Why a Huge Budget Deficit Might Be Good News for California

California is facing a projected deficit of $68 billion, a larger amount than the entire annual budget of the state of Florida.

As someone who watches the governor and Legislature fairly closely, I find it rare to see good news coming out of the Capitol. The state's leaders spend money wildly on every imaginable progressive priority, concoct myriad tax and fee increases, lavish handouts on public-employee unions, and rail against the "greed" of private companies.

But, finally, we're seeing an encouraging development. According to the Legislative Analyst's Office (LAO), the state is facing a $68 billion budget deficit, which is 50 percent larger than the general fund budget of Florida. In normal states, red ink isn't something to cheer about. In California, however, a money shortage is the only thing that imposes any fiscal limits.

Stein's Law says, "If something cannot go on forever, it will stop." Named after the late economist Herb Stein, its point is government is not going to stop doing whatever it does until external factors force it to do so. Obviously, California officials aren't going to restrain their spending addiction on their own. States must (on paper, anyway) balance their budgets, so a deficit is the external constraint we need.

We're a long way from a Day of Reckoning—the long-predicted but never-arriving time when officials, confronted by economic reality, change their ways. Never underestimate the ability of politicians to delay hard decisions by embracing accounting gimmicks that foist the problem on future lawmakers. We heard about that day during the pension crisis of 2012, and yet pension systems are in worse shape than ever and no one even mentions pension reform in the Capitol.

Some of us thought that last year's $31.5 billion deficit would put the kibosh on the spending train (and maybe even on the $100 billion actual bullet train boondoggle), but we were wrong. As columnist Dan Walters noted, Newsom "clawed back" some money that hadn't been spent, but was warned by the Legislature's budget analyst that this year's budget would be as much as $10 billion short. Newsom also shifted general fund spending to special funds to paper over the problem.

Then the governor announced his grand achievement in his usual way. "In partnership with the Legislature, we have made deep investments in California and its future—transformative efforts that will benefit generations of Californians, and that this budget will continue to guide as we navigate near-term ups and downs in revenue," Newsom declared after "closing" the deficit, before going on his merry way of lecturing conservative states about their governmental failures.

Now he faces the largest challenge of his political career thanks largely to downturns in the state's tech economy. As the LAO put it: "investment in California startups and technology companies is especially sensitive to financial conditions and, as a result, has dropped significantly. For example, the number of California companies that went public (sold stock to public investors for the first time) in 2022 and 2023 is down over 80 percent from 2021."

Expect the governor and lawmakers to play the victim, blaming the situation on national economic conditions (higher interest rates, for instance) that are out of their control. Don't buy it. Consider that 18 months ago, California enjoyed a remarkable and unparalleled budget surplus of $97.5 billion. Lawmakers had the cushion to revamp our steeply progressive tax system, which makes it always dependent on boom-and-bust cycles.

With that much spare cash, Sacramento pols could have placed the state on solid fiscal ground for many years. Even with our inexcusably high-cost structure, they could have fixed our water infrastructure, bolstered our transportation systems, and reformed the chronically underperforming public schools. They did in fact send a few bucks back to taxpayers and put more money aside in the rainy day fund, but mostly ramped up social spending.

When one considers the shoddy level of state services, it's easy to wonder where all this money goes. Here's one place, according to a state fact sheet: "The California Climate Commitment will bring California's multi-year climate investment to $53.9 billion—more than what most other countries are spending—to lead the world in fighting climate change, designed to involve and benefit all Californians." Despite that, state carbon emissions actually are increasing.

Perhaps it's my hobby horse, but California officials measure success by how much they spend—not by the effectiveness of their spending. Perhaps now California might have to prioritize programs that are working and defund those that aren't. Just a thought. Former Gov. Jerry Brown also liked to spend, but he always warned that a recession is around the corner. He eliminated redevelopment agencies when he was faced with a big deficit, which was the best reform in decades.

Brown also raised taxes. And that's the main danger now. California already is around the top on the tax-taking front. We are heading toward perilous times, but at least the deficit will impose some restraint on a government that can't restrain itself. That's good news.

This column was first published in The Orange County Register.