California sliding

California, one of the world’s biggest economies, responsible for nearly 13% of the United State’s GDP, is on the brink of going completely broke. It is forecast that if California does not pick up its act together soon, it will be forced to start issuing IOUs to households and government staff.

How did California get in such a mess? California had already undergone a budget crisis after the dot-com bust but was saved by the post-9/11 economic recovery. However, in the classic case of myopia, legislators failed to see that the rapid growth wouldn’t continue forever and used the extra revenue in major infrastructure projects, leaving little in the government coffers.

So now, with tax revenues collapsing as a result of the global slowdown, California is forecast to run a $41.6 billion budget deficit over the next two fiscal years. However, unlike ordinary governments, which can run up deficits when they spend more than they receive, California is constitutionally required to have a balanced budget. Therefore, once it runs out of money, it is simply unable to spend any more.

So far, two months into the crisis, Californian legislators continue to debate the various solutions with little success. The two-thirds majority requirement for any new budget means that gaining enough support is unlikely, as Democrats refuse major cuts in spending and the Republicans oppose tax rises, leading to the inevitable stand-off. So, as the stalemate continues, California’s revenue continues to shrink perilously low in the face of the deepening recession.