California will face a budget deficit of $54.3 billion due to a huge drop in revenue combined with increased expenses linked to the coronavirus pandemic, according to a projection released Thursday by financial advisers to Gov. Gavin Newsom.
The new projections, which cover the period up to end-June 2021, come as Newsom, a Democrat, is preparing to revise his proposed budget for the most populous U.S. state to reflect vastly different circumstances than when it was first proposed in January and California was flush with money.
At that time, when Newsom proposed a budget that increased spending for anti-poverty efforts, education, mental health services and other programs, unemployment was at 3.9% and the state had a projected $5.6 billion surplus, with another $21 billion in reserves.
But the fiscal update prepared by Newsom’s Department of Finance and seen by Reuters said 4.2 million people had filed unemployment claims since mid-March, when businesses began closing down public health restrictions aimed at slowing the spread of the virus.
The state projects that the unemployment rate in 2020 will hit 18%, more than during the worst of the Great Recession, when it peaked at about 12.3% in 2010.
As a result of large job loss, overall personal income for Californians is expected to drop by 9% in 2020, leading to a drop in revenue from state income taxes, the report said. New housing construction is also expected to drop, with a projected 21% reduction in new building permits.
The finance department projects a 25.5% decline in personal income taxes collected by the state, and a 27% decline in sales taxes and a 23% drop in corporate taxes.
In addition, the state expects to spend more than projected in 2020 because of expenses related to the coronavirus pandemic of about $13 billion.