The uptick has buoyed hopes within the Capitol that California’s chronic budget deficits might disappear if the revenue surge continues. That would spare Newsom and legislators from having to dream up more accounting gimmicks, deferrals and loans to cover the gap between income and outgo.

However, the Legislature’s fiscal advisor, Legislative Analyst Gabe Petek, threw cold water on those rosy scenarios Wednesday. He sees recent revenue gains as a spike driven by an artificial intelligence boomlet in Silicon Valley that’s likely to implode, as have previous tech-related bubbles.

“With so much exuberance surrounding AI, it now appears time to take seriously the notion that the stock market has become overheated,” Petek says in his annual fiscal overview, which predates the governor’s introduction of a new budget. “History suggests that the stock market is prone to overreact to major technological advances, even if the technology itself turns out to be revolutionary.”

Instead of savoring a surge in revenues that would erase what officials are calling a “structural deficit” that is somewhere in the $10-20 billion range, officials should anticipate a larger gap, Petek says.

“Under our revenue and spending estimates, the Legislature faces an almost $18 billion budget problem in 2026‑27,” Petek says. “This is about $5 billion larger than the budget problem anticipated by the administration in June, despite improvements in revenue.”

The analyst notes that California’s constitution requires the state put money toward public schools and reserves, which will “almost entirely offset revenue gains,” and toward other spending that’s running about $6 billion over the current budget’s estimates.

“Starting in 2027‑28, we estimate structural deficits to grow to about $35 billion annually due to spending growth continuing to outstrip revenue growth,” Petek says.

It should be noted, not for the first time, that California’s chronic deficit is not caused by an economic downturn, which has occurred in the past, but rather by an enormous error by Newsom and his budget advisors three years ago.

In 2022, they projected a permanent increase in revenues, based on a one-time spike, leading Newsom to declare a $97.5 billion budget surplus, boasting “No other state in American history has ever experienced a surplus as large as this.”

Confident that the money would be there, Newsom and lawmakers fattened up the spending side of the budget, only to learn that the supposed surplus was based on what was later acknowledged to be a $165 billion overstatement of revenues over four years.

Ever since, revenues have failed to cover the elevated spending, and Newsom and lawmakers have covered the gaps with the aforementioned gimmicks. They have incurred more than $20 billion in internal loans from special funds that must be repaid. They also have drawn down reserves that were supposed to cover genuine emergencies, not political shortsightedness.

Newsom and his staff are now in the final throes of drafting an initial 2026-27 budget that will be his last as governor and will be unveiled in January. The question is whether he will face the fiscal music and finally write a truly balanced budget or employ more short-term fixes and dump the problem on his successor.

That would mean either making real cuts in spending or raising taxes, both of which would take some courage. The past has not been encouraging.

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That’s where we find ourselves. The U.S. is at peace and despite President Trump’s claims, there’s no national emergency. And yet we’ve only seen debt as a higher share of GDP during the years of 1945, 1946, 2020 and 2021. Then, Republicans and Democrats knew to scale back. Now, debt explodes during emergencies and continues to grow in peacetime.

In 1946, after World War II, debt-to-GDP was 106%. It declined to just 25% by 1980, not only because of inflation and economic growth but because of real fiscal discipline. With budgets nearly balanced, the fruits of a booming private sector could actually reduce the burden. Beginning in the Reagan era, discipline gave way to a new normal of chronic budget deficits.

Three forces made the shift possible:

First, and the main cause of the mess we are in, is that the entitlement state became enormous, yet untouchable. The Social Security reforms of 1983 are a rare example of bipartisan structural reform of a major entitlement program in U.S. history. Since then, despite economic and societal changes, the program has never been reformed. Never mind that it faces insolvency and the potential for automatic benefit cuts of more than 20% in 2033. The same is true of our other major debt driver: Medicare. And Medicaid is growing far beyond its original intent.

Democrats, occasionally helped by Republicans, have worked to expand welfare programs meant for lower-income people to those in higher and higher income brackets. The most recent and extreme example is the COVID-era expansion of the Obamacare tax credit to wealthier taxpayers, a significant share of whom enjoy early retirement. The fight over its continuation is what the government shutdown is about.

Second, Republicans discovered that promising tax cuts without offsetting spending cuts was politically painless so long as one claims that they “pay for themselves.” There is one rare and recent exception: this year’s “One Big Beautiful Bill,” which included $1.5 trillion in spending reductions over 10 years to offset some of the tax cuts. It’s not enough, but it’s something. Meanwhile, the Democrats love to claim that debt wouldn’t be a problem if the rich paid their “fair share.” They already do pay an enormous amount in taxes. But the numbers still don’t add up.

Finally, the Federal Reserve, starting under Chairman Alan Greenspan in 1987, learned how to anesthetize the political pain of budget deficits by keeping interest rates artificially low and monetizing debt. Politicians concluded that they could borrow endlessly without suffering political consequences. The problem is that this only works insofar as investors don’t worry that they will be paid back with inflated dollars.

That illusion has vanished. Interest costs have surged from $372 billion annually just a few years ago to nearly $1 trillion today, surpassing what we spend on defense or Medicaid. Within a decade, yearly interest payments are projected to nearly double, reaching $1.8 trillion. Even without new programs, the built-in deficit would keep rising and outpace economic growth. And Washington keeps adding more deficit spending.

This decade’s bipartisan binge has debt on track for 166% of GDP by 2054. I don’t think we will actually reach that point, because inflation will break out and stabilize the debt. That would destabilize the country and inflict enormous amounts of pain and lost purchasing power. So, my point remains: Politicians on the left and right see that the debt is exploding and are doing nothing.

The current politics of this crisis are as bipartisan as its origins. Democrats defend every entitlement and dream up new benefits. Republicans demand more defense spending and still more tax cuts. Both claim that faster growth will somehow erase the arithmetic, but growth alone can’t close a structural gap this large.

Even sustained 3% real annual growth — a questionable assumption given the implications of an aging population and crackdown on immigration — would produce about $4.4 trillion in extra revenue over a decade, while total deficits will total $21.7 trillion.

Don’t be fooled: The debt explosion is not driven by waste, fraud or foreign aid. Nor is it the result of a lack of revenue. It’s the direct result of reckless promises to retirees, the cost of healthcare and an unwillingness to pay the bills honestly. For most of American history, debt fell when wars ended and peace returned. Since 1980, we’ve managed the opposite: peace without prudence and prosperity without restraint.

The post The three forces fueling America’s 45-year debt addiction appeared first on The Hemet & San Jacinto Chronicle.

More than 1 million people signed a petition to put a measure on the ballot this November that would have required voters to approve any tax increase passed by the state Legislature. It also would have required all local tax increases to be approved by two-thirds of voters instead of a simple majority vote.

The biggest impact, however, would have been that the measure threatened to retroactively reverse most tax increases approved since Jan. 1, 2022. Local governments warned they would have lost billions of dollars in revenue that had previously approved by voters. And it would have threatened recent statewide tax increases, including one on guns and ammunition set to take effect July 1.

That prospect alarmed Newsom and legislative leaders so much that they took the unusual step of asking the state Supreme Court to remove the measure from the ballot before voters had a chance to decide it.

California voters are allowed to bypass the governor and the state Legislature to amend the state Constitution at the ballot box, something they do frequently. Voters have amended the Constitution to protect abortion rights, declare marriage is between a man and a woman and dock legislators’ pay if they fail to pass a budget on time.

But the court has recognized a distinction between amending the Constitution — adding something new — and revising it by altering the way government works. Voters can amend the constitution by a ballot measure, but they cannot revise it.

In this case, the court ruled the ballot measure is a revision because it would take away the Legislature’s power to raise taxes — a shift the justices said would “fundamentally rework the fiscal underpinnings of our government at every level.” The only way to add these rules to the Constitution, the court ruled, would be for the Legislature and voters to approve a call for a new constitutional convention.

Matthew Hargrove, president and CEO of the California Business Properties Association, called the ruling “a gut punch to direct democracy in California.” Rob Lapsley, president of the California Business Roundtable, accused the court signaled its willingness “to back the progressive agenda at every turn moving forward.”

“There is no independent judiciary in California anymore,” Lapsley said. “Be scared. Because it’s only going to get worse.”

Newsom declined to speak to reporters after the ruling, but he issued a written statement — attributed to an aide — that said he supports the ballot initiative process but noted it “does not allow for an illegal constitutional revision.”

The issue is tricky for Newsom, a Democrat now in his second term who is a potential candidate for president. Newsom has tried to counter California’s reputation for high taxes by publicly opposing many new tax proposals, including campaigning publicly against a new tax on the rich.

But he has been willing to temporarily raise taxes on some businesses to balance the budget, something he is proposing to do again this year. And he signed a tax increase last year on guns and ammunition that is likely to be challenged in court once it takes effect on July 1.

Republicans on Thursday were quick to portray Newsom as “greedy,” arguing his successful attempt to block the measure will continue to make things more expensive in California, whose taxes on incomes, sales and gasoline are among the highest in the country.

“The California Democrat machine’s love affair with new taxes to pay for their ludicrous policies keep costing Californians their hard-earned money, and Newsom just made it that much easier to take even more,” said Jessica Millan Patterson, chairwoman of the California Republican Party.

Removing a measure from the ballot before an election is rare, but not unprecedented in California. In 1999, the court threw out one that would have cut lawmakers’ salaries and removed their authority to set boundaries for legislative districts. The court removed that measure from the ballot because it included more than one subject.

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