Saturday, July 30, 2011

Budgepocalypse Now or Budgepocalypse Later?

The San Francisco Chronicle brings us another reminder today that financial disaster could come to California sooner rather than later. Forget the fact that new accounting standards may soon require vastly higher payments to the state's underfunded public pensions. And forget about the possible (though not likely) U.S. government default, which would absolutely devastate governments at all levels in this state by halting their issuance of new debt. Today, we're reminded of how dependent the state is on Washington, and how the cuts being discussed as part of the debt ceiling debate could push California over the edge.

According to the article, $79 billion of the $208.5 billion California will spend this year comes from the federal government, and represents about a tenth of Washington's spending. Though no deal has been reached, currently both sides are aiming at a ten-year cut of $1 trillion from DC's budget. Because all the plans leave tax rates unchanged and won't touch Social Security, Medicare, or Medicaid, many of these cuts will involve domestic discretionary spending. These will fall heavily on states like California, which relies on such programs for billions in block grants for education, social services, and other activities. And since discretionary spending makes up only 19% of the federal budget, finding $1 trillion in savings could require very deep cuts.

The three points to keep in mind are as follows. First. the loss of a substantial chunk of these funds would blow a huge hole in the state's budget, one it might not be able to patch up. Second, this scenario doesn't require either of the disaster scenarios being dicussed (a downgrade of U.S. Treasuries by the major ratings agencies, or outright default) to take place. And third, it should serve as another reminder of how unwise it is for Americans to continue to trust a collapsing Ponzi scheme of an economy for their prosperity..

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