Schwarzenegger With Obama on Auto Bailout

California Governor Arnold Schwarzenegger tells ABC News' George Stephanopoulos that he backs an automakers' bailout if the industry reforms itself.

(ABC News)

Schwarzenegger: 'They're Living in a Fantasy World'

Schwarzenegger, who has called California legislators back to hammer out a solution to the state's runaway deficit of nearly $28 billion, said that industries and governments must cut back.

"Anyone that wants to go and think that they don't have to shift down and make changes -- if it is states, if it is local government, if it is the auto industry, or any other industry as far as that goes -- they're living in a dream world or in a fantasy world. You've got to recognize that this is the time now to renegotiate and do work in a different way." he said.

"We've got to find ways to cut down, because there's not that much money around right now. It's a different world."

The California budget crisis has forced the anti-tax governor to abandon his no new taxes pledge. Schwarzenegger has proposed more than $10 billion in spending cuts and $14 billion in tax increases, including a 1 1/2-cent temporary increase in the sales tax -- which critics say could further curtail spiraling consumer spending.

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"It is very hard when you have to increase taxes," Schwarzenegger said. "I don't want to do it. I hate taxes. I hate the word taxes and all of those things. But there's certain times when you have to forget about the ideology and, you know, all of this and fix problems."

GOP 'Values' Talk is 'Nonsense'

The Governor also addressed the challenges facing Republicans coming out of the national election. While he was unable to join his colleagues at the Republican Governors Association conference this week, he argued that his party has lost sight of what's important to the future of Americans.

"So many times there's dialogue about, you know, we have to go back to our core values.What is that? What is core? How far does core go back in history in America, the word 'core'?" he asked.

"Does it go back 30 years? Does it go back 50 years? Because we know that Teddy Roosevelt talked about universal health care. So [they've been] off the core for a long time... so I think it's all nonsense talk. I think if they just talk about one thing, [it is] what do we need now?"