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To understand what happened to the state budget in 2024, we have to go back to 2023.
That year Governor Gavin Newsom and the Democrats control the Legislature decided against plundering the state’s roughly $37 billion rainy day fund despite a shaky budget picture. Those dollars came in handy as lawmakers struggled to close an estimated $56 billion deficit this year and next.
That the state had a major deficit is partly to blame for flying fiscally blind. In response to devastating storms, federal and state tax collectors extended filing deadlines last year, well past the date when lawmakers normally finalize the state budget. As a result, the revenue picture was incomplete. In fact, last year’s government spending plan assumed more revenue than actually came in, all because key data was not available in time.
What are these deficit figures in context? The the general budget of the state — spending on schools, health care, prisons, green energy initiatives and more — will reach $298 billion from July 1 to June next year, one of the highest ever. In 2021 the state was Spending $270 billion.
How did lawmakers close this year’s budget gap? For starters, they took $12 billion from state reserves over the next two years. Lawmakers also cut most state agency allocations by nearly 8%, eliminated thousands of vacant government jobs and eliminated a handful of mid-level spending programs — savings of $16 billion. A plan was gone to have the state lend money to colleges to build more student housing, $1.1 billion in affordable housing and about $500 million for a new program that would have paid students to work in jobs related to their studies.
Other savings came from freezing corporate tax credits. Then there are the budget “fund shifts” that lawmakers apply to the numbers that move money to achieve savings.
Among the few state programs whose budgets actually grew? Public colleges and universitiesalthough the University of California and California State University will make these 8% cuts next year unless the state budget picture improves.
Outlook for 2025
The income to date is higher than expected – thanks to big gains in the stock market, especially in technologyand the income tax paid by these investors. But the Legislature’s independent budget analysts say all that extra revenue doesn’t mean there is room to spend morepartly because they project multi-billion dollar deficits through 2028-2029. In addition, much of what California now spends money on is expected to become more expensive.
How much the state ultimately decides to spend on its wide array of programs—we have the fifth largest GDP in the world for a reason—depends largely on the stock market and the incomes of California’s wealthiest residents. Capital gains taxes from hot Wall Street mean big money for state programs.
A Republican-led White House and Congress focused on tax cuts could cause stock prices to rise (although tax cuts often mean cuts to the federal program). But President-elect Donald Trump’s plan for heavy tariffs and mass deportations of undocumented workers could shrink the economy because higher inflation and labor shortages.