Coming California Recession: New California State WILL Happen
“We estimate that a relatively mild recession would produce a drop in total General Fund revenue between $28 billion and $36 billion spread over three years. Should the state experience a moderate recession, revenue declines would range between $69 billion and $100 billion over four years. And finally, in a severe recession declines would be even deeper, between $173 billion and $185 billion over five years.”
Public Policy Institute May 2019
The numbers are starting to come in from the Public Policy Institute of California from their May 2019 report Preparing for California’s Next Recession for the state of California. In the report they give us staggering numbers from three different circumstances which if any one of the three were to occur California state government would fall apart and fail its basic governmental functions.
From the report:
This report begins with the assumption that California will face a recession in the none-too-distant future. When that recession comes, the state will most likely experience a fall in revenue over multiple years. Our goal is to estimate the impact of a recession on the state’s budget, determine the extent to which current reserves could help the state navigate drops in revenue, and help identify steps policymakers can take to reduce the next recession’s impact on the state’s economy and residents.
Because California’s tax structure is highly sensitive to economic ups and downs, recessions hit the state’s budget particularly hard. Past recessions have caused deep drops in General Fund dollars leading to a combination of spending cuts, tax increases, and borrowing in an effort to balance the state’s budget.
Since the Great Recession, the governor and legislature have taken a number of steps to help the state prepare for the next economic downturn. But there is room for more preparation. Using the state’s experience with past recessions as a guide, we outlined scenarios for the next downturn: mild, moderate, and severe.
Since California began to emerge from the Great Recession in June 2009, it has been enjoying one of the longest periods of economic expansion in US history. Unemployment is low and, as of April 2019, jobs had been growing
for 102 consecutive months. Tax revenue has grown, exceeding projections in recent years. The state has made tremendous progress in terms of its fiscal position as it recovered from the Great Recession.
But history confirms that expansions do come to an end. As Jerry Brown observed when presenting his final budget, “What’s out there is darkness, uncertainty, decline and recession, so good luck, baby.”
1. The governor’s pessimistic assessment of the future is the blunt reminder that California has known great highs, but also has experienced tremendous lows. And when the economy slows down and recessions occur, California’s governments feel it acutely.
2. Government revenues, in general, are sensitive to economic swings. California is no different, but its revenue roller coaster has steeper slopes. These effects are amplified by the state’s progressive tax system, which relies on a relatively small number of high-income residents to generate a large share of General Fund revenue. When the economy slows, state revenues dip and the budget falls out of balance. The state’s most vulnerable residents turn to government for help just when resources are most strained. Policymakers then face decisions about cutting programs, raising taxes, or borrowing—all of the options are unappealing.
Looking back at how officials grappled with these decisions, we can assess the past responses to budget shortfalls and offer suggestions and adjustments for potential improvements to these tough decisions.