Newsom’s last budget: Cut California spending now, save for the AI bubble to burst

Gov. Gavin Newsom is proposing further budget cuts and expanding the state’s reserves despite a recent surge in tax revenue — an attempt to balance the books in anticipation of a looming long-term deficit in the coming years, he said.

In a presentation riddled with criticism of the Trump administration and featuring memes including an image of President Donald Trump and Treasury Secretary Scott Bessent as “Dumb and Dumber,” Newsom released his last budget plan as governor on Thursday.

He proposed a $350 billion spending plan that would zero out the state’s budget deficit for two years and cut longer-term budget gaps in half. Newsom had pledged not to leave his successor with a giant structural deficit.

“I’m not trying to get out of Dodge,” Newsom said. “This is a balanced budget structurally for the next 18 months after I’m gone.”

He proposed slashing general fund spending by $1.8 billion, primarily by further cutting Medi-Cal, including by raising monthly premiums on undocumented immigrant adults by $20 and reinstating Medi-Cal asset tests.

While Newsom wants the state to continue withdrawing $7 billion from the state’s reserves this year, his proposal would also shore up the rainy day fund by transferring $3.6 billion to the account and setting aside nearly $10 billion more for fiscal year 2027-28.

The governor’s presentation is an updated outlook at the state’s finances since January, when Newsom’s administration projected a “modest shortfall” of $2.9 billion that would grow to a $22 billion deficit in fiscal year 2027-28.

Since then, the state’s tax revenue has grown faster than anticipated, thanks to a robust stock market and California’s robust AI-driven technology sector. Newsom projects that the state will see $16.5 billion more in revenue over a three-year budgeting window than expected in January.

But Newsom said the state’s financial outlook remains ominous, attributing much of the uncertainty to Trump’s policies, including a spending plan the president calls his “one, big beautiful bill.” It could strip 2 million low-income Californians of health insurance coverage, and the war in Iran, which has sent gas prices skyrocketing nationwide.

“We have a president who … doesn’t particularly give a damn about the financial situation of the average American,” Newsom said.

It’s unclear how long California’s revenue boon would last. The recent spike in tax collection suggests that the stock market is reaching “bubble territory” and could head toward an “eventual bust,” said the nonpartisan Legislative Analyst’s Office, which advises the state Legislature. “The state should be prepared for revenues to be tens of billions lower within one or two years.”

California’s spending has continued to outpace revenue growth. Since fiscal year 2019-20, spending has grown by more than $100 billion, primarily from maintaining and expanding K-14 education, according to the LAO.

“We need to tighten our belt, and we need to focus on the outcomes,” he said.
But Newsom is proposing new spending in some areas, including $300 million to subsidize private healthcare for low-income and middle-class Californians as well as money to offer paid pregnancy leave for TK-12 and community college employees and to cut filing fees for roughly 250,000 new businesses in half.

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.