By Rory Carroll and Robin Respaut

By Rory Carroll and Robin Respaut

(Reuters) - California Governor Jerry Brown on Tuesday proposed a $179.5 billion state budget for the 2017-2018 fiscal year, a 5 percent increase over this year, but warned that the state must remain fiscally prudent ahead of an inevitable economic downturn.

The Democratic governor also proposed a $122.5 billion general fund budget for fiscal year 2017-18, virtually unchanged from this year.

Brown said the surging tide of tax receipts over the past few years appears to have turned, and that the state now faces a budget deficit of $2 billion, its first in five years.


Although the $2 billion is much smaller than the $27 billion the state faced in 2011, he said it demanded immediate attention.

"Small deficits can quickly mushroom into large ones if not promptly eliminated," Brown said in a statement.

Brown's budget proposed to boost funding for state reserves, education, healthcare expansion, and transportation infrastructure, counteracting poverty and combating climate change, while rolling back some planned spending increases.

Brown stressed the need for the state to bolster its rainy day fund in anticipation of an economic recession.

"California has the most progressive tax system in the United States," Brown told a press conference on Tuesday.

"But as a corollary, we have one of the most unreliable revenue systems in the country," he said, referring to the state's greater reliance on capital gains taxes and less on property tax revenue.

Republicans warned that the incoming Trump administration could have a negative impact on the state's finances.

"We face a multi-billion dollar gap in federal funding, and the state needs to be responsible enough to plan for a substantial loss of federal dollars," Republican state Senator Jeff Stone said in a statement on Tuesday.

When asked about how California would respond to the incoming administration, Brown said the state cannot budget for something that has not happened yet.

There was a lot of uncertainty about what the Trump administration and Republican Congress would actually do on issues like healthcare and immigration, he said, adding that the state will remain vigilant.

Brown said the state would continue to be an international leader in combating climate change while also fighting any efforts to deport large numbers of undocumented immigrants.

The budget will now go to lawmakers in the Democratically-controlled state Assembly and Senate before a revised version of the budget is released again in May.

(Reporting by Rory Carroll; editing by Diane Craft and Tom Brown)