California slashes billions to erase virus-induced deficit

Hundreds of people gather to protest the stay-at-home orders outside the state capitol building in Sacramento, California on May 1, 2020. California, which before the pandemic had a $6 billion budget surplus, now faces a $54 billion deficit (AFP Photo/Josh Edelson)

Los Angeles (AFP) - California, the world's fifth largest economy before COVID-19, will have to cut spending and borrow from special funds to try and close a $54 billion deficit brought on by the pandemic, the state's governor said Thursday.

"COVID-19 has caused California and economies across the country to confront a steep and unprecedented economic crisis -- facing massive job losses and revenue shortfalls," Governor Gavin Newsom said.

"Our budget today reflects that emergency," he added, as he submitted a revised budget with plans to erase a $54.3 gap caused by the COVID-19 recession.

Newsom said the new plan focuses on key sectors, including health and safety, and provides support to workers and small businesses as the state's economy churns back to life.

"But difficult decisions lie ahead," the governor added. "With shared sacrifice and the resilient spirit that makes California great, I am confident we will emerge stronger from this crisis in the years ahead."

Some of the spending increases cancelled under the revised budget are special health care funds for the poor, money to help elderly undocumented immigrants, and funding for public schools and colleges.

The proposed budget also calls for a 10 percent pay cut for all state workers starting July.

Newsom's proposal reflects the staggering economic impact of the pandemic that has resulted in more than four million unemployment claims being filed since mid-March in California, which had a budget surplus of nearly $6 billion only months ago.

With the onset of the pandemic, however, the state has seen a $41 billion drop in revenues compared to January's forecast and the unemployment rate is now projected to be 18 percent for the year.

"With a higher demand for social safety net services increasing state costs, the $54.3 billion deficit is more than three times the size of the record $16 billion set aside in the state's Rainy Day Fund," the governor's office said in a statement.

It added that barring billions of dollars more in federal assistance to deal with the pandemic and protect essential sectors, deeper cuts will be necessary.

"We are going to be dealing with challenges that we haven't faced in some time," Newsom told reporters.

"Nothing breaks my heart more than making budget cuts," he added. "We have been making historic investments in the last many years in the state of California.

"And now being forced back into this position where we are having to make cuts breaks my heart because one thing I know about cuts, there's a human being behind every single number."