Judgement Day for Arnie as California suffers 'fiscal emergency'

And we think we have problems. California is so broke that it's had to start issuing IOUs...

Last Updated: 31 Aug 2010

Governor Arnold Schwarzenegger has declared a 'fiscal emergency' in California, after the state senate failed to agree on measures to address its enormous $25bn budget deficit. After missing Tuesday’s deadline to sign off a budget ahead of its new financial year, the state of California – the world’s eighth biggest economy, lest we forget – is now so short of cash that it’s issuing IOUs instead of paying bills, and forcing state workers to go home without pay for three days a month. Not even the Terminator himself has been able to put an end to the political squabbling...

California’s problems are partly historic. Its budget has to be passed by a two-thirds majority, so it’s hard to get the senate to agree on anything – while its voters tend to be in favour of more public services, but against the extra tax measures that will pay for them. But it’s also been hit hard by the recession; unemployment is well above the national average, and its property market has gone to the dogs (the state apparently now accounts for more than a quarter of all US repossessions). Every year it struggles to balance its gigantic $100bn budget, but the slump in output and tax receipts this year has left it staring at a deficit of about $25bn.

Arnie is under no illusions about how bad things have got. ‘Our wallet is empty, our bank is closed and our credit is dried up,’ he said last month, demanding cuts equivalent to the entire deficit. But his minority Republicans can’t seem to agree with their Democrat counterparts about how to go about it: the Democrats are unwilling to back cuts to social programmes, while the Republicans are unwilling to hike taxes to boost revenue (arguing that this will affect economic recovery).

As a result, the budget remains up in the air despite the passing of Tuesday’s deadline – and the deficit keeps piling up. The governor’s announced emergency measures to make up the shortfall, including postponing payments to companies working for the state (who’ll get an IOU instead – must have gone down well) and forcing state staff to take three days of unpaid leave every month for the next year (we dread to think what would happen if our Government tried that - it makes BA's Willie Walsh look like Father Christmas).

The good news is that Arnie’s not giving up – he absolutely will not stop, ever, until the deficit is dead. ‘Solving the entire deficit’ is apparently his ‘first and only priority,’ and he ‘will not rest until we get it done.’ All other state business has apparently been shelved until the budget is sorted – but it’s clear that this won’t happen without some radical, and no doubt extremely painful, cuts to public spending. Perhaps what Arnie needs is a budget hawk to come back from the fiscally responsible future and tell him exactly how to do it.

Either way, if he pulls it off, maybe we can get him to do the same for us next year...


In today's bulletin:
Phoney war looms as O2 linked with T-Mobile bid
Judgement Day for Arnie as California suffers 'fiscal emergency'
Editor's blog: Goldman Sachs, the 'great vampire squid'
PM seeks Brownie points with hi-tech fund
'35 Under 35' in focus: Maternity matters

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