Handling California´s tiny deficit

Escrito el 1 abril 2010 por Gayle Allard en Uncategorized

California, which if it were an independent country would be the 8th largest in the world, has struggled with budget deficits for years. This year, however, the situation has reached crisis proportions, with the shortfall equivalent to $20 billion and likely to reach $40 billion next year.

Obviously, the recession has not helped California to balance its accounts. Nor has the continuing enormous influx of legal and illegal immigrants, who are eligible for free health care, food stamps and other income payments, as well as free university education under the state´s generous poverty programs.

The key issue that leaves California in continuous budget crisis, however, is that US states are not allowed to run deficits. California´s 2010 deficit would be equivalent to less than 1.1% of GDP, certainly a good figure in the current recession (the US national government is expected to run a deficit of 9.7% of GDP in 2010 and the UK´s may be 13.3% of GDP; Spain, Ireland and of course Greece show equally high or even higher figures). If it widens to a $40 billion shortfall next year, that would be 2.26% of GDP.

At the same time, California´s peculiar brand of democracy allows voters to initiate proposals –called Propositions—which are then put on the ballot in the next general election and are made law it they are approved. Some of these laws have limited the state´s ability to obtain revenues, such as Proposition 13, which in the 1970s capped property taxes. Others have curbed its flexibility in spending. In addition, the two chambers of the California “congress” must pass tax and spending plans by a 2/3 margin, which is almost impossible to achieve.

What can be done? Governor Arnold Schwarznegger, known locally as the “Governator”, has pushed through severe budget cuts and raised fees on services such as California´s excellent and inexpensive public university system. These measures will make the local recession worse.

The alternative would be to allow US states like California to run deficits. In a time of punishing indebtedness, allowing the debt problem to get worse by allowing widespread borrowing across the country does not sound like a good solution.


Ram Parasuraman 2 abril 2010 - 19:13

I can give a “from the ground perspective”, as someone living in California over the past 5 years. In this time, I have seen it go from being an insignia of the Nation’s capitalist growth to a factor that the nation wished it could forget, the abundance of red ink on California’s balance sheet.

One of the biggest asset bubbles burst when the real estate market crashed. In California, the bursting of this bubble dwarfs the extent to which it impacts states like Nevada, Idaho or Colorado. Foreclosures mean that State Govt is losing billions in Property tax revenue. Banks as a result are unable to lend to small businesses, the engine of US’ growth.

Unemployment due to Global crises have hit California harder than US average. The unemployment in CA is at near record high and well over 10%. This means that more and more people are lining up for unemployment benefits from the state. The lost wages mean lost tax revenue. This is a double edged sword that bleeds red ink from the state’s coffers.

Businesses are finding ways to cut their costs, and hence relocating to other states, which are pouncing on the opportunity to capitalize on CA’s misery. Silicon Valley, the hub of global innovation, is finding itself more and more constrained. Startups, the seeds of innovation are unable to weather this storm, they are either closing down or selling to bigger players like Cisco, Google and HP. This means that the commercial real estate market suffers! Vacancies are hitting an all time high as companies slash their workforce, reduce the size of cubicles and compact themselves into 1 building instead of the proud “campus” they once occupied. This means more avenues for bankruptcies.

All in all, this forces the Governor and his staff to make massive cuts, in the form of Government Furloughs (reduced work hours) and Education cuts. The famed University of California in Berkeley has been forced to raise fees, increase class size and reduce staff. All of this casts doubts on the quality of education and UC as a result attracts far fewer international students, a lucrative revenue stream, since international students pay almost 3 times as much as locals. The problem becomes much worse in primary through secondary school. Lawmakers are contemplating cutting school week to 4 days, closing down schools, which means that staff and students have to travel longer making them less productive.

It is a gloomy tale in CA. Debt is selling briskly, but we need an economic miracle to get out of this rut and it certainly seems unlikely that CA will ever regain the highs it once saw! Even the proud Bear on the California flag seems to be lowering its head in humility.

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