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SAN FRANCISCO (Reuters) - California faces a modest $1.9 billion budget gap for its next fiscal year, a considerably smaller deficit than seen in prior years as a result of economic recovery, spending cuts and new revenue from tax increases approved last week by voters, the state's budget watchdog agency said in report on Wednesday.
"Our economic and budgetary forecast indicates that California's leaders face a dramatically smaller budget problem in 2013-14 compared to recent years," the report by the Legislative Analyst's Office said.
California has reached a "promising moment: the possible end of a decade of acute state budget challenges," the report added.
"Furthermore, assuming steady economic growth and restraint in augmenting current program funding levels, there is a strong possibility of multibillion-dollar operating surpluses within a few years," the report said.
California could have an operating surplus in its 2014-2015 fiscal year of more than $1 billion, and it could grow to more than $9 billion in the 2017-2018 year, according to the report.
But the office cautioned that its multi-year budget forecast depends on a number of factors, including state leaders holding down spending, steady economic growth and rising stock prices.
"We also assume — as the state's recent economic forecasts have — that federal officials take actions to avoid the near-term economic problems associated with the so-called 'fiscal cliff,'" the report said.
California's main source of revenue is personal income taxes and it relies heavily for that money on its wealthiest residents.
They will face higher income tax rates after voters last week approved tax measure put to them by Governor Jerry Brown. The measure raises the state sales tax by a quarter-cent for four years and increases income tax rates for seven years for individuals who earn more than $250,000 a year.
The Legislative Analyst's Office in its report urged that California's government use budget surpluses to build a reserve and to tackle outstanding pension liabilities, particularly for the state's teachers pension fund.
Surplus funds could also be tapped to "selectively" restore recent spending cuts, particularly for cuts affecting schools, or to invest in the state's infrastructure, the report said.
Reporting by Jim Christie; Editing by Dan Grebler