Governor Gavin Newsom is expected to announce that California’s budget deficit could be much larger than previously thought

Governor Gavin Newsom is expected to announce that California’s budget deficit could be much larger than previously thought
  • Governor Gavin Newsom will likely announce that California, one of the few states with a deficit this year, could suffer additional losses of $5 billion after reporting a budget deficit of $22.5 billion.
  • California’s economic deficit reflects a falling stock market and delayed tax payments following a series of powerful and destructive winter storms.
  • To cut spending, Newsom proposed delaying funding for a subsidized child care program that angered California Democratic lawmakers.

Governor Gavin Newsom is expected to announce a budget deficit on Friday even bigger than the $22.5 billion hole he faced in January, reflecting an economy burdened by a falling stock market and disrupted by a series of powerful winter storms. who delayed billions of dollars in tax payments.

California is one of the only states to run a deficit this year, primarily because its progressive tax code relies on wealthy taxpayers whose incomes are closely tied to stock market performance.

The deficit is small compared to the cash crunch the government faced during the last recession. But the challenge for Newsom will be persuading lawmakers to cut spending that isn’t used to enacting it.


Since taking office in 2019, Newsom’s biggest budget fight with the Democratic-controlled state legislature has been over how to spend California’s record surpluses. Agreeing on what to cut could be a lot harder.

Newsom’s plan in January was to cut funding for flood protection projects, delay the expansion of a subsidized child care program and cancel a $500 million plan to help small businesses to pay higher tax rates associated with government debt.

On Thursday, Newsom announced he was restoring money previously cut from flood protection projects, in addition to introducing an additional $250 million in new spending, which includes raising a levee to protect the community of Corcoran. in the central valley.

It is not yet clear whether he can or will back down on his other proposed cuts. Newsom last year signed an expansion of a subsidized childcare program that would pay to help an additional 20,000 families. But because of the shortfall, Newsom offered to delay that funding for a year. He argued that the state was struggling to fill the child care slots it already had.

California Assembly Majority Leader Eloise Gomez Reyes, left, and Democratic Assemblywoman Cecilia Aguiar-Curry, right, march with supporters of the state’s subsidized child care programs state on May 10, 2023, in Sacramento, Calif. Governor Gavin Newsom, who has proposed delaying funding for subsidized child care slots, will announce his updated budget plan on May 12, 2023. (AP Photo/Adam Beam)

That angered some Democratic lawmakers, who said the reason the state was struggling to fill its child care slots was because there weren’t enough child care staff. On Monday, House Democrats proposed $1 billion in new spending to raise the salaries of early childhood educators.

“Now we just have to put a little bit of pressure on the governor to make sure he’s on board,” Assembly Majority Leader Eloise Gomez-Reyes said in a speech to a panel on Wednesday. gathering of parents and child care workers at the State Capitol.

It’s not just about child care. State Senate Democrats want to raise taxes for 2,500 of the biggest businesses so they can cut taxes by about 25% for most other businesses — a plan Newsom has previously said he opposes . And environmental groups want Newsom to reverse its planned $6 billion cut to some of its climate proposals.


But restoring these cuts could be difficult. The situation has only gotten worse since Newsom announced the deficit in January. California tax revenue continued to decline, falling $4.6 billion below what the governor’s office expected. The Office of the Nonpartisan Legislative Analyst says it expects the deficit to be about $5 billion higher.

Then there is the weather. Since January, California has been battered by a dozen atmospheric rivers — intense storms that bring heavy rain and snow. The storms caused so much damage across the state that authorities decided to give people more time to pay their taxes, extending the deadline from April to October.

That’s a problem now for Newsom and the state legislature, which must pass a budget before the start of the new fiscal year on July 1. Late collection of taxes means they will have to come up with a plan without knowing how much money they have to spend.


The last time this happened was at the start of the coronavirus pandemic in 2020, when taxpayers had more time to file their taxes. Newsom and state lawmakers assumed the worst, approving a budget that cut spending to cover what they thought was a $54 billion deficit. But this deficit never materialized as the impact of the pandemic on state revenues proved less damaging than expected.

This time, California’s deficit appears to be real. The California legislature taxes the wealthy more than other states. About half of the state’s money comes from just 1% of wage earners. This means that the state is vulnerable to sharp swings in the stock market, which is the source of wealth for most rich people.

The stock market fell as the federal government raised interest rates to fight inflation.

The downward turn had the biggest impact on California’s massive tech industry, as companies like Google, Facebook and PayPal laid off thousands of workers. Earlier this year, Silicon Valley Bank – one of the nation’s largest financial institutions, whose customers were mostly in the tech industry – went bankrupt and was taken over by North Carolina-based First Citizens Bank.


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