January 8, 2010 / 6:22 PM / 10 years ago

SCENARIOS-California economy struggles to recover

SACRAMENTO, Calif, Jan 8 (Reuters) - California Governor Arnold Schwarzenegger on Friday proposes a budget to close a roughly $20 billion budget gap, kicking off what is almost certain to be a bitter fiscal fight.

Central to the problem are the state’s weak economy, the biggest of any U.S. state, and laws that require a two-thirds majority to pass a budget — a big hurdle in a legislature full of hard-liners from both ends of the political spectrum.

Following are possible scenarios for the economy:

* MUDDLING ALONG - Overall economy remains sluggish. Unemployment, now over 12 percent, remains in the double digits for a couple of years, depressing the state’s main source of revenue — personal income taxes. Consumer spending and housing remain slow, limiting job creation. The state lacks funds for a solid social safety net or stimulus, and federal funds fail to fill the gap. The legislature passes a budget of cuts and gimmicks that allow the state to maintain its credit rating at the current low levels but ensure recurring budget shortfalls will persist. As other parts of the country recover sooner, people and businesses leave the state.

* CRISIS DEEPENS - Unemployment remains high and increases as businesses and the state shed jobs. Pension liabilities mount, requiring state bailout. Courts require more spending on prisons, consumer spending slows to a crawl. Divided legislature cannot pass budget, leading to further credit downgrades and forcing the state to issue IOUs as markets refuse to lend to it. Parts of state government and social services slowly shut down as jobs and programs cut.

* TURNING A NEW LEAF - Surge in 2009 stock market translates to rise in income tax receipts in 2010, easing government strain and improving spending by consumers. Legislature makes tough, permanent cuts rather than push problems to future years. Credit agencies slowly raise ratings, easing state’s borrowing costs. Voters approve constitutional changes that marginalize party hard-liners, and more consensus-oriented legislature begins passing balanced budgets on time. (Reporting by Peter Henderson and Jim Christie in Sacramento, editing by Mary Milliken and Kenneth Barry)

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