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California Cannot Afford the State’s New Budget


Does Governor Schwarzenegger remember standing at podiums with huge anti-spending banners behind him during the recall election that brought him into office? If so, you certainly can’t tell by looking at the budget he recently signed. His budget fails to resolve California’s fiscal problems and will not promote economic prosperity—but it will keep big government growing.

Schwarzenegger’s biggest campaign promise was to decrease state spending, but his $117 billion budget increases spending by more than 10 percent. This is a dramatic increase, but many state lawmakers don’t sound worried. Assembly minority leader Kevin McCarthy (R-Bakersfield) said of the budget, “this is the right step, the right direction, but let’s keep the movement going forward.” But if the legislature continues to pass budgets with 10 percent spending increases, the size of the California government will double approximately every seven years!

Ten percent spending growth is not fiscally sustainable. Our economy rarely grows faster than four percent per year. California’s new budget significantly increases the relative burden of government on our economy. That’s bad for our fiscal situation and bad for future economic growth.

Although the state will not have to borrow more money this year, the current budget forecast predicts that it will need to borrow close to $5 billion next fiscal year. Moody’s recently upgraded California’s bond rating, but that’s still not much to cheer about. California’s credit rating remains one of the worst of any state. The upgrade happened not because of any spending restraint but mainly because an unexpectedly strong economy has generated more tax revenue. In other words, we just got lucky.

Republicans credit Schwarzenegger for his spending “restraint” because he used his line item veto to eliminate $190 million from the budget. Some perspective is needed, however. In a $117 billion budget, those vetoes amount to 0.1 percent. That’s one-tenth of one percent. He cut essentially nothing.

The entire fault does not lie with Schwarzenegger, of course. He did have to compromise with Democratic lawmakers. But there is little reason to believe the Republicans would do much better if they had complete control of the state legislature. Just look at the federal government. During Bush’s first term, spending increased by 33 percent without him vetoing a single spending bill. The last president to increase spending at such a fast rate was Lyndon Johnson—not exactly someone we’d call a small-government Democrat.

Californians need to demand real reform from both Republicans and Democrats if the state is to resolve our fiscal problems and maintain a healthy rate of economic growth. They need to demand real spending cuts, not just the superficial rhetoric that has taken place since Schwarzenegger got elected.

Ireland provides a striking example that California should emulate. In response to a severe fiscal crisis in the 1980s, Ireland’s lawmakers dramatically slashed spending. Consequently, the country’s deficit disappeared, it began paying down its debt, and its economy started growing faster. The Irish followed up their spending cuts with more pro-market reforms that promoted economic freedom. Most importantly, since their fiscal affairs were in order, Ireland was able to decrease their tax burden. The overall result? Ireland was one of the fastest growing economies in the world during the 1990s and now has a higher standard of living than almost all of its European neighbors.

California has a long way to go in order to match Ireland’s success. In the recently published Economic Freedom Index of the 50 states California scored second to last in economic freedom. Many reforms are needed, in particular tax and regulatory reform. But to move in the right direction, first and foremost we need real across the board spending cuts, not the superficial rhetoric Schwarzenegger has given us to accompany his bloated budget.

Benjamin Powell is a Senior Fellow at The Independent Institute, Director of the Free Market Institute at Texas Tech University, and former President of the Association of Private Enterprise Education. Dr. Powell received his Ph.D. in economics from George Mason University. He has been Assistant Professor of Economics at San Jose State University, Associate Professor of Economics at Suffolk University, a Fellow with the Mercatus Center's Global Prosperity Initiative, and a Visiting Research Fellow with the American Institute for Economic Research. He is also the editor of the Independent Institute books, Housing America: Building out of Crisis and Making Poor Nations Rich.

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