After Years of Growth, State Budget Tanks

And just like that, California is in an economic recession.

But not just any recession. According to Governor Newsom’s Department of Finance, since mid-March, more than 4.2 million claims for unemployment benefits have been filed in the state. The Department projects that the 2020 unemployment rate from the COVID-19 Recession will be 18%, much higher than during the Great Recession.

Personal income is projected to fall in 2020 by nine percent, and the Department projects that permits for new housing construction, a key driver of the California economy, will drop by more than 21% this year.

As goes the state’s economy, so goes the state’s budget.

After eight consecutive years of growth and with general spending up by 75%, the bottom has dropped out of the state treasury. The Governor’s fiscal advisers project general revenues coming in $41 billion below what they estimated just four months ago, with each of the major taxes producing about 25% fewer revenues than originally projected.

Adding on higher Covid-19-related spending means the overall fiscal deficit will be pegged at about $54 billion.

Governor Newsom has taken some initial steps at re-opening the economy, but no one knows the pace at which our businesses will get on their feet, employers will start hiring again, and consumers regain the confidence to make purchases.

As the Legislative Analyst recently observed, “we can be fairly confident that the state currently is in a deep recession, but its depth and duration are difficult to anticipate.” So while the Administration’s large deficit is on the more pessimistic end of the range, it is by no means unreasonable or a worst-case scenario.

It is also no small blessing that California is entering this recession in far better fiscal shape than in 2009, having accumulated a $16 billion rainy day reserve that can offset a large portion of the deficit. Governor Newsom has also indicated his intention to ask Congress and the President for substantial federal funds to support state and local government and schools to mitigate tax revenue losses.

The Administration has not divulged how it proposes to resolve the looming budget deficit, whether with spending cuts, tax increases, borrowing from special funds or from taxpayers. That news will come with the announcement of the Governor’s Budget Revision on Thursday.

In any case, Californians must now grimly anticipate the third leg of the calamitous COVID-19 triad, adding the threat of higher taxes and reduced government services to the earlier catastrophes for personal health and financial security.

Contact: Loren Kaye

Loren Kaye
Loren Kaye was appointed president of the California Foundation for Commerce and Education in January 2006. He has devoted his career to developing, analyzing and implementing public policy issues in California, with a special emphasis on improving the state's business and economic climate. He also was a gubernatorial appointee to the state's Little Hoover Commission, charged with evaluating the efficiency and effectiveness of state agencies and programs. Kaye served in senior policy positions for Governors Pete Wilson and George Deukmejian, including Cabinet Secretary to the Governor and Undersecretary of the California Trade and Commerce Agency. See full bio.