Governor Newsom released his proposed budget on January 10, 2025. Prior to the start of the COVID-19 pandemic, California was experiencing the longest economic expansion since WWII (began following the Great Recession in 2009). The state had large surpluses in 2021 and 2022 due to higher-than-expected revenue and federal COVID relief funds. However, the state has faced deficits each year beginning in 2023-24. The 2024-25 budget agreement included provisions to reduce the deficit for 2025-26, leading the Governor’s proposed budget roughly balanced. However, the state would face a deficit of $14.3 billion if the proposals in the budget were not adopted.

The LAO predicts that General Fund revenues will be $7.5 billion higher than assumed in the 2024 Budget Act. This is largely driven by overages in receipts from personal income tax ($4.8 billion), corporation tax ($2 billion), not otherwise classified revenues ($854 million), pooled money interest ($251 million), and insurance ($199 million). It is offset by a shortfall of $708 million in sales tax that was due to November receipts shifting into December.

Unemployment: Prior to the pandemic, the unemployment rate in California was at a historic low of 3.5%—about one-third the Great Recession peak of 12.3%. Following the onset of the COVID-19 pandemic, the California unemployment rate reached a record 16.4% in April and May 2020 (the U.S. unemployment rate peaked at 14.7% in April 2020). The California unemployment rate was 5.4% as of February 2022 and 4.3% in February 2023. The unemployment rate is 5.5% as of March 2025.

Personal Income: Total personal income in California increased by 3.6% from Q2 2024 to Q3 2024. U.S. personal income increased by 3.2% (or $191.4 billion) over the same time period, according to the U.S. Bureau for Economic Analysis.