Jump to content
House Price Crash Forum
Sign in to follow this  
cashinmattress

Rejection Of California Budget Sets Stage For Even Larger Spending Cuts

Recommended Posts

Rejection of California budget sets stage for even larger spending cuts

The California legislature failed to get the two-thirds vote needed to pass a Democratic Party proposal to address the state’s $24 billion budget deficit. Democrats will now enter closed-door negotiations with Governor Arnold Schwarzenegger on a compromise that will include even more massive cuts in social services.

Discussions between the two parties have been ongoing for the last several weeks, much of it in secret and with no public input. Both sides have already agreed that draconian cuts in basic social programs are necessary.

To offset some cuts, however, Democrats had proposed a variety of mainly regressive tax increases, which require the support of a two-thirds majority in the legislature. This proposal failed as expected on Wednesday, largely along party lines. The Democrats control both houses of the state legislature, but do not have a two-thirds majority.

A proposal advanced by Schwarzenegger calls for $16 billion in budget cuts. These include eliminating the state welfare program; shutting down Healthy Families, the health insurance program for 930,000 children; closing 220 state parks; and ending Cal-Grants, which provides aid to poorer students to attend college. Schwarzenegger is also proposing a 5 percent pay cut for state workers, in addition to a 10 percent pay cut already announced.

Public education will be singled out for a large share of the budget cuts. About $5.3 billion would be taken from K-12 education and community colleges over next year, on top of the billions in cuts that have already been enacted.

The so-called “alternative†proposed by the Democrats was a slightly less severe program of $11 billion in budget cuts. The Democrats propose cutting $4.5 billion from K-12 education, $2.8 billion from higher education, and $2.6 billion from health and human services.

Democrats also proposed $2.2 billion in tax increases, including a 9.9 percent levy on oil extracted in California, a $1.50 per pack cigarette tax and a $15 registration fee for vehicles. In an accounting move designed to save $1 billion, Democrats have proposed pushing state workers’ paychecks back one day from June 30 to July 1, the start of the next fiscal year.

Senate President Pro Tem Darrell Steinberg, a Democrat from Sacramento, told the Pasadena Star News, “We present a budget where everybody feels some pain; every part of the safety net takes a cut.â€

In fact, both Democrats and Republicans are determined to make the working class pay for the crisis. No matter what compromise is now reached, either through a combination of borrowing from local governments, accounting maneuvering, tax levies, or selling off state assets, a massive attack on the social infrastructure of California is underway.

The Democratic Party accepts the argument that the only way to fix California’s budget deficit is to strangle what remains of public education and the social safety net. Senator Gloria Romero, a Democrat, told The Los Angeles Times, “When someone tells us ‘No new cuts,’ I say, ‘Look, don’t tell me that.’...There is the sense that we must do what we must do to keep California solvent.â€

Indeed, the proposed tax increases were largely for show. Even before the vote, Democrats acknowledged that they would not pass. Last week Schwarzenegger responded to a question about what kind of fight he expected over the tax increases by responding, “Well, what is being said and what is being done, as you know, are sometimes two different things.â€

The Mercury News commented: “Schwarzenegger was suggesting that Democrats were posturing on their $2.1 billion in tax proposals, putting on what he calls Kabuki theater for their constituents before he expected them to relent to the reality that Republicans will never agree to taxes as part of the solutions lawmakers must find to close the $24.3 billion deficit.â€

The budget crisis takes place against the backdrop of the economic collapse of California, the most populous state in the US and, if measured as an independent country, the eight largest economy in the world.

According to government officials, the state will be insolvent by July 28, which has prompted Governor Arnold Schwarzenegger to threaten to bring the government to a “grinding halt†and stop borrowing to cover the state’s expenses.

The state comptroller, John Chiang, has warned that without a new budget the state will begin issuing “IOUs†in place of cash to social service agencies, private contractors and state vendors. The state’s cash crunch, Chiang said, is unlike anything “seen since the Great Depression.â€

Recent figures point to a continued deterioration of the state economy. Unemployment in California soared to 11.5 percent for May, the highest level since World War II. The April unemployment figure was 11.1 percent, compared to 6.8 percent in May 2008. A more complete measure of unemployment, including those forced to work only part time, shows that more than one in five Californians is unemployed or underemployed.

California, accounted for one out of every five jobs lost last month. Out of a population of 37 million people, 2.1 million Californians are officially unemployed, 885,000 more than last month.

The state has been hit particularly hard by the collapse of housing prices, which have wreaked havoc on the real estate market, construction, and other financial related industries. With several major ports on the Pacific Ocean, California is also heavily dependent on world trade, which is falling rapidly.

California saw a decline of 33.8 percent of personal income tax receipts in May. The decline in revenue will mean a new round of austerity measures to balance the state budget, since the state collects half of its revenue from personal income taxes.

The state is under intense pressure from Wall Street to impose concessions. Moody’s Investor Service has threatened California’s general obligation debt with a “multi-notch†downgrading if the state legislature failed to produce a balanced budget before going bankrupt. The state is currently at an A2 credit rating, which are just five notches above speculative status.

A downgrade will mean that the state will face sharply higher interest rates for borrowing, if it is able to gain credit at all.

The Obama administration has responded to the economic meltdown of California by repeatedly refusing federal assistance. Instead, the administration, speaking on behalf of the most powerful sections of the financial elite, is making California an example for other states to follow as they enact austerity budgets.

By abandoning the richest and most populous state to its own devices, the Obama administration has directly contributed to the crisis now unfolding. Trillions are handed out to private banks, but when it comes to the world’s eight largest economy on the verge of bankruptcy, no money is available.

As California collapses, executives at Goldman Sachs and other banks are anticipating record bonuses, returning to business as usual. No faction of the political establishment so much as suggests that those who are responsible for the economic crisis—the wealthy corporate and financial elite—should be made to pay for it.

On the contrary, the budget crisis in California is being used a template to enact cuts to social services all across the country. The ruling class is determined to seize on the economic crisis to restructure class relations in the United States.

Mmmm. I love the smell of state failure in the morning...

Do you think Arnold is still on the wacky baccy?

schwarzenegger_smoking_joint.jpg

Share this post


Link to post
Share on other sites

The Americans seem to be made differently to us. Their approach is very cut and dried. They tend to recognise that they have a problem and deal with it as best they can. If their first approach doesn't work, they try something new. The creative destruction process at work. One effect of this approach is that they seem to reach crisis points quite quickly but also to resolve them quite quickly.

We tend to try to keep up appearances and soldier on rather than confronting issues directly until the situation becomes unsustainable. This sometimes drags out the process of recovering from bad positions and often doesn't allow us take quick and decisive action.

My read of current circumstances is that we are even more phucked than the Californians. Our financial position at the government and household level is breathtakingly dire. Our nature probably means that we will try to muddle through until we reach a crisis point at which stage we will have to face up to our problems and deal with them in a draconian way that is not too dissimilar to the choices that California is currently facing.

Part of what accelerates the process in California compared to the UK is all of the "Propositions" that allow voters to more directly impact legislation than we can. While our governments (at the national and local levels) may be lacking some of the contraints that the California Legislature faces, I suspect that markets are going to impose the same discipline on government actions here that voters are able to impose directly in California.

There is still a very long way to go here ....

Share this post


Link to post
Share on other sites

Yes, there is something about all this report which you wouldn't see over here. They seem to realise they are in the carp, over here it's printy printy and all's well. I suspect if we go forward 10 years they will be in a better position than us.

Share this post


Link to post
Share on other sites
Yes, there is something about all this report which you wouldn't see over here. They seem to realise they are in the carp, over here it's printy printy and all's well. I suspect if we go forward 10 years they will be in a better position than us.

California is in the same position as national governments which use the Euro. They can't print money directly as much as they might want to.

The ECB addressed this problem yesterday by lending EUR 442 bn to banks in Europe for a year at 1%. It was a sort of stealth QE which got around the problem of trying to decide which government issued bonds to buy.

The equivalent situation in America would be for the Fed to lend USD 500 bn or so directly to state governments at 1% for a year. I would be surprised to see that happen but it can't be ruled out.

The problem for California is that their fiscal position is deteriorating so rapidly that lenders are becoming increasingly reluctant to extend credit to them. Whether California eventually resolves its short term situation by cutting spending or increasing borrowing is becoming less relevant. If people won't lend to California, their only option will be to cut spending. We will face the same problem within 2 years at the most.

Share this post


Link to post
Share on other sites
We will face the same problem within 2 years at the most.

...we face it now ...Brown does not have the belly for cuts....General Election required now ...! ...these retards were handed the strongest economy in Western Europe in 1997 ....like all Labour governments they blew it to a state where simple things like pensions for people outside the public sector are no more....!....the retards need to go now..!..... <_<

Edited by South Lorne

Share this post


Link to post
Share on other sites
...we face it now ...Brown does not have the belly for cuts....General Election required now ...! ...these retards were handed the strongest economy in Western Europe in 1997 ....like all Labour governments they blew it to a state where simple things like pensions for people outside the public sector are no more....!....the retards need to go now..!..... <_<

I agree that we face the same fiscal situation now. Every month of delay in avoiding addressing our problems probably means at least a year of additional pain before we get back onto an even keel.

The desire for relatively low risk assets and QE means that there is unsustainable demand for gilts at the moment.

I was not clear enough in saying that my view is that we are going to face the same market disciplines that California is already facing within two years.

Sterling is not a reserve currency. The Dollar is at the moment. If the Dollar loses its status, the problems there are going to accelerate even more and expose our weaknesses in global debt markets even more quickly as well.

Share this post


Link to post
Share on other sites

If this were the Uk it would be like bailing out the banks then turning to a county council who have lost all to icelandic banks then saying" feck em! close all old peoples homes, shut the schools, stop collecting rubbish and turn out the streetlights.....feckin scary times....unless you are a banker ofcourse!

Share this post


Link to post
Share on other sites
If this were the Uk it would be like bailing out the banks then turning to a county council who have lost all to icelandic banks then saying" feck em! close all old peoples homes, shut the schools, stop collecting rubbish and turn out the streetlights.....feckin scary times....unless you are a banker ofcourse!

That is probably not a fair comparison. California has nearly 40 million people and an economy almost as large as ours.

The scale of the problems in California are more comparable to ours on a national level rather than at a council level.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   288 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.