By Maxwell Adler | Bloomberg
California Governor Gavin Newsom said he’ll have to cut the state’s baseline spending to balance next fiscal year’s budget because new federal trade policies under President Donald Trump have dampened California’s economic outlook.
Both state and independent economists have “universally downgraded” California’s gross domestic product for next year, Newsom said at a press conference Wednesday. Trump’s tariffs have created a “toxic uncertainty” that has raised unemployment and inflation projections for the most populous US state, he said. The trade war is prompting economists to scale back their forecasts for GDP growth worldwide.
RELATED: California sues Trump administration over tariffs
Newsom in January proposed a $228.9 billion general fund budget for the fiscal year that begins July 1 that would spend about about $3 billion less than the current year. That spending plan would have left the state with a modest $363 million discretionary surplus, ending a two-year streak in which state lawmakers needed to plug significant spending shortfalls. Now, he says, he’ll need to adjust that proposal during his scheduled revision in May.
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“The markets play an outside role in our budget. Capital gains plays an outsized role in our budget. Nvidia’s success as a company plays an outsized role in the revenue we generate in this state,” Newsom said. “The impacts of that have already forced and compelled me to adjust the budget that I will be submitting in May.”
Nvidia’s stock has dropped about 22% this year through Wednesday’s close. The US government this week announced new restrictions on the export of the company’s chips to China in an escalation of Washington’s tech battle with Beijing. The Bloomberg Magnificent 7 Index, an equal-weighted gauge of the megacap tech stocks, has fallen 20% this year, after jumping 67% in 2024.
Because of its reliance on its richest people, California’s economy is sensitive to extreme booms and busts in equities and debt markets. The top 1% of California earners pay nearly half of the state’s personal income-tax collections.
Newsom on Wednesday sued to block Trump’s tariffs, saying they were harming California consumers and businesses, including those in agriculture and entertainment.
“President Trump’s unlawful tariffs are wreaking chaos on California families, businesses, and our economy — driving up prices and threatening jobs,” said Newsom. “We’re standing up for American families who can’t afford to let the chaos continue.”
–With assistance from Eliyahu Kamisher.
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