The White House budget chief is seeing a drop in revenue growth.

The federal government is seeing a drop in the rate of growth of revenue as the debt crisis starts to slow economic growth, said Jim Nussle, the White House Budget chief. Asked on CNBC if the White House was seeing a drop in revenue growth, Nussle replied: “we’re starting to.” Private and government economists are forecasting a slight slowing in the U.S. economy, but are not projecting a recession, Nussle said

In California Schwarzenegger’s Fiscal Discipline Shattered by Subprime Slump

Four years after Arnold Schwarzenegger was elected governor of California, vowing to “tear up the state’s credit card,” the actor and former body-builder is about to charge $7 billion to taxpayers’ accounts.

My Comment: Using the words “Fiscal Discipline” and “Arnold Schwarzenegger” in the same sentence together is a joke unless there is a “negative” in the sentence somewhere.

California is selling notes tomorrow due in eight months to help pay its bills until tax revenue comes in, the largest short-term loan since Schwarzenegger took office and almost five times more than last year. Debt is increasing after cash receipts fell $777 million below the state’s projections during the first three months of the fiscal year that started July 1.

My comment: Selling bonds with a promise to pay back later is Schwarzenegger’s answer to every problem. In March, Schwarzenegger asked for $500 billion to rebuild California.

Sound Bytes From The Above Link

  • It will take $500 billion to “rebuild California the way it ought to be“.
  • $500 billion is “too big for people to digest, so you don’t talk about that” even though he is talking about it.
  • California needs $500 billion even though it has “done tremendously with the revenue increases“.
  • California will not issue less debt even if the economy slows.
  • California “could face lower tax revenues” but he opposes tax hikes.

The day of reckoning has now arrived. Will he keep spending money he does not have while refusing to hike taxes to pay for it all?

Schwarzenegger is losing the revenue cushion he used to plug budget deficits as home foreclosure rates increase at a faster pace than the rest of the country. The rise in IOUs is an early sign that finances are deteriorating after four years of revenue growth won credit-rating upgrades and spurred gains of more than 20 percent on California bonds.

“A California budget crisis is beginning to recur, and the big increase in short-term seasonal borrowing is the classic leading indicator,” said Richard Larkin, a municipal bond analyst at J.B. Hanauer & Co., a Parsippany, New Jersey-based money manager that oversees $10 billion.

My comment: California never left a budget crisis. All it ever did was forestall the day of reckoning. Even that “plan” is now failing. It is going to take increasing revenue to be able to pay back the bonds that were already issued. Now what?

Schwarzenegger, 60, may have to cut spending, said H.D. Palmer, his budget spokesman. The state needs to borrow to shore up its reserves after ending last year with about $6 billion less in cash than fiscal 2006, Palmer said.

My comment: Schwarzenegger has vowed to not cut spending even if revenue growth slows. Schwarzenegger claims he will not raise taxes either. Right now, he is keeping his words. To get by he is playing various shell games.

His latest scheme is to use lottery proceeds to expand health care. Given that lottery proceeds now fund education, the governor’s proposal would replace money from the lottery that now goes to education with funds from the state’s general fund. Schwarzenegger did not say what would be used to fund the shortfall in the state’s general fund.

In the three months ended Sept. 30, the state has spent $10.2 billion more than it received in taxes and fees, according to Controller John Chiang. Officials project a $6.1 billion budget gap in fiscal 2009 between mandated expenditures and projected revenue, up from $1.5 billion in the current year.

My comment: That’s quite a feat for someone who vowed to “tear up the state’s credit card”.

No ‘Upside’

Investors require an extra quarter of a percentage point in yield to own California debt instead of top-rated municipal bonds, down from a high of 63 basis points in July 2003, according to data on 20-year bonds compiled by Bloomberg. That was during the height of the budget crisis under Davis.

The bonds have gained 20.8 percent since Schwarzenegger took office in November 2003, compared with 19.9 percent for the broader municipal market, according to indexes compiled by New York-based Merrill Lynch & Co.

“There doesn’t appear to be much upside potential,” Brennan said.

My comment: No upside in California bonds is correct. California will likely default at some point, but that could be many years away. In the meantime however, Moody’s, Fitch, and the S&P; are going to have to start lowering California’s debt rating. That will increase the state’s borrowing costs looking ahead.

The state had the third-highest foreclosure rate in September, or one for every 253 households, according to RealtyTrac Inc., an Irvine, California-based company that has a database of more than 1 million properties from 2,500 U.S. counties. Only Nevada and Florida had higher foreclosure rates.

Home sales have declined 23 percent this year, the California Association of Realtors said Oct. 10. The trade group estimates a decline of 9 percent in 2008.

My comment: The foreclosure party in California is just beginning. Unemployment is going to rise and commercial real estate prices will plunge as well.

Schwarzenegger campaigned on a promise to rein in spending without raising taxes. “We tore up the credit card,” he told lawmakers during his first State of the State speech in January 2004. “Never again will government be allowed to spend money it doesn’t have. Never again will the state be allowed to borrow money to pay for its operating expenses.”

My comment: Obviously every bit of that is a lie, except perhaps for not raising taxes.

Revenue drops are now being seen in many states, not just California. See Grim Forecast for State Budgets for more details.

Amazingly enough, no one sees a recession coming, even though it is likely we are already in one. I am not the only one who feels that way. U.S. “undoubtedly in recession” says Jim Rogers.

Officially, the U.S. is not in a recession, but housing already is and retail spending is quickly headed there. In real (inflation adjusted) terms, retail spending is also in a recession. Revenue declines are looking recessionary as well. Finally, the first 2 percent of GDP is hedonics and imputations and fictional reporting that increases every year.

Whoever the next president is will backdate the start of the recession as much as possible, to prove it did not start on their watch. So even if the official stats don’t show it now, GDP will be revised to show it a couple years down the road. That is the way the game is played.

Mike Shedlock / Mish/