Hard choices for California

By Stephen Evans BBC North America Business Correspondent in San Francisco

Schwarzenegger may face more criticism if he wins

This week Californians go to the polls to decide whether to sack their current governor, Gray Davis, and, if so, who should replace him.

But "regime change", California-style, is likely to be painful for taxpayers and politicians alike.

There's a fundamental dishonesty at the heart of the ballot in California: many of the candidates seem loathe to say what they know to be true, namely that taxes will have to rise.

Voters won't learn much about the likely course of politics after the ballot by watching politicians' lips before it.

That's because there's such a taboo about raising taxes in California, even though some natural tax-cutters there concede that there are not enough spending cuts to go around.

Californians under their vigorous brand of direct democracy have voted to have their cake and eat it.

To take the most prominent example of ballot-box budgeting: Proposition 13, enacted in 1978, put a ceiling on property taxes.

CALIFORNIA'S ECONOMY GDP: $1,392bn World's fifth largest economy Manufacturing exports: $111bn Population: 35.6m Median family income: $54,000 Unemployed: 1.16m Employed: 17.4m Source: State of California California election back on Recall circus rolls into town

Proposition 98 meant that education spending had to rise with population.

Proposition 184, meanwhile, brought in tough sentencing of criminals without mandating the extra money to pay for it.

On the ballot next week, voters will also be able to decide on Proposition 53, under which up to 3% of California's spending would have to be on roads, sewers or public buildings.

Budget nightmare

All this voting means a nightmare for the new governor in Sacramento, who will face a large budget deficit.

Most candidates say that they will not raise taxes, but that will be tricky to achieve, says Bill Whalen, a Fellow of the Hoover Institution at Stanford University in California.

"They also say they won't cut education. If you refuse to touch education in the Californian state budget that leaves you with about $45bn to tangle with if you want to talk about cutting spending.

"That means the incoming governor might have to cut $10bn or $15bn or even $20bn out of $45bn, and that cannot be done because you're talking about cutting into health care services. You're taking away literally people's crutches.

"You're talking about cutting into the ability to maintain prisons. You won't be able to put in enough prison guards. You'll either have overcrowded prisons or let prisoners out on the streets, and that won't sit well with the public."

This explication of California's budget arithmetic is all the more powerful coming from Bill Whalen because he's a Republican who has advised Arnold Schwarzenegger, the candidate leading in many opinion polls.

Taxes

If Republicans are saying taxes will have to go up, then taxes will have to go up, as they did twice when Ronald Reagan was governor of the state.

He too did the sums when he got to the state capital, Sacramento, and concluded that his tax-cutting agenda had to be put on hold.

The real question is how much will taxes have to rise, and how much will spending be cut, and the balance between the two.

Bill Whalen, for example, accepts that tax rises are inevitable, but says that Democrats haven't accepted that there was what he calls an "orgy of spending" on which politicians became hooked.

The California economy grew by 12% in the last four years while state spending grew by 40%, and that doesn't add up.

Taxes may rise but spending also has to give.

Burst bubble

California was Ground Zero for the crash when the internet bubble burst.

California's Silicon Valley, more than anywhere else on the planet, is where the billions flowed in, so now it is the state that feels the pain.

When the crash came, Republicans argue that the state of California avoided a debate on how to bring spending in line with the new straitened times.

That debate is now happening with a vengeance.