funds ($9.3 billion), delaying some spending to future years ($7.9 billion), and borrowing money that must be repaid later.
Taken as a whole, the budget assumes that the 2023-24 deficit is just a short-term annoyance that will disappear as revenues resume growth. That approach relieved Newsom and legislators from having to make harder choices on spending reductions, which would have been particularly traumatic given the expansionist mindset of the dominant Democrats.
A couple of weeks after he signed the budget, however, Newsom’s Department of Finance quietly released a multi-year budget forecast that projects stagnant tax revenues for the remainder of the governor’s second term and a string of operating deficits even with no growth in spending.
More ominously, the forecast sees those gaps between projected income and outgo growing – hitting $14.3 billion by 2026-27 – even if the state’s economy doesn’t lapse into recession.
The Legislature’s budget analyst, Gabe Petek, believes that revenues in this fiscal year alone will fall short of the Newsom administration’s estimates by $11 billion, meaning the red ink would continue to flow even with the so-called solutions adopted by legislators and the governor.
Moreover, Petek sees baseline spending – what’s required by current law – being $10 billion over the administration’s forecast by 2026-27 which, if true, would sharply increase the $14.3 billion 2026-27 deficit in the administration’s forecast.
Given the administration’s forecast and Petek’s gloomier income and outgo projections, the 2023-24 budget’s politically expedient decision to avoid deep spending cuts could turn out to be a fiscal disaster.
With his first term interrupted by the COVID-19 pandemic, Newsom clearly wants his second to build his legacy, perhaps one that will propel a bid for the White House circa 2028, notwithstanding his denials of presidential ambitions.
Newsom wants to be known as a governor who wrought universal medical care, educational services stretching from cradle to adulthood, an end to the state’s highest-in-the-nation level of homelessness, a revolution in mental health care, and measurable reduction in the nation’s highest rate of family poverty.
The Legislature’s left-leaning Democrats want everything Newsom wants and more, but the wish lists would cost untold billions of extra dollars.
The bottom-line question, therefore, is how could Newsom and legislators get what they want over the next three years if they can’t even pay for what they’ve already adopted?
There are four potential other solutions: tap into $37.8 billion in reserves meant to be used only when recession strikes, cover deficits by borrowing even more money from special funds or outside lenders, raise taxes, or reduce actual spending.
There’s some sentiment in the Legislature to use reserves to preserve current levels of spending, and some support for increasing taxes, particularly income or wealth taxes on the state’s richest residents.
Newsom has opposed both, which is the underlying reason the budget he signed in June has so many gimmicks. There’s also substantial support for issuing bonds to pay for programmatic expansions, and Newsom buys into that approach, at least partially.
How about setting aside dreams of remaking California into an American version of Sweden and keeping spending within available revenues? That’s the least popular option within the Capitol but it might be what real-world economics dictate.