California’s Budget Deficit and Debt

First a couple of numbers.

After the spending reductions adopted in March and the additional income tax revenue that was reported in April, California now faces a structural (ongoing if nothing happens) budget deficit of $10 billion per year.

This deficit is tiny in relation to the income of residents and small in relation to the federal deficit as a percent of the economy.

The $10 billion is roughly 1 penny out of every $2 of income for residents. The federal deficit is roughly 20 cents out of every $2 of national income or 20 times as large as the state deficit, which is now a smaller portion of our income than some states including Texas.

The small size of the deficit does not tell residents how to balance the budget or, as is obvious now, make it easy to balance.

But the numbers do tell us that we are dealing with a political not an economic problem.

Moreover, the state does not have an especially high level of debt compared to other states or to our income. And paying off our bond debt and interest is not in danger as it comes before most other expenses in priority.

There are longer term challenges from rising retirement benefits but these are not immediate and are likely to be reduced although again the politics in California gets in the way of reaching agreement.

The economy is improving, which is helpful looking forward but will not be sufficient to erase the %10 billion ongoing shortfall without additional reductions in education and safety net spending or some version of continuing the tax increase adopted in February 2009 for an additional period of time.

The state budget deficit does not rank in the top ten challenges facing us as Californians measured by the actual changes needed to make the deficit go away permanently. However, in a state and nation where people like to make everything an ideological game of chicken, even small challenges can go on for a long time.

For what it is worth at the current level of spending and revenues, we are near the lows of the last three decades in the share of our income that we tax and spend for state services.

The good news is that unlike terrorism or global economic competition, the challenges regarding state deficits and debt is totally in our
hands. It is ours to solve or stay stuck with for our children.

I favor the Governor’s plan as the sensible approach and while I favor the tax extensions I do not favor balancing the budget by only putting the responsibility on higher income families and corporations.

Shared participation makes sense to me economically and in terms of fairness.