A few hours before Gov. Arnold Schwarzenegger delivered his first State of the State address to the Legislature on Tuesday, San Francisco Assemblyman Leland Yee told an interviewer that in the clash over how to close a massive budget deficit, Democrats count on Schwarzenegger being "a closet Democrat" who will eventually opt for higher taxes.

Democrats' hopes about Schwarzenegger's eventual position on the budget have been conservatives' fears, but the new governor gave no indication that he'll tilt to the left as he pledged to slash state spending deeply and resist new taxes.

Schwarzenegger, in a smoothly delivered but bluntly worded address, echoed classic Republican rhetoric: "We do not have a budget crisis; we have a spending crisis. We cannot tax our way out of this problem. More taxes will destroy what we're trying to save -- jobs and revenue. ...

"A tax increase would be the final nail in California's financial coffin. The people of California did not elect me to destroy jobs and businesses by raising taxes. I will not make matters worse. We have no choice but to cut spending, which is what caused the crisis in the first place."

Republicans cheered and applauded and Democrats sat on their hands as the former action movie actor delivered conservative red meat, not only on the budget but in calling for an overhaul of workers' compensation, unemployment insurance, energy and other policies that he said make the state unattractive to business. And he said that if the Democratic-controlled Legislature rejects his call for rapid action on "real" workers' compensation reform, "I am prepared to take my ... solution directly to the people. It will be on the ballot in November."

Schwarzenegger was 11 pages into a 14-page speech before Democrats found something they could applaud, a specifics-devoid promise to encourage solar energy and other environment-friendly programs. And Democrats quickly promised a battle if Schwarzenegger's new budget, which is to be unveiled Friday, slashes health and welfare spending deeply. "We will cooperate with the governor but we will not capitulate on Democratic core values," said Assembly Speaker Herb Wesson.

The governor's speech sets up what could be a climactic battle over the ideological direction of state government, which has drifted leftward over the past half-decade with billions of dollars of new spending and enactment of measures sought by unions, environmentalists and other groups.

Schwarzenegger interprets the recall of Democratic Gov. Gray Davis and his own election in October as a mandate to change direction, citing his rollback of Davis' increase in taxes on cars and legislative repeal of a new law granting driver's licenses to illegal immigrants, and demanding tough curbs on state spending to deal with "huge deficits (that) are the aftershocks of past financial recklessness." The Legislature, however, not only remains in Democratic hands but also is ideologically and politically beholden to the most liberal elements of the party, and thus is unwilling to make the sharp change in direction Schwarzenegger is demanding, because it would violate what Wesson described as "Democratic core values."

That would seem to be a recipe for gridlock -- Schwarzenegger and Republicans demanding more spending cuts and more business-friendly policies, while Democrats push billions of dollars in new taxes, especially on the wealthy, to close the budget gap and resist rolling back gains that unions and other groups have made in recent years. But stalemate, if it were to occur, carries its own set of risks, such as another downgrade in the state's lowest-in-the-nation credit rating. Schwarzenegger even used the B-word -- bankruptcy -- to describe what California could face if voters do not restructure the state's debt by passing a $15 billion bond issue in March.

The hard bargaining on the budget probably won't occur for four or five months; if nothing else, the politicians have to see what happens to the bond issue in March. In the meantime, the battle will be waged in the public arena, with Schwarzenegger-led Republicans and Democrats, along with dozens of specific interest groups, vying for support among the media and voters, especially those in the middle of the ideological road.