California is facing a $68 billion deficit amid a sharp decline in revenue

California is facing a $68 billion budget deficit, according to the state’s nonpartisan budget analyst announced on ThursdayThis signals a “serious” financial challenge for the Democratic-led government heading into an election year.

The Legislative Analyst’s Office said a revenue decline this year “similar to those seen during the Great Recession and the dot-com bust” was largely responsible for the sobering forecast. Without a sudden reversal, Gov. Gavin Newsom and his fellow Democrats in the Legislature would face the state’s biggest budget challenge since the early 1990s, undermining the governor’s national messaging that has fueled the rise of California has largely portrayed its exit from the Covid-19 pandemic as an economic crisis. good luck.

California has been in a recession since 2022 and state finance officials had warned of a worsening budget outlook, the report said. But the state was late to recognize the full extent of falling revenues, due to a decision to delay the tax filing deadline until mid-November this year to give residents some wiggle room as they recover from a series of catastrophic storms from last winter.

The state’s tax system is prone to wide fluctuations due to its heavy reliance on taxation of capital gains and the personal income of high earners. For these residents, a steep decline in stock markets in 2022 resulted in heavy losses, which translated into lower tax revenues in returns filed last month.

The legislative analyst noted that this is also partly due to the federal government’s efforts to control inflation. Now that the Federal Reserve has raised key interest rates, loans have become significantly and abruptly more expensive for businesses and homebuyers, which in turn has exacerbated unemployment and depressed new business startups in California.

“Home sales have fallen by half,” the legislative analyst reported, “largely because the monthly mortgage to purchase a typical California home has risen from $3,500 to $5,400.” Tech companies have also been hit hard, the report found, with an 80 percent drop since 2021 in the number of California companies going public. (In recent years, IPOs have become a… noticeable boost to the government treasury.)

As a result, the report found, the state has added nearly 200,000 workers to its unemployed ranks since last year, and the unemployment rate has risen from 3.8 percent to 4.8 percent, nearly a full percentage point higher than the national unemployment rate .

The $68 billion deficit projection is a California record in raw dollar terms, although the state faced a larger gap during a recession in the early 1990s when measured as a percentage of total spending. State leaders passed a total budget of $225.9 billion this summer, and the projected deficit represents a hit of roughly 30 percent.

The prevalence of remote work in California initially helped the state weather the pandemic with less financial pain than expected; in early 2022, analysts predicted the state would bring in nearly $100 billion more than it had committed to spending.

In June, however, the governor warned that the state was facing a revenue slump and that its full scope would not be clear until late fall, after the postponed tax revenue deadline. California Treasury spokesman HD Palmer said the state would face “a significant challenge” with the 2024 budget.

Mr. Newsom must send his budget proposal to state lawmakers next month.

As California’s budget problems became apparent last week, legislative leaders said the state was prepared to address the projected budget shortfall without cutting back on core programs. Senate President Toni G. Atkins noted that the forecast was “not welcome news” but that the state also had “record reserves” to cover the deficit.

The cuts should be manageable if the state uses the substantial reserves it has built up during boom periods, cuts back on one-off expenses and cuts some key items such as school funding, the legislative analyst suggested. But the Legislature will be forced to make some tough choices because deficit years often force a range of interest groups in Sacramento to compete with each other to protect their own funding — or avoid additional fees or taxes on their members.

The deficit is likely to lead to significant budget cuts in an election year and challenge the state’s national image.

“California dominates,” Mr. Newsom told Governor Ron DeSantis of Florida in a debate on Fox News last week. “It is the fifth largest economy in the world.”