Gov. Christine Gregoire for the first time Thursday echoed what Republicans have been saying for months: The state will face a budget deficit next legislative session.

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OLYMPIA — Gov. Christine Gregoire for the first time Thursday echoed what Republicans have been saying for months: The state faces a budget deficit next legislative session.

“I’m expecting a shortfall and I’m preparing for it,” she said in a telephone interview.

Her comments came after a new state forecast showed tax revenues are expected to drop an additional $529 million below projections.

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If that number holds true, state lawmakers could face a $3.2 billion shortfall when they meet in January to put together a new two-year budget.

The projected shortfall is a growing issue in the governor’s race.

Republicans have hammered Gregoire for not acknowledging the prospect of a budget gap. For months, the state Senate Ways and Means Committee has projected a shortfall that’s grown as the economy got worse.

“Our state is headed for a budget train wreck, and Christine Gregoire is driving with her eyes closed because she can’t bear to look at the mess she’s created,” State Republican Party Chairman Luke Esser said in a recent statement.

State spending has increased by $8 billion since Gregoire was elected governor in 2004. Half of that money, around $4 billion, was spent on public schools and higher education. The current two-year general fund budget is $33.6 billion.

Gregoire had maintained it was too early to tell if there would be a deficit next year and that there was still time for the economy to turn around.

The state actually reported a slight increase in tax collections for the month of August, “and then last weekend happened,” Gregoire said, referring to the crisis on Wall Street.

Growing turmoil in financial institutions triggered a dive in the stock market, further shaking consumer confidence.

“It became obvious what was going to happen,” the governor said. “I’m very disappointed, to say the least.”

While Republicans blame the projected shortfall on Gregoire, saying she spent way too much money, Gregoire points to President Bush.

“The blame goes squarely to Washington, D.C. This is the worst economic situation we’ve faced since the Depression,” she said. “We’re going to blame that on the Washington state Legislature and the governor?”

Although Gregoire is now saying she expects a shortfall, she still won’t say how big the deficit could be.

Her chief budget writer, Victor Moore, also won’t discuss numbers.

“We’re preparing for all scenarios,” Moore said.

The interim state chief economist, Steve Lerch, pointed out several weaknesses in the state economy, including sagging consumer spending, slack construction employment and a slow recovery in the housing sector.

Automobile sales, in particular, have suffered.

“We’re definitely slowing down,” Lerch said when the forecast was released Thursday. “Not as fast as the U.S. economy, but we’re definitely slowing down.”

One telling point: For the first time in years, quarterly taxable sales receipts were down compared with a year earlier.

“We haven’t seen that since the last recession. That’s a big deal,” Lerch said.

Washington relies heavily on the sales tax so drops in consumer spending and business receipts can have a big impact on the state budget.

Gregoire’s budget office wouldn’t discuss what it might do to cut spending, except for previously announced steps such as a state freeze on hiring, equipment purchases and out-of-state travel. That’s expected to save $90 million. The governor also told Moore to look for ways to trim another $200 million out of the current budget.

Dino Rossi, the Republican candidate for governor, also would not discuss significant cuts he would make if elected to balance the budget.

“I have a demonstrated history of being able to do this,” he said, referring to a budget he helped craft in 2003 along with former Gov. Gary Locke to close a large budget shortfall. Rossi was chairman of the Senate Ways and Means Committee at the time.

Rossi has said he would not increase taxes to balance the budget and has repeatedly argued that Gregoire would.

But the governor said that’s not true. “When you’ve got tough economic times, it’s not the time to raise taxes,” she said. “Nobody is talking about taxes but him.”

Some Democrats are already talking about tapping a constitutionally protected rainy-day fund.

The state expects to have about $728 million in the rainy-day fund.

It normally takes a three-fifths vote in both the House and Senate to spend the money. However, when state employment growth drops below 1 percent, it takes only a majority vote. The September forecast for employment growth for 2009 was 0.6 percent.

Democrats hold strong majorities in both the state House and Senate.

Rep. Hans Dunshee, D-Snohomish, vice chairman of the House Appropriations Committee, said he has no hesitation about using the rainy-day fund.

But Sen. Joe Zarelli, R-Ridgefield, the ranking Republican on the Senate Ways and Means Committee, said it should not be tapped.

“I suggest we start by agreeing on the size of the shortfall, then diagnosing the cause of the shortfall, which seems pretty obvious. Then we look at ways to slow the growth of government and bring it back in line with projected revenue, without raiding the rainy day fund,” he said in a statement.

Andrew Garber: 360-238-8268 or

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