While just about everyone is familiar with the economic depression we are heading for on account of the Covid-19 pandemic, the looming budget crisis created by this situation could prove to be an even bigger hurdle for government officials here in California.
In addition to the same depression issues that the rest of the world is going to be facing, California leaders are also going to have to contend with a unique combination of problems created by lower tax revenues combined with high fixed costs and rising variable costs.
This combination of economic problems is not completely unique to California, but a quick review of the separate situations shows that our state is likely to have some of the most significant budget shortfalls.
Lower Expected Revenue
Because California was quick to respond and is showing signs that it will be cautious with reopening its economy, businesses that are located here are likely going to be some of the hardest hit in the entire country.
With so many businesses closing their doors for such a long stretch of time, there are going to be serious shortages in just about every type of budgeted tax revenue.
Every program and policy funded by the state counts on a certain amount of tax income from local businesses, and that income simply isn’t going to be there for at least the first two quarters of 2020, and those shortfalls could continue for years to come as businesses that are able to survive struggle to recover.
Existing Fixed Costs
The lack of funds coming in from tax revenue will not do anything to change the sky-high fixed costs that California is already committed to paying.
Basic government infrastructure and state programs that take care of pension funds and retirees need their budgeted funds to survive, but with no money coming in there won’t be any to keep these programs going.
Rising Variable Costs
In addition to coming up with the fixed costs required to run the state despite lower-than-expected tax revenue, state officials are also going to have to contend with rising variable costs as well.
The primary concern here is the skyrocketing number of unemployment claims from out-of-work residents. The increased expense for just this one example is likely going to be big enough to bankrupt the state if something isn’t done to adjust the budget.
Finding a Balanced Equilibrium
With not enough money coming in and more than expected going out, there is no easy solution for California to survive the coming budget crisis. However, there are certainly some things that can be done to get closer to a balanced equilibrium.
The first move for most lawmakers is going to be a push to raise a wide range of taxes. Combining that with getting local workers off of unemployment and back to work will continue to be steps in the right direction.
Getting the state of California through the recovery that will need to happen following the pandemic is not going to be easy, but if our leaders are able to work together to help local residents, a quick recovery is definitely a possibility.