California watchdog estimates $26 billion deficit just days after Gov. Newsom touts economy

The California Legislative Analyst’s Office estimates the state will have a $26 billion revenue shortfall for the 2022-2023 fiscal year and announced the state entered into a recession in March 2023.

The news comes the day after Gov. Gavin Newsom defended Democrats' economic record in a nationally televised debate. State Republicans blame Newsom and California Democrats for nearly doubling the state’s budget over the last six years and called for reductions in government programs to protect critical government functions from severe budget cuts.

“Despite all warnings that it was unsustainable, the Majority party has increased state spending by $116 billion over the last six years, nearly doubling the general fund budget in that short time,” said State Sen. Roger Niello, R–Fair Oaks, in a public statement. “Hopefully, the majority will see it is time for a more realistic budget strategy, instead of throwing money at a laundry list of projects that sounds nice on the national television debate stage.”

The LAO estimates that if spending remains unchanged, the state is likely to have a $26 billion shortfall for 2022-2023, $19.1 billion for 2023-2024, and $13.3 billion for 2024-2025, totaling a $58 billion shortfall over the next three years.

The LAO reported higher borrowing costs and reduced investment have cooled the state’s economy, causing the state to enter a recession in March in 2023 under the Sahm Recession Indicator. The LAO claims the Sahm Recession Indicator, which identifies the start of a recession when the “three-month moving average of the unemployment rate rises by 0.5 percentage points or more relative to its low during the previous 12 months,” has had “no false positives” and accurately indicated the last six U.S. recessions

As a result of the state’s downturn, the LAO projects a 20% revenue decline for the 2022-2023 fiscal year, flat revenue for 2023-2024, and a return to revenue growth in 2024-2025. The LAO also noted that state revenue shortfalls could be far worse than its estimates, and could rise to $34.1 billion in 2023-2024 and $43.3 billion for 2024-2025 if conditions follow the office’s worst-case possible projections. In this worst-case scenario, the state’s three-year revenue shortfall would rise from $58 billion to $103.4 billion, placing the state on perilous financial footing and likely leading to significant cuts to core government programs, especially education.