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California Projected To Have $25 Billion Deficit

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Sonora, CA – California could be facing a $25 billion deficit next year, which would lead to some painful spending decisions.

It is the fiscal outlook forecasted today by the state’s non-partisan Legislative Analyst Office (LAO), which typically signals a warning to other states about a potential recession. California’s revenue has steadily increased over the last decade, including this year’s $72.4 billion surplus, but tax collections have slowed significantly this year, with revenue down $41 billion from expectations, according to the LAO. The office points to a drop in revenues due to the very rich not making as much money as they used to and the rollercoaster stock market falling more than 17% since its peak in January.

“Our revenue estimates represent the weakest performance the state has experienced since the Great Recession,” the LAO report said.

Other key factors are inflation and higher interest rates, which make it more expensive to borrow money and cause people to spend less. That could lead to layoffs and people paying less in taxes.

“The longer inflation persists and the higher the Federal Reserve increases interest rates in response, the greater the risk to the economy,” the LAO said. “The chances that the Federal Reserve can tame inflation without inducing a recession are narrow.”

State Republicans’ response to this new prediction came from the Vice Chair of the Assembly Budget Committee, Assemblyman Vince Fong (R-Central Valley). Noting that state leaders must be fiscally prudent, he stated, “As the ruling party continues to spend and grow government programs without accountability, I have repeatedly warned that California’s budget was on an unsustainable path. Today’s report is another wake-up call to those warnings. We must refocus on fiscal responsibility.”

Currently, employment in California remains strong, with a 3.9% unemployment rate for September, tied for the lowest since 1976. LAO officials added that California is in a much better position to weather a potential recession than in the past, as the state has more than $37.2 billion stored in its various savings accounts. Those revenues have allowed for an expansion of government services, including making 4-year-old kindergarten free for everyone and paying for the health care of low-income immigrants who are living in the country without legal permission. The Legislative Analyst’s Office did not recommend lawmakers cancel ongoing spending on those programs. Instead, it urges lawmakers to pull back on some planned one-time spending increases this year, adding, “To address the budget problem for the upcoming year, these cases might provide the Legislature with areas for pause, delay, or reassessment.”

Find the entire LAO fiscal outlook report here.

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