As Gov. Gavin Newsom unveiled a revised 2025-26 budget Wednesday, he blamed a “Trump slump” from President Donald Trump’s tariffs and other economic moves as the major factor in increasing the state’s deficit by another $12 billion.
“California is under assault,” Newsom told reporters at a budget briefing, declaring that Trump’s actions had created “a climate of deep uncertainty.”
The initial budget Newsom proposed in January already had at least an $11 billion gap between income and outgo that he filled with reserves, loans, deferrals, raids on special funds and accounting maneuvers.
State tax receipts were running ahead of expectations during the early part of the year, but after Trump imposed tariffs on imported goods, saying it would spur domestic production, Newsom and his budget staff revised revenue estimates downward, particularly personal income taxes.
“Washington’s imposition of tariffs has driven a downgrade in both the economic and revenue forecasts,” the revised budget declares. “Combined with increased expenditure growth above the governor’s (January) budget — most notably in Medi-Cal — the state must now close an estimated shortfall of $12 billion to balance the budget and provide for a prudent discretionary reserve. This will require difficult but necessary decisions to reduce ongoing expenditure growth to maintain budget resilience and stability for critical state programs.”
The revised budget maintains overall spending at virtually the same level of the January version, $322 billion, but drops general fund expenditures by $2 billion to $226 billion.
As noted, the state also experienced a multibillion-dollar spike in costs for Medi-Cal, the state’s health care system for the poor, which contributed to the $12 billion deficit estimate. Newsom proposed a series of maneuvers to close the new deficit, primarily reductions in Medi-Cal, including a freeze on adult enrollments and $100 per month premiums for Medi-Cal enrollees.
By singling out Medi-Cal as a major driver of state spending and urging reductions, Newsom was doing a 180-degree political pirouette from a year ago, when he was boasting about achieving nearly 100% medical care coverage for Californians with the addition of thousands of undocumented immigrants to the programs rolls.
The latest expansion of California’s chronic budget gap, what fiscal experts deem a “structural deficit,” makes it virtually certain that Newsom’s governorship will end 19 months hence with the state’s finances still unbalanced. The governor’s own budget staff and the Legislature’s nonpartisan budget advisor, Gabe Petek, have both projected multibillion-dollar deficits well into the future. It doesn’t appear that a sudden economic boom will provide fiscal salvation.
The revised budget projects that California’s economy faces a sluggish future, with little overall job growth and unemployment rates, which are now among the nation’s highest, virtually unchanged. Accordingly, state revenues are projected to increase slowly.
The forecasts don’t assume that the national economy will drift into recession, as some economists are predicting due to Trump’s tariffs. If one occurred, it would depress revenues even more.
The budget also does not assess the potential reductions in federal aid to states, particularly in health care, that Trump and Republicans in Congress have proposed. Medi-Cal and other social and medical programs are targets in both Washington and Sacramento because they are among the largest items in both federal and state budgets.
As services are trimmed to close budget gaps, advocates for the poor, public employee labor unions and progressive groups are increasing pressure for tax increases to balance the state’s books.
Newsom has resisted those calls, but if the projected multi-year deficits become reality, the tax increase drumbeat will grow louder. He can and probably will continue to shun tax increases but if he does, the pressure will hit his successor, whomever that is, immediately upon inauguration.
Dan Walters is a CalMatters columnist.