February 23, 2009

By Paul Feinberg

Dr. Jerry Nickelsburg is a senior economist with the UCLA Anderson Forecast. Among his responsibilities are the economic forecast for California and authorship of the associated quarterly California Report.

Last week, the state of California ended a months-long stalemate with the passage of a new budget. While the next UCLA Anderson Forecast for California is not scheduled for release until March, Nickelsburg had some immediate reaction to the newly-passed budget.

Q: What is your immediate reaction to the passage of the California budget and what is its impact on the California economy?

A: The problem California had was an imbalance between revenues and expenditures. And because California borrowing capability is limited, the legislature and the governor really had no choice but to cut expenditures and raise revenues to eliminate the deficit. The only question was how they would raise revenue and how much expenditures would be cut. However those choices were made, the deficit (estimated at $40 billion by the governor's office) gets eliminated.

Q: And the impact?

A: The impact of these choices, whatever the specifics are, is a drag on the California economy. It's a drag on the economy in two ways. When expenditures are cut, you have less spending and more unemployment. When taxes are raised, it creates a disincentive for private economic activity and that leads to more unemployment.

California has two problems: for this fiscal year there was not enough revenue to cover the planned spending. This budget solves that. But it does not solve the underlying structural problem. The underlying structural problem is that California has a very progressive income tax. California relies heavily on the state's highest income earners for funding state government.

But the income of those in the highest income bracket is highly volatile and this variable source of revenue leads to recurrent deficits.

Q. Does the passed budget impact the California Forecast, will it make a difference in the upcoming California Report?

A: No, the budget agreement per se will not impact the forecast. The critical thing was the amount of the deficit and we assumed one way or another that it would be addressed.

Q: What does impact the forecast?

A: The national stimulus package has some impact. It alleviates some of the inevitable unemployment from the budget agreement, particularly in health and education. But there is actually very little stimulus in the stimulus package for California. A third of the stimulus, for example, is for infrastructure which will not impact California until 2010 or later.

There are some tax decreases on the federal level, but they'll be offset by tax increases in the state, so Californians will pay less federal taxes but more state taxes. The bottom line of the stimulus plan is that it helps California solve its current problem, but it does nothing to help California solve the inherent systemic problems that plague Sacramento.

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