By Jon Coupal
There is near unanimity among economists that the United States will experience a recession in 2023. Last month, the Conference Board predicted a 96 percent likelihood of a recession in the U.S. within the next 12 months due primarily to the Federal Reserve’s interest rate hikes.
Relative to other states, California is ill-prepared to weather a recession, especially a severe one. But even without a recession, California’s Legislative Analyst predicts a $25 billion shortfall for fiscal 2023-24. The deficit, which the LAO calls a budget “problem,” is mainly attributable to revenue estimates that are $41 billion lower than previous budget projections.
Moreover, the LAO acknowledges that programs which include inflation adjustments will make the problem worse: “Our estimate of a $25 billion budget problem understates the actual budget problem in inflation-adjusted terms.”
Particularly surprising is that all this bad news from the LAO doesn’t even assume that a recession is imminent. “While our lower revenue estimates incorporate the risk of a recession, they do not reflect a recession scenario.” If a recession does occur in 2023, the LAO says that revenues could be $30 billion to $50 billion below its initial revenue outlook.
If the legislature took seriously the report from the LAO, it would take immediate action to blunt the damage from the economic downturn predicted for 2023. But that is unlikely because California’s political leadership lacks the will to reduce spending as well as the high tax burden which drives that spending. Government spending is California’s growth industry, exploding 600% since 1989-90. ($49.1 billion to $303 billion).
California’s out of control spending leads to the second reason why an economic downturn will hurt California more than other states: A reduced tax base due to outmigration of businesses and productive taxpaying individuals.
This column has reported numerous times on how California’s high taxes, heavy regulations and lack of affordable housing have led to an exodus out of California. The well-known satire site, Babylon Bee, recently featured an image of a high speed train emblazoned with a U-Haul logo with the caption: “U-Haul Builds Bullet Train from California to Texas.” Humorous, but capital flight out of California is no laughing matter.
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