Times are tough across the country. Legislators in almost every state are frantically searching for ways to close their budget deficit gaps. Few have to work as hard as the elected officials in California. With a deficit currently at $15.4 billion, the state lacks cash for $126 of every $1,000 it spends (not counting federal funds). This has put Sacramento in a virtually unprecedented kill-the-deficit mode.
The rest of the nation better take notice. What California is going through now is what the federal government is going to have to face very soon. Our elected officials in Washington, DC better watch and learn, both what to do and what not to do. The causes of the U.S. deficit are largely the same as the causes of California’s budget gap: excessive spending on welfare state entitlement programs.
The good news out of Sacramento is that the deficit is the dominant topic of conversation in town. Unlike the past couple of years, there is now a concerted effort both among lawmakers and in the governor’s mansion to put an end to the Golden State’s notoriety as the home of fiscal irresponsibility.
The bad news is that both legislators and the governor tend to treat the budget deficit as the disease itself, not realizing that it is in fact only the symptom of the state’s true fiscal illness: structural overspending.
Like every other government, the state of California lives off the money that its taxpayers make. Taxpayer earnings sum up to the state Gross Domestic Product, or GDP. The growth rate of state GDP determines the growth rate of government spending. According to the U.S. Bureau of Economic Analysis, over the past quarter-century California’s state GDP has grown by 5.5 percent per year on average (not adjusted for inflation).
State spending, on the other hand, has grown by 6.8 percent on average. In plain English, this means that every time tax revenues grew by $100, the state increased its spending by $123.64. There have of course been numerous adjustments to tax rates in California, but those adjustments have only served to conceal the state’s structural over-spending.
Leading causes of this over-spending have been public education, with a 6.5 percent increase per year, and Medicaid, which expanded by 10.7 percent per year from 1985 through 2009. Both these figures should, again, be compared to the 5.5 percent growth in the state’s tax base. They should also be contrasted against the futile attempts by Sacramento to close the current deficit. The Sacramento Bee reports:
Like many cash-strapped families, California paid bills late and ran up its credit cards when the economy tanked. Gov. Jerry Brown says it is time to straighten up the state’s finances, in part by extending higher taxes – on income, sales and vehicles – worth about $10 billion a year. Under the governor’s new budget schedule, much of the state’s tax revenue growth over the next two years would help clean up balance sheets rather than buy more school days or restore Medi-Cal cuts. The state would generally wait to pump more money into programs until 2013-14. Despite significant revenue growth in the meantime, schools and low-income residents would generally have to wait to claw back from the Great Recession. “Paying off the remainder of this budgetary borrowing should be the top priority of any new revenue received in the coming years,” Brown’s budget says.
While the short-term efforts to close the deficit are laudable, the result will only be a temporary patch on a budget that still includes the same old spending programs as before. Unless California does something about its permanent budget leakage, it will go down in the darker waters of history and be remembered not as The Golden State, but more appropriately as The Entitlement State.
