California’s economic output has surpassed $4 trillion a year and in doing so slipped past Japan to become, were it a nation, the globe’s fourth largest economy, surpassed only by the United States, China and Germany.
The news was an opportunity for Gov. Gavin Newsom to exercise his penchant for braggadocio.
“California isn’t just keeping pace with the world — we’re setting the pace,” Newsom declared. “Our economy is thriving because we invest in people, prioritize sustainability, and believe in the power of innovation.”
It was also an opportunity for Newsom to take another shot at President Donald Trump, saying, “while we celebrate this success, we recognize that our progress is threatened by the reckless tariff policies of the current federal administration. California’s economy powers the nation, and it must be protected.”
If California’s economy is booming, as Newsom boasts, one might wonder why the state’s unemployment rate is the third highest in the nation, with more than a million jobless workers, and why its poverty rate is the nation’s highest.
One might also wonder why, if California’s economy is so healthy, the state budget is experiencing chronic multi-billion-dollar deficits.
Newsom must tell the Legislature this month how he would alter the 2025-26 budget he proposed in January, touching off the annual whirlwind of negotiations to produce a more-or-less final version for adoption by June 15.
The January budget proposed at least $11 billion in short-term fixes, including off-the-books borrowing, dips into the state’s budget reserves and accounting gimmicks to close the gap between projected income and the spending dictated by current law.
Tax revenues are running a bit ahead of expectations so far this year, but not nearly enough to close the deficit, which has widened due to spending on Medi-Cal, California’s health care system for the poor that’s far exceeding the level of the 2024-25 budget enacted last June.
Overall, Medi-Cal expenditures are over $6 billion higher than expectations, with a major chunk caused by higher-than-expected enrollment of undocumented immigrants.
Therefore the May revise, as it’s dubbed, is likely to contain even more expedient fixes that may postpone the day of fiscal reckoning until Newsom’s governorship ends two years hence but will continue to plague his successor and the Legislature.
The Medi-Cal situation exemplifies the underlying reason why California’s budget is unhealthy while the state’s economy continues to grow, albeit without producing many new jobs.
The pertinent data is to be found in a recent publication by the Legislature’s budget analyst, Gabe Petek, called “ CalFacts 2024.”
It reveals that since Newsom became governor in 2019, state spending has increased, on average, by 9% a year while annual revenues have grown by just 6%. The difference between those two numbers constitutes what budget mavens call a “structural deficit,” meaning that spending baked into law far exceeds what the current revenue system can generate.
The underlying discrepancy between income and outgo is important to remember, because when Newsom unveils his revised budget he’s likely to cite the Los Angeles wildfires and Trump’s tariffs as factors in the budget’s gap.
Both of those events are likely to increase the deficit, but they didn’t cause it. The deficit exists because Newsom and the Legislature have chronically spent more than the revenue system produces, even though Californians have one of the nation’s highest state and local tax burdens, relative to the state’s economy.
Moreover, by tapping into reserves meant to cushion the impact of recessions or other emergency situations, Newsom and legislators have weakened the state’s ability to cope with genuine economic setbacks or disasters, such as the wildfires.
By Dan Walters
