California’s budget

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For sale, 432 acres of prime waterfront property, free electric chair with purchase. After Tuesday’s drubbing of ballot measures that would have helped mitigate California’s looming cash crunch, everything is on the table, including its notorious San Quentin Prison. A new fiscal year is just six weeks away and the state faces a shortfall of over $20bn that requires some painful cuts. Short-term borrowing to cover a third of the gap will not be forthcoming without a realistic budget that would see tens of thousands of government employees fired, prisoners released and loss of healthcare coverage.

California often has played the role of trailblazer for the rest of the country including the taxpayers’ revolt 30 years ago that resulted in the passage of Proposition 13. Two-thirds of voters supported that measure to cap property taxes – the same proportion that voted against the latest revenue-raising measures. Such direct democracy is now showing its flaws, turning California into a living political and economic laboratory. Will voters accept deep cuts or agree to raise some of the highest sales, income and excise taxes in the country? Will lenders continue to bet California is too big to fail?

“None of the above” is not an option unless a controversial congressional proposal to backstop California’s borrowing succeeds. In that case, many other states will join the queue, postponing painful decisions. “Too big to ignore” should not be confused with “too big to fail”. Californians make up 13 per cent of all Democratic congressmen and the state carries the largest number of presidential electoral votes. But the Obama administration should resist pressure to intervene. However dire the numbers, California will not fail and may well show the rest of the country’s political class how to start living within its own means.

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