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Four Ways the Budget Could Get Worse

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Four Ways the Budget Could Get Worse

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SACRAMENTO, CA - JANUARY 10: California Governor Jerry Brown speaks to reporters as he announces his proposed budget at the California State Capitol on January 10, 2011 in Sacramento, California. Governor Brown announced a balanced state budget that cuts spending by $12.5 billion and includes an eight to ten percent cut in take home pay for state employees and proposes a "vast and historic" restructuring of government operations. (Photo by Justin Sullivan/Getty Images)

As bad as the state budget looks, things could be worse. The Legislative Analyst Office's report on Gov. Brown's revised budget proposal is based on certain economic assumptions, including the expectation of steady growth in the next few years. But the same report also identifies four economic factors that could alter those assumptions.

Those four are, the report says:

"Oil Prices. Our office’s economic forecast reflects an expectation that recent spikes in fuel prices will be a temporary phenomenon due to the recent upheaval in the Middle East. If prices remain high, however, near–term economic performance could be weakened.

"Federal Debt Limit Debate. Our forecast also assumes no economic disruption due to a failure of Congress and the President to approve increases in the federal “debt limit,” which is key to allowing the United States to continue making its debt payments to investors around the world. Should there be substantial disruptions in credit markets from the failure to resolve the debt limit issue, severe economic consequences may result. For California, such disruptions in credit markets could hamper the state’s ability to borrow this fall for cash flow purposes.

"Japan’s Recovery. Our forecast assumes little or no net economic effect resulting from Japan’s efforts to rebuild after its recent earthquake, tsunami, and nuclear disaster. Japan is a leading trade partner, and adverse developments in its recovery could affect both the United States and California.

"Housing Prices. The housing market remains fragile, with the most recent California data from February suggesting that prices continued to fall slowly in San Diego, San Francisco, and Los Angeles. Further drops in national and California housing prices are expected to be small, but housing markets are volatile and if the drop is bigger than expected, various elements of our economic and revenue forecasts could be affected adversely, including building permits, employment growth, and capital gains.

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