California approves budget bill

California Governor Arnold Schwarzenegger holds a news conference on 1 December

Mr Schwarzenneger said responsible steps had been taken

The California state assembly on Thursday approved a budget that raises taxes and cuts spending, to help close a $42bn (£29bn) deficit.

The bill, passed by both the Democratic controlled Senate and Assembly, will be signed into law by the Republican state governor Arnold Schwarzenegger.

"I'm absolutely delighted about the budget passing," he said.

The approval ends three months of political wrangling that has paralysed the most populated state in the US.

The package includes a combination of spending cuts, tax increases and borrowing.

It includes $15bn in permanent spending cuts, $12.8bn in temporary tax increases and $11.4bn in borrowing. And it creates a $1bn reserve for for the financial year from 2009 to 2010.

"By passing this difficult budget we keep infrastructure projects moving, keep teachers teaching, keep small businesses getting paid, keep taxpayers getting the refunds they are due and keep California eligible for federal stimulus," assembly speaker Karen Bass said in a statement.

'Extremely proud'

A combination of factors linked to the state's size and power have led to a situation where the eighth largest economy in the world cannot pay its bills.

California generates nearly 13% of US gross domestic product, but its huge manufacturing sector has taken a massive hit in this recession. Unemployment is heading towards 10%, compared with about around 7.5% nationally.

California's property boom has been followed by a crash; 28% of all US properties at some stage of the repossession process are found there.

Taxes levied on property sales have consequently declined.

People are spending less, so sales tax - levied on most goods - is also down and income tax receipts are expected to fall sharply.

Califonia's credit rating has been downgraded to the lowest of any US state, making it almost impossible to borrow money.

After the budget was approved, Mr Schwarzenegger said in a statement: "I am extremely proud of the members of the legislature, both Republicans and Democrats, who had the courage to stand up and put the needs of Californians first.

"We took the difficult but responsible steps to address our entire $42bn budget deficit and pass historic bipartisan reform measures."