$100 Billion Surplus Turns to $24 Billion Deficit

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Just like that, California’s record $100 billion surplus has vanished into the Pacific Ocean fog, replaced by a $24 billion deficit. That’s according to the projections of the nonpartisan Legislative Analyst for fiscal year 2023-24, which begins next July 1, in “The 2023‑24 Budget: California’s Fiscal Outlook.”

Well, I warned them repeatedly right here in The Epoch Times. Here are two:

May 26: “California should expect the vast wealth currently generated by our world-leading tech sector won’t last forever. Indeed, looking at the exodus of Tesla and other firms shows there are storms on the horizon. The tech gold rush, too, someday will end.”

April 6: “[A]s we’ve seen in recent years, the budget numbers swing wildly and unpredictably. Two years ago the governor and legislature were expecting massive deficits from the pandemic lockdowns. Instead, surpluses resulted from the large increase in wealth of tech companies that profited from people staying home and binge-watching Netflix (headquarters in Los Gatos) while ordering food on DoorDash (San Francisco).

It’s just like any family or business: If you spend wildly and don’t adequately plan for the future, bad things will happen when the inevitable recession hits. This new budget problem also shows how California politicians’ rhetorical trope that this is the world’s “fifth largest economy” is a fantasy. Because California state politicians had close to zero influence on such policies compared to the record deficit spending that goosed inflation—or on the Federal Reserve Board’s hiking of interest rates.

The LAO indeed blames the recession on the Fed:

Facing rising inflation, the Federal Reserve—tasked with maintaining stable price growth—repeatedly has enacted large interest rate increases throughout 2022 with the aim of cooling the economy and, in turn, slowing inflation. The longer inflation persists and the higher the Federal Reserve increases interest rates in response, the greater the risk to the economy. The chances that the Federal Reserve can tame inflation without inducing a recession are narrow.

The Fed’s basic rate of interest, the Fed Funds Rate, has been boosted from 0 percent to 3.75 percent. And it’s expected to go up again, to 4.5 percent.

California’s ‘Budget Problem’

The LAO shows how that $100 billion surplus turned into a $24 billion “budget problem.” It helpfully explains the euphemism, “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 main culprit: tax revenues are dropping by $41 billion over the next two fiscal years. However, “Revenue losses are offset by lower spending in certain areas.” Hence the $24 billion deficit number.

The good news is the state’s Rainy Day fund has been filled up to $23 billion as required by Proposition 58 from 2014. Give Gov. Jerry Brown credit for pushing that through. The bad news is the $24 billion “budget problem” devours that $23 billion like a shark munching on a surfer.

The LAO then estimates, “Over the subsequent years of the forecast, annual deficits would decline from $17 billion to $8 billion.” That would be, respectively, for fiscal years 2024-25 and 2025-26. I think for these estimates on the later years, what’s important is not the exact numbers, but the likelihood the deficits—excuse me, “budget problem”—still will be around.

Looking to 2023

We’re just weeks now from January 2023, when Gov. Gavin Newsom presents his budget proposal for the fiscal year under discussion here. It will be interesting to see how his estimates compare to those in the LAO’s projection. Especially as Newsom obviously is eyeing a promotion to the job that vacations at Camp David—and he doesn’t want to embarrass himself on the national stage.

But his fellow Democrats again won a supermajority in each house of the Legislature. They will not be happy about cutting programs to their constituencies, especially the California Teachers Association. Whose members the past year have been enjoying a cornucopia beyond the dreams of avarice.

The temptation will be to raise taxes. Because of their supermajority, Democrats won’t even have to consult Republicans to do so, let alone try to get a couple of their votes.

Just for fun, here’s a possible scenario. The Legislature passes a tax increase, say a “temporary” sales tax increase of 1 cent. Newsom vetoes it, gaining national exposure for “being tough protecting taxpayers.” The Legislature overrides the veto and gets its tax increase anyway.

Meanwhile, the state’s reputation as toxic for taxpayers is reinforced and thousands more leave every month.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

John Seiler


John Seiler is a veteran California opinion writer. He has written editorials for The Orange County Register for almost 30 years. He is a U.S. Army veteran and former press secretary for California state Sen. John Moorlach. He blogs at JohnSeiler.Substack.com

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