fiscal

SACRAMENTO — California and its state-funded programs are heading into a period of volatile fiscal uncertainty, driven largely by events in Washington and on Wall Street.

Gov. Gavin Newsom’s budget chief warned Friday that surging revenues tied to the artificial intelligence boom are being offset by rising costs and federal funding cuts. The result: a projected $3-billion state deficit for the next fiscal year despite no major new spending initiatives.

The Newsom administration on Friday released its proposed $348.9-billion budget for the fiscal year that begins July 1, formally launching negotiations with the Legislature over spending priorities and policy goals.

“This budget reflects both confidence and caution,” Newsom said in a statement. “California’s economy is strong, revenues are outperforming expectations, and our fiscal position is stable because of years of prudent fiscal management — but we remain disciplined and focused on sustaining progress, not overextending it.”

Newsom’s proposed budget did not include funding to backfill the massive cuts to Medicaid and other public assistance programs by President Trump and the Republican-led Congress, changes expected to lead to millions of low-income Californians losing healthcare coverage and other benefits.

“If the state doesn’t step up, communities across California will crumble,” California State Assn. of Counties CEO Graham Knaus said in a statement.

The governor is expected to revise the plan in May using updated revenue projections after the income tax filing deadline, with lawmakers required to approve a final budget by June 15.

Newsom did not attend the budget presentation Friday, which was out of the ordinary, instead opting to have California Director of Finance Joe Stephenshaw field questions about the governor’s spending plan.

“Without having significant increases of spending, there also are no significant reductions or cuts to programs in the budget,” Stephenshaw said, noting that the proposal is a work in progress.

California has an unusually volatile revenue system — one that relies heavily on personal income taxes from high-earning residents whose capital gains rise and fall sharply with the stock market.

Entering state budget negotiations, many expected to see significant belt tightening after the nonpartisan Legislative Analyst’s Office warned in November that California faces a nearly $18-billion budget shortfall. The governor’s office and Department of Finance does not always agree, or use, the LAO’s estimates.

On Friday, the Newsom administration said it is projecting a much smaller deficit — about $3 billion — after assuming higher revenues over the next three fiscal years than were forecast last year. The gap between the governor’s estimate and the LAO’s projection largely reflects differing assumptions about risk: The LAO factored in the possibility of a major stock-market downturn.

“We do not do that,” Stephenshaw said.

Ramallah, occupied West Bank – The Palestinian economy is undergoing a severe downturn, driven by Israel’s continued assault on Gaza, intensified restrictions on movement and trade in the occupied West Bank, and a sharp decline in both domestic and external financial resources.

As the Palestinian government struggles to manage an escalating fiscal crisis, official data and expert assessments warn that the economy is approaching a critical threshold – one that threatens the continuity of state institutions and their ability to meet even basic obligations.

A joint report by the Palestinian Central Bureau of Statistics (PCBS) and the Palestine Monetary Authority (PMA), published in the Palestinian Economic Monitor for 2025, found that the economy remained mired in deep recession throughout the year.

According to the report, gross domestic product (GDP) in Gaza contracted by 84 percent in 2025 compared with 2023, while GDP in the occupied West Bank declined by 13 percent over the period. Overall GDP levels remain far below their pre-war baseline, underscoring the fragility of any potential recovery and the economy’s inability to regain productive capacity under current conditions.

The report documented a near-total collapse of economic activity in Gaza, alongside sharp contractions across most sectors in the West Bank, despite a modest improvement compared with 2024. It also recorded a decline in trade volumes to and from Palestine compared with 2023, while unemployment in Gaza exceeded 77 percent during 2025.

Withheld revenues and mounting debt

Palestinian Economy Minister Mohammed al-Amour said Israeli authorities are withholding approximately $4.5bn in Palestinian clearance revenues, describing the move as a form of “collective punishment” that has severely undermined the Palestinian Authority’s (PA’s) ability to function.

“The total accumulated public debt reached $14.6bn by the end of November 2025, representing 106 percent of the 2024 gross domestic product,” al-Amour told Al Jazeera.

The minister said the debt includes $4.5bn owed to the International Monetary Fund, $3.4bn to the Palestinian banking sector, $2.5bn in salary arrears to public employees, $1.6bn owed to the private sector, $1.4bn in external debt, and $1.2bn in other financial obligations.

“These pressures have had a direct impact on the overall performance of the public budget,” al-Amour said, contributing to a widening deficit and sharply reduced capacity to cover operational spending and essential commitments.

All of that has led al-Amour to conclude that the Palestinian economy is undergoing “its most difficult period” since the establishment of the PA in 1994.

Official estimates show GDP contracted by 29 percent in the second quarter of 2025, compared with 2023, while GDP per capita fell by 32 percent over the period. These figures align with a recent report by the United Nations Conference on Trade and Development (UNCTAD), which concluded that the Palestinian economy has regressed to levels last seen 22 years ago.

In response, al-Amour said the government was implementing an “urgent package of measures”.

“The government is rolling out a series of actions that include strengthening the social protection system, supporting citizens’ resilience in Area C [of the West Bank], and backing small and medium-sized enterprises and productive sectors, particularly industry and agriculture,” al-Amour said.

Official data show a sharp drop across nearly all economic activities. Construction contracted by 41 percent, while both industry and agriculture declined by 29 percent each. Wholesale and retail trade fell by 24 percent.

The tourism sector has been among the hardest hit. Following the start of Israel’s genocidal war on Gaza in October 2023, the Ministry of Tourism reported daily losses exceeding $2m, as inbound tourism nearly collapsed. By the end of 2024, cumulative losses were estimated at approximately $1bn.

The Palestinian Economic Policy Research Institute (MAS), citing PCBS data, reported an 84.2 percent drop in hotel occupancy in the West Bank during the first half of 2024 compared with the same period a year earlier. Losses in accommodation and food services alone amounted to roughly $326m.

Despite the downturn, al-Amour said the Ministry of Economy is focusing on sustaining the private sector, substituting Israeli imports across seven key sectors, developing the digital and green economies, and improving the business environment. He noted that about 2,500 new companies continue to be registered each year.

Tourism collapsing

Samir Hazbun, a lecturer at al-Quds University and board member of the Palestinian Federation of Chambers of Commerce and Industry, said repeated crises have hollowed out the economy.

“Over the past five years, all economic sectors have entered successive crises, starting with the COVID-19 pandemic and followed by the war on Gaza,” Hazbun said. “Tourism, one of the most important sectors, has been especially affected, exhausting the local economy and weakening its ability to recover.”

Hazbun said preliminary estimates indicate tourism has suffered direct losses exceeding $1bn, alongside extensive indirect losses resulting from the paralysis of hotels, souvenir shops, travel agencies, tour guides and street vendors.

He added that hotel investments alone are estimated at $550m, with no financial returns for owners, forcing many workers out of the sector due to the absence of job security and safety nets.

Economic expert Haitham Daraghmeh described Palestinian debt as “accumulated debt that increases monthly”, owed to banks, suppliers, contractors, and the telecommunications and health sectors.

“The withholding of clearance revenues is no longer a temporary financial crisis; it has become a factor of complete economic paralysis,” he said.

With external aid frozen and domestic revenues at historic lows, Daraghmeh warned that the government was “no longer able to cover salaries or operational costs”.

“The government is operating like an ATM, with no real capacity for investment or economic stimulus,” Daraghmeh added.

Economic warnings

Daraghmeh said World Bank reports warn that continued failure to pay salaries and meet obligations could trigger comprehensive economic collapse. While some countries, including France and Saudi Arabia, have pledged support, he said none of that assistance has materialised.

He outlined three possible scenarios; the most likely is a continued gradual decline, driven by ongoing revenue withholding and shrinking resources. The second involves international intervention to prevent total collapse, particularly at a decisive political moment. The third scenario could see a conditional breakthrough, tied to European demands for financial reform, anticorruption measures, curriculum changes and elections.

Taken together, the data and expert assessments suggest the Palestinian economy is approaching a dangerous tipping point. Analysts warn that without an end to revenue withholding, renewed international financial support, and a shift in the political context, the economy risks sliding from prolonged crisis into outright collapse.

The question facing Palestinian officials and economists alike is how long the system can endure under siege-like conditions – and whether political and economic shifts will arrive in time to halt what many now describe as a slow and deliberate economic unravelling.