Newsom warns of $10B shortfall as California’s economy takes a hit

Sacramento, California – According to multiple sources briefed on the situation, California Gov. Gavin Newsom is bracing for a massive budget shortfall — at least $10 billion, with the potential to balloon to $20 billion or more.

A combination of factors is fueling the unexpected fiscal crisis: the economic fallout from former President Donald Trump’s tariff policies, a Medi-Cal funding shortfall, and delayed tax filings from high-income residents in wildfire-affected areas. These pressures are hitting just as the state heads into its most critical budget planning period.

State lawmakers have been warned to prepare for significant cuts when Newsom unveils his revised budget proposal next week. The grim forecast marks a sharp reversal from January, when the Department of Finance projected a modest surplus.

“We’re going to be trying to pass a shell of a budget,” said one lawmaker, referencing the uncertain revenue outlook. “They’re just fake numbers, because we just don’t know.”

Although income tax receipts have been $4 billion above projections, officials say that may not be enough to offset the broader economic slowdown. Inflation, increased unemployment, and a dip in California’s GDP all contribute to lower-than-expected capital gains revenue — a crucial source of funding for the state.

Newsom acknowledged these headwinds last month, saying his revised budget “will reflect a downgrade in economic outlook,” with slower growth and tighter revenues requiring a baseline spending adjustment.

Some lawmakers are placing blame squarely on Trump-era economic decisions. “We were doing really well a couple months ago, and then Donald Trump and Elon Musk took a chainsaw to our economy,” said Assemblymember Marc Berman (D-Menlo Park). “It’s clear as day.”

The budget negotiations, which Newsom will undertake with Assembly Speaker Robert Rivas and Senate President Pro Tem Mike McGuire, are expected to be contentious, especially as social safety net programs like Medi-Cal and homelessness grants face cuts. If Republicans in Congress successfully shift more Medicaid and food stamp costs to the states, California could be forced to absorb even more financial burden.

Complicating matters, Congress may not finalize a federal spending plan until fall, potentially forcing California lawmakers back to Sacramento after the regular legislative session ends to make budget adjustments.

Newsom will address the public and lawmakers next week during his first formal budget presentation of the year. He skipped his January budget announcement due to the wildfires, leaving Finance Director Joe Stephenshaw to field questions. This time, the governor will have to deliver the bad news himself and chart a path forward amid growing economic uncertainty.