State officials announced Wednesday that California will likely have a $25 billion budget deficit next year, thereby ending a run of historic surpluses and acting as a warning to other states about a potential recession.
The deficit will likely lead to some painful spending decisions in the nation's most populous state. But it likely won't affect the state's biggest expansions of government services — including free kindergarten for 4-year-olds and free health care for low-income immigrants living in the country without legal permission.
Democratic-controlled California taxes rich people more than other states, and most of the drop in revenues is because the uber-wealthy aren't making as much money as they used to. The S&P 500, a key indicator of the health of the stock market that drives the incomes of the super rich, has fallen more than 17% since its peak in January.
"The longer inflation persists and the higher the Federal Reserve increases interest rates in response, the greater the risk to the economy," the LAO said."The chances that the Federal Reserve can tame inflation without inducing a recession are narrow." But California is in a much better position to weather a potential recession than it has been in the past. The state has more than $37.2 billion stored in its various savings accounts. And the state has plenty of cash available to meet its obligations this year.
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