California Faces $18B Budget Gap as Newsom Nears Final Year

• Nov 20, 2025

California is projected to face an $18 billion budget deficit next year, creating a major test for Governor Gavin Newsom as he enters his final year in office. The Legislative Analyst’s Office (LAO) released the projection on Wednesday, marking what would be the state’s fourth consecutive year in the red after last year’s $12 billion deficit.

According to the LAO, state spending continues to grow faster than revenue, while new federal policy changes in health care and food assistance will add another $1.3 billion in costs. Newsom will release his own budget proposal in January, and he has occasionally disagreed with the LAO’s estimates in past years by presenting a more optimistic outlook. His final term ends in January 2027, making this budget cycle his last chance to shape spending priorities in the country’s most populous state.

Legislative Analyst Gabriel Petek explained that weak corporate and sales tax trends, high borrowing costs, and tariff-related shifts are contributing to sluggish job growth and lower revenue. One of the few positive developments has been strong investment in artificial intelligence, which boosted personal income tax collections. However, much of that money is already obligated to schools or debt payments, and the report warns that AI-driven gains may not last. “It’s risky to assume that these trends will just continue unabated,” Petek said, noting the state’s overall fiscal position has grown “relatively weak.”

For Newsom, the challenge is balancing the budget without undermining the progressive programs that have defined his administration—a balancing act that could also influence his national reputation as he considers a presidential run. Last year, he scaled back a high-profile initiative that offered free health care to immigrants regardless of legal status. Beginning next year, those without legal status will no longer be allowed to enroll, and some will be required to begin paying premiums in 2027.

Democratic lawmakers have previously relied on borrowing from special funds and delaying payments to protect core programs, but those temporary solutions are running thin. Health care may face additional cuts next year, given its significant share of state spending. Newsom has repeatedly resisted raising taxes to resolve budget shortfalls, but lawmakers must pass a balanced budget by June.

A spokesperson for the California Department of Finance acknowledged ongoing challenges such as federal uncertainty, market instability, and rising costs in major state programs. The LAO estimates the deficit could climb as high as $35 billion the following year.

Republican lawmakers blamed the growing gap on excessive spending, with state Sen. Roger Niello criticizing what he called the majority party’s “unstoppable spending problems.” Meanwhile, Democratic leaders pledged to work with Newsom on a responsible budget that protects key services, including education, childcare, health care, and public safety.