Source: Fortune
Summary
A bipartisan consensus is emerging to reduce the US national deficit to 3% of GDP. The proposal, dubbed “The 3% Solution,” aims to lower the deficit by roughly half from its current level. Influential figures, including hedge fund manager Ray Dalio and Trump’s economic policy maker Scott Bessent, have endorsed the idea. The Congressional Budget Office (CBO) expects the deficit to reach 5.8% of GDP in FY 2026 and 6.7% by 2036, with interest on the federal debt more than doubling to $2.144 trillion.
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The numbers tell one story.
The US deficit is projected to reach 6.7% of GDP by 2036, with interest on the federal debt more than doubling to $2.144 trillion. To achieve the 3% target, the deficit would need to be reduced by roughly one-third, which would require a combination of tax increases and entitlement spending cuts. The US already has a template for a plan that could work, the Budget Enforcement Act, which introduced pay-as-you-go requirements. However, the program’s effectiveness was undermined by gimmicks and expirations.
The situation is unsustainable, and the US might be forced to enact an emergency national sales or value-added tax, which would mean abandoning spending discipline and making government spending a bigger part of GDP.
President Trump’s omission of the deficit issue in his State of the Union speech may prove to be a big mistake.
The 3% Solution is a herculean task that requires a long-term commitment to fiscal discipline.
