Thursday, November 17, 2022

Uncertain Outlook

The Legislative Analyst's Office - LAO - typically does a fiscal outlook review around this time and one has now been published. It has the unfortunate mixing of stocks and flows in analyzing the state budget, with sloppy use of the word "deficit." If we unravel what the LAO is saying and use the word "deficit" to mean less revenue than expenditure, the LAO projects a deficit this year of something like $22 billion. For the next year, it estimates a deficit of something like $18 billion. And it notes that its projections do not include a recession. The villain it sees is that with the state's heavy dependence on top income earners for tax revenue, and with those earners taking financial losses, revenues will be cut relative to spending. 

We noted in a prior post that although the initial months of this fiscal year showed revenue coming in below forecast levels, for the first four months of the year, that problem seems to have vanished.* It is possible, therefore, that the LAO projections were based on earlier data. And given the state's dependence on top earners and their experience in the stock and other financial markets, there is a lot of uncertainty about what will happen. We could have a test of the multi-year compact between UC and the state regarding state support. In the past, such compacts have evaporated when state budgets got into trouble.




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