SACRAMENTO, Calif. – A year ago, newly elected Governor Schwarzenegger faced a huge budget deficit, an unfriendly Legislature, and uncertainty about his administration’s direction.

Little has changed as the Republican governor prepares to deliver his second State of the State speech Wednesday. California’s budget shortfall is $8 billion and climbing, Democrats are still bristling over Mr. Schwarzenegger calling them “losers” following the November 2 election, and many in the Capitol are questioning the governor’s priorities.

Some political analysts say Mr. Schwarzenegger’s speech will be critical to defining his agenda not just for this year, but for the rest of his term.

“This is about the road to 2006 and beyond – not just getting an on-time budget this year or the litany of programs he’s going to propose,” said Allan Hoffenblum, a Republican consultant based in Los Angeles. “This is going to be about substantive changes.”

Expectations remain high for the governor, who most Californians agree was able to generate some positive results during his first year in office.

Buoyed by an improving economy, Mr. Schwarzenegger pushed a pro-business agenda and embarked on a trade mission to Japan to help change the state’s image as unfriendly to commerce. Political gridlock at the Capitol has eased somewhat, thanks to his ef forts to reach out to Democrats. And polls show that most voters believe the state is headed in the right direction.

Still, even Mr. Schwarzenegger’s most ardent supporters acknowledge he faces tough decisions, including whether to raise taxes or cut programs to solve the state’s economic crisis.

While he closed part of the state’s budget gap, estimated at one point to be $17 billion, he did it with borrowed money, one-time fixes, and accounting gimmicks that won’t be available in 2005.

A report issued by state Legislative Analyst Elizabeth Hill’s office in November found that the deficit will balloon to nearly $10 billion in 2006-07 without a tax hike, spending cuts – or a combination of both.

Lawmakers can close some of the deficit by tapping the remaining $3.5 billion from the $15 billion in borrowing that voters approved in March. But Ms. Hill warned against any new borrowing; California already has $26 billion in debt for ongoing budget needs.

“The fiscal crisis facing California is every bit as severe, if not more so, than it was when he tossed (former governor) Gray Davis out of office,” Mr. Hoffenblum said.

Mr. Schwarzenegger has said that he opposes higher taxes and believes the budget can be balanced by cutting the growth rate of key programs. But he has offered few details on what he proposes to do.

The governor is expected to submit his budget to lawmakers January 10.

“It all gets back to the budget,” said Raphael Sonenshein, a political science professor at California State University, Fullerton. “If you are not credible on the budget, people begin to think you are a little less credible on other things. You are taken less seriously.”

Although Mr. Schwarzenegger has made some inroads with Democrats, the state’s majority party, his early missteps may have cost him credibility in the Legislature, too.

During the budget fight, he branded Democrats “girlie men,” infuriating some who called the remark sexist and homophobic. Two days after the Democrats took a drubbing at the polls in the November election, Mr. Schwarzenegger referred to leaders of the party as “losers.”

Mr. Schwarzenegger could alienate Democrats even further by focusing on how legislative districts are drawn in his speech. If he appears intent on undermining Democratic power by redrawing legislative districts, he may be accused of ignoring the state’s more pressing financial concerns.

“There’s two roads he could go – there’s the partisan Arnold and the nonpartisan Arnold,” said Bruce Cain, a University of California, Berkeley, political scientist.

If Democrats are unwilling to accept some of his reforms, aides have hinted, the governor may take them to voters in an election he will call for late summer or fall.