Under our outlook, the Legislature would face a budget problem of $25 billion in 2023‑24. (A budget problem—also called a deficit—occurs when resources for the upcoming fiscal year are insufficient to cover the costs of currently authorized services.) The budget problem is mainly attributable to lower revenue estimates, which are lower than budget act projections from 2021‑22 through 2023‑24 by $41 billion. Revenue losses are offset by lower spending in certain areas. Over the subsequent years of the forecast, annual deficits would decline from $17 billion to $8 billion.
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The $25 billion budget problem in 2023‑24 is roughly equivalent to the amount of general‑purpose reserves that the Legislature could have available to allocate to General Fund programs ($23 billion). While our lower revenue estimates incorporate the risk of a recession, they do not reflect a recession scenario. Based on historical experience, should a recession occur soon, revenues could be $30 billion to $50 billion below our revenue outlook in the budget window.
California’s revenues soared in the past two years, thanks to a speedy economic recovery that began under President Donald Trump, and massive transfers from the federal government under President Joe Biden.
The state was so flush with cash that Newsom sent lower-income households a “Golden State Stimulus” before his recall election last year, and sent them $400 checks to offset higher fuel costs before this year’s election.
However, California’s state budget is exceptionally sensitive to shifts in the national economic outlook, as it depends heavily on tax revenues from a very small group of high earners in Silicon Valley and Hollywood.
And a lot of those high earners are fleeing the state.