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.