The budget plan that Gov. Arnold Schwarzenegger released Friday is about perception as much as anything, a signal to a waiting world that Sacramento is serious about tackling the state's fiscal problems and making California a better place to do business.

By holding the line on taxes and proposing billions in spending cuts, Schwarzenegger is taking a businessman's approach to a budget deficit that has come to symbolize a state that's gone dangerously out of control. The deficit, along with California's worst-in-the-nation credit rating on Wall Street, have become a kind of giant warning sign to companies thinking of setting up shop here.

In that sense, Schwarzenegger's plan, which drew media interest from around the world, could restore some of California's lost credibility among business executives.

"It's going to send a big message," said Wayne Schell, head of the California Association for Local Economic Development. "At least there's the feeling that something is happening, that somebody is making some moves."

But the Republican governor's plan could generate genuine economic distress, at least in the short run. His proposed spending cuts would take billions out of the state's economy, and the news could be especially painful for state workers. Although the Schwarzenegger administration made no forecast of layoffs Friday, others believe they're inevitable.

"There will be cuts in the bureaucracy in Sacramento," said state Controller Steve Westly.

That, of course, could harm the region's economy. "A budget deficit is bad news for the people of the state of California -- it's worse news for the people of Sacramento," said Matt Newman, director of the economic forecast at California State University, Sacramento.

Moreover, some say Schwarzenegger's medicine could do more harm than good. By raising college tuition and taking money away from transportation projects, Schwarzenegger would create long-term problems for the business climate, said Stephen Levy of Palo Alto's Center for Continuing Study of the California Economy.

"Part of maintaining the economic competitiveness of this state ... is public investment in K-12, in higher education, in infrastructure, in resources that allow cities to become attractive places for folks to live and work," Levy said.

Much depends, of course, on how Schwarzenegger's plan fares with the Democratic-controlled Legislature. Opposition developed quickly. Democrat State Treasurer Phil Angelides, a frequent Schwarzenegger critic and likely political opponent in 2006, called the governor's plan bad for the business climate: "It all adds up to a budget that crimps our economic development."

But Schwarzenegger's plan could yield dividends in later years by improving how California is viewed by business owners inside and outside the state. The deficit is so enormous that it's created a pall over the entire state economy, making California seem unstable and unsuitable for business investment, said economist Ross DeVol of the Milken Institute in Santa Monica.

Ironically, DeVol said, the deficit has made California's business climate seem worse than it really is. "The budget deficit has become the proxy for the overall position of the California economy," he said. "The perception of the business climate has deteriorated more than the reality."

Still, perceptions are important, and California's unstable fiscal situation is a big turnoff to businesses. Companies crave certainty, and they won't bring jobs here if they're "subject to fluctuations in taxes because the state can't manage its fiscal house," said Allan Zaremberg, president of the California Chamber of Commerce.

In this view, the short-term harm that may result from budget cuts could be worth it if businesses come to believe California is getting its act together.

"The immediate steps may be painful (but) it's necessary to get control of this," said economist Steve Sheffrin of the University of California, Davis.

For his part, Schwarzenegger said his plan will help "make California the powerful job-creating machine it once was."

Whether Schwarzenegger's plan remedies the credibility gap remains to be seen. Although his official budget summary spells out $4.62 billion in spending cuts, his plan also relies on various fund shifts and transfers. As a result, the governor and Legislature will have to struggle once again next year to cut the deficit.

"This doesn't really eliminate the ongoing structural gap," Sheffrin said. "We're going to be back at this next year."

Schwarzenegger's plan also depends heavily on passage of the $15 billion "deficit bond" he's asking voters to approve in a March ballot initiative. The bond is designed to spread some of the budget pain over multiple years.

Schwarzenegger spoke Friday of the need to regain "the confidence of the financial community," but financiers weren't ready yet to endorse his budget.

"The devil, of course, is in the details," said Steven Zimmermann, a credit analyst with the Standard & Poor's bond rating firm. S&P, like the other Wall Street rating firms, have designated California's bonds as the least creditworthy of any state in the nation.

Zimmermann said he planned to talk to administration officials Monday to get a better read on the budget.

Schwarzenegger's plan assumes personal income in California will grow by 5.6 percent this year and state tax revenue will grow by about $1.8 billion, amid expectations that the economy will improve.

Westly called those projections "pretty darn rosy." But others, such as economist Brad Williams of the Legislative Analyst's Office, said the governor's economic forecast seems realistic.

Of course, the future of the state economy will depend heavily on the performance of the U.S. economy, which seemed to take a dip Friday. After several months of upbeat news, the Labor Department reported Friday that the nation created a mere 1,000 jobs last month.