California Faces $68 Billion Deficit in 2024

Unemployment up, incomes down: State budget report gives grim outlook for Newsom's California

California Gov. Gavin Newsom (Justin Sullivan/Getty Images)
December 7, 2023

California governor Gavin Newsom (D.) faces a $68 billion deficit in 2024, more than double this year’s $32 billion shortfall, the state budget analyst reported Thursday.

The shortfall stems from the state's 2022 economic downturn and the accompanying declines in revenue even as California leaders maintained their high levels of spending with a nearly $311 billion budget.

California entered an economic downturn in 2022 as unemployment jumped to 4.8 percent—higher than the national rate of 3.9 percent—and Californians’ inflation-adjusted incomes declined for five straight quarters, the report says. Meanwhile, high borrowing costs have slowed home sales and investments into California’s profitable tech industry while deterring businesses from expanding or hiring more workers.

The grim outlook is the latest sign of domestic trouble for Newsom, who has presided over a three-year population exodus that included wealthy taxpayers while increasing spending by more than 60 percent. It comes as the governor’s poll numbers have tanked in his state, where the majority of voters worry about the economy, jobs, and inflation while Newsom builds his national profile ahead of a potential presidential campaign.

Republican assemblyman Vince Fong, who serves as vice chair for the state assembly’s budget committee, said Thursday’s report brought more "alarm bells."

"I have said for years, a slowing California economy coupled with unsustainable spending is a recipe for fiscal disaster," Fong said. "No more gimmicks; we must take action now to get our fiscal house in order."

In a statement, Newsom communications director Erin Mellon said the governor's investments into the state's reserve fund puts California in a "strong position" to weather the deficits."

"In January, the Governor will introduce a balanced budget proposal that addresses our challenges, protects vital services and public safety, and brings increased focus on how the state's investments are being implemented, while ensuring accountability and judicious use of taxpayer money," Mellon said.

The analysis warns that the state’s economic problems could drag into next year. Californians’ personal income tax payments fell by 25 percent in 2023—similar to declines during the 2008 Great Recession and the dot-com stock market bust in the 1990s. Sales tax revenue stayed flat even as inflation drove prices higher. And $30 billion deficits are expected to continue for the next three years, according to the report.

Just two years ago, California had a nearly $100 billion budget surplus, which Newsom largely spent on one-off programs spanning homelessness, mental health, and climate.

This past year, even as state analysts warned California could yet face recession, Newsom and the Democratic legislature approved nearly $311 billion in spending. They closed last year's $32 billion shortfall largely through budgetary maneuvers that shifted expenses to different state funds, deferred other spending, and borrowed about $6 billion. They cut expenditures by just $8 billion.

Newsom has hiked state spending considerably since taking office in 2019 even as California lost population. A decade ago, his Democratic predecessor, former governor Jerry Brown, enacted a $138 billion budget. In 2021, Newsom proposed boosting state spending by one-third with a $268 billion budget proposal that the legislature whittled down to $262.6 billion. By 2022, when more than 800,000 Californians left the state, spending jumped to nearly $308 billion.

While spending has grown, quality of life has not. Polls show that Californians feel the gap between rich and poor is growing as cost of living is more than 40 percent higher than the national average.

Update 5:44 p.m.: This piece has been updated with comment from a Newsom spokeswoman.