Explaining Southern California's economy

California's 'structural deficit': What does it mean?

California Gov. Jerry Brown released his 2012 budget plan yesterday. It contains a lot of numbers, but one set of them is especially important: the size of the "structural deficit." The 2011-12 fiscal year is projected to end up $4.1 million the red. If there are no new taxes or cuts to spending in 2012-13, as Brown has proposed, the shortfall is expected to be $5.1 million. That makes the total deficit for 2012-13 $9.2 billion. 

The chart above shows what this looks like over time. 

So what exactly is a structural deficit? Basically, it's the deficit you can't escape. Here's a snappy defintion, from DaveManuel.com:

In a structural deficit, things are so out of balance that a country (or state, or municipality, etc.) will post a deficit regardless of how well the economy is doing. In a strong economy, revenues (tax receipts, etc) rise due to increased economic activity (more jobs, more spending, etc). With a structural deficit, the strength of the economy is irrelevant - a deficit will be posted regardless.. 

How do countries get rid of structural deficits? 

1. Cut spending. 

2. Raise revenues (usually through tax increases). 

Neither of these options are too appealing for politicians, which is why many structural deficits continue to linger. 

On the plus side, California has reduced the structural deficit from $20 billion to less than $5 billion, with projections that it will zero out sometime after 2016. Brown's plan is to pursue both of the cures outlined above, using tax increases and spending cuts to generate $10.3 billion. This would erase the current $9.2 billion deficit and — Hooray! — create a $1.1 billion reserve fund.

Unfortunately, structural deficits are a little those extra pounds we pack on at the holidays: easy to put on but tough to take off. The issue is that everything relies on projections. For example, California wasn't supposed to end 2011 in such a deep revenue hole. But it did anyway, as the recovery failed to gain pace.

Additionally, wealthy Californians now account for 22 pecent of all income in the state, up from 10.5 percent in 1980. So it becomes increasingly critical to figure out how much money that group will be making, given that their incomes account for a fifth of the tax base.

Baked in the Brown cake here is the assumption that cuts and taxes will be coupled with an improving state economy overall. If that happens, the structural deficit becomes a surplus. If it doesn't we're struck with a structural deficit for a lot longer.

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