The Governor called for a combination of cuts and revenue increases to solve California's budget shortfall which has now reached USD11.2bn.

The state budget agreement for the year was signed only six weeks ago after a long and tortuous debate about taxes and spending between Democrat and Republican legislators, but the state economy has deteriorated markedly in the meantime as the mortgage crisis deepens, unemployment increases and tax revenues plummet.

Schwarzenegger's action plan proposes to raise an additional USD4.7bn in new revenues for the current-year budget, in additional to USD4.5bn in spending cuts. At the centre of this is the proposal for a temporary increase in the state sales tax, from 5% to 6.5%, which will generate additional sales tax revenues of USD3.22bn in 2008-09 and USD6.6bn in 2009-10 for the General Fund. At the end of three years, the state sales tax would revert back to 5%.

Additionally, the Governor called for additional revenue increases including broadening the sales and use tax to include certain services, imposing an oil severance tax upon any oil producer that extracts oil in the state, and increasing the alcohol excise tax by five cents per drink.

Schwarzenegger also talked of a new stimulus package focused on helping companies retain their staff and create new jobs, although he did not go into detail.

"We have drastic problems that require drastic and immediate action. We must stop the bleeding right now," Schwarzenegger declared in announcing his plan.

"We must first close a projected current year shortfall of USD11.2bn, and then we must address the mortgage crisis to keep people in their homes, implement an economic stimulus package to help retain existing jobs and create as many new ones as possible, and fix the state's unemployment insurance fund," he added.