CA 2025-2026 State Budget Deficit at $2 Billion, Expected To Grow Exponentially

The Legislative Analyst’s Office unveiled the California state budget forecast for the 2025-2026 fiscal year on Wednesday, showing a $2 billion deficit for the year, but with the number expected to grow exponentially if more cuts aren’t made soon.

California’s state budget has fluctuated wildly in the past several years. During the COVID-19 pandemic, California saw the largest surpluses in state history, including an unprecedented $31 billion surplus in 2022-2023. However a weakening economy, a massive loss of the state population, businesses moving out of state, delayed tax changes, as well as numerous other factors led to a severe deficit the next year. An initial deficit of $25 billion, which was later changed in May to $31.5 billion, rocked the state. While Governor Gavin Newsom managed to continue on with a reduced budget, experts warned that the situation would likely grow worse with continued tax shortcomings.

In December 2023, the LAO announced that the state would be facing a $58 billion budget deficit for at least the next few years. However, with lower than expected tax revenues coming in partially because of taxes delayed by atmospheric river storms from earlier this year, as well as recent losses in the tech sector, the amount was adjusted to $68 billion only a week later. The forecast went all the way up to $73 billion in February until lawmakers finally began cracking down. By May, the forecasted deficit went down to $55 billion, and even more cuts were made as a result. The budget was slashed even more, and Newsom even announced that nearly all vacant state jobs in the state would be cut. Governor Newsom’s new budget worked for the interim, but critics pointed out that it wouldn’t be sustainable for long. Newsom even went as far as to claim the budget was now balanced.

However, on Wednesday, things proved to be mixed for Newsom and the state. While the projected 2025-2026 budget deficit is no longer anywhere near the totals of last year, it still isn’t in good shape. And, unlike what Newsom said, there is a deficit. Thanks to all the cuts and shoring up of funds, the deficit for the next fiscal year is currently at only $2 billion. But the LAO also warned that, unless more cuts are made, another $20-$30 billion will be added to the deficit for each of the next 3 fiscal years under current projections.

“We describe the state’s budget condition as being in fair shape, and we would describe it as being roughly balanced,” said LAO Legislative Analyst Gabe Petek on Wednesday. “The subsequent three fiscal years after the budget year, we estimate there to be pretty significant operating deficits emerging in the range of $20-30 billion per year.

A new deficit

“The state does have $7 billion in revenue. It’s really been driven by income gains among high-income taxpayers, which are benefiting a lot from the very strong stock market trends that we’ve been seeing.”

Many lawmakers noted that, like the LAO said, that more cuts would be needed to stave off the projected future deficits now.

“We need a robust analysis of existing programs and whether or not they’re doing what we expected them to do when they were established,” explained Senator Roger Niello (R-Fair Oaks). “And if they’re not, we need to eliminate those programs and therefore cut expenses.”

Assemblyman James Gallagher (R-Yuba City) also agreed, saying, “California is the highest-tax state in the country, yet we are still facing multi-billion-dollar deficits well into the future. Democrats got us into this mess and I have no confidence in their ability to fix things without inflicting real pain on Californians.”

While not advocating major cuts, many Democrats advised restraint on spending in the coming years. This included Assembly Speaker Robert Rivas (D-Hollister) who added “We need to show restraint with this year’s budget, because California must be prepared for any challenges, including ones from Washington. It’s not a moment for expanding programs, but for protecting and preserving services that truly benefit all Californians.”

As of Wednesday night, Governor Newsom has not commented on the projections. But experts said that Newsom, in his final two years, should continue to look for places to slash the state budget so that the next Governor doesn’t inherit a budget crisis.

“Newsom owes it to whoever is next that they get a balanced budget,” said Lee Greenman, a California-based accountant who helps city and other regional entities fix budget problems, to the Globe on Wednesday. “The legislature really found ways to get it close to balanced this year, but those projections for the rest of the decade are not great. We’re in calm waters now, but there are also storm clouds ahead. We need to heed that warning now and not wait for it to get worse down the line. We need to be smart about this.”

More on the projected budget is expected soon.