Gov. Newsom’s proposed budget fails the moment

Governor Gavin Newsom is wrong. His proposed budget is not “resilient;” it demonstrates an inability to learn the lessons from California’s volatile budget history.

The crippling deficit is merely one manifestation of the broader crisis. Newsom estimates a $37.9 billion deficit, about one-half of the nonpartisan Legislative Analyst Office’s (LAO) initial $68 billion calculation. In response, the Analyst says Newsom’s revenue estimate is “about $15 billion higher than ours . . . fall(ing) on the optimistic side of what we consider most plausible.”

Even if the governor’s estimate proves correct, California is once again facing a fiscal crisis that will likely last for several budget cycles. This prolonged fiscal crunch is not due to revenues simply returning to “normal.” It is a spending problem that requires fiscally sound solutions, not proposals that kick the can down the road in the hope that robust revenue growth will somehow return.

Budget gimmicks, moderate expenditure reductions, and unreasonable budget estimates, as Newsom proposes, simply fail the moment.

California’s current budget problems exemplify the state’s destructive spending cycle. The state’s volatile economy and progressive tax system cause revenues to surge during good economic times, which politicians eagerly spend. This enables spending to grow faster than people’s incomes and pushes expenditures to unaffordable levels.

When the economy sputters, as it always does, revenues crash, revealing the unsustainability of the spending binge. Resolving the crisis requires fiscal discipline, but politicians often use difficult times to push for counterproductive tax increases.

Eventually, total state spending becomes affordable again due to years of expenditure controls coupled with the eventual economic recovery that reignites income growth. Historically, the affordable level of government has been between 7.5% and 8% of residents’ income.

Governor Newsom has followed this pattern to a T. Just 2 ½ years ago, Newsom announced “a $100 billion California Comeback Plan” that was supposed to “pay dividends for generations to come”. This spending has increased state expenditures to over 9.5% of taxpayers’ income.

Had expenditures remained at 8%, which Governor Brown generally maintained following the 2009 budget crisis, current reserves would be sufficient to cover the revenue shortfalls. But the state recklessly returned to overspending not seen since Gray Davis was governor.

The path forward is clear. Tapping the $23 billion reserves will help reduce the severity of budget cuts. However, Sacramento should rely on strict expenditure controls, ideally reining in total spending to around 8% of personal income to address the deficit.

This is attainable by adhering to the mantra of doing better with less.

Take homeless spending. The governor’s plan relies on the Housing First approach, placing people in permanent homes to address homelessness, which is exceptionally costly. In Los Angeles, providing one homeless person an affordable home costs $600,000 on average,  not including the cost of necessary support services.

Innovative solutions, such as the temporary housing offered by Dignity Moves in San Francisco, achieves better results for far cheaper. Dignity Moves constructs temporary housing and provides support services for the homeless for around $50,000 per person. Leveraging such innovative thinking would enable the state to serve 6 times the number of homeless for half the budget.

In the same way,  much academic research finds no relationship between education spending and student outcomes. Researchers say that how we spend limited education dollars is far more important than how much we spend.  Based on the LAO’s estimates, up to $17 billion in savings is possible by aligning school spending with “the constitutional minimum allowed by Proposition 98”.

Other potential savings could be gained by pulling back one-time spending, rescinding new programs, and bargaining public employee furloughs to help manage overall costs. While these are difficult decisions, they are no different than the trade-offs millions must make every day to live within their means.

Beyond spending, the governor ignores the budget benefits from deregulation. Chevron’s recent decision to “pare back” its state operations exemplify how overregulation is costing us jobs and income. Reducing these burdens will accelerate income growth and raise overall revenues through economic growth.

California faces another difficult budget crisis. Solving it requires tough spending decisions. Salvaging the state’s fiscal soundness and encouraging economic prosperity requires a budget that is up to this challenge.

Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute.