Ray Dalio, Scott Bessent, along with bipartisan House representatives, are uniting in support of a '3% solution' aimed at bringing the soaring national debt under control

Bipartisan Momentum Builds for Deficit Reduction Target

In an era marked by deep political divisions, a rare agreement is emerging among both Republicans and Democrats: the need to rein in the federal deficit. Lawmakers from both parties are rallying behind new legislation that aims to steadily reduce the gap between government spending and revenue to 3% of GDP—effectively cutting the deficit in half. This movement gained traction on January 9, when members of the Bipartisan Fiscal Forum in the House introduced a resolution advocating what’s being called “The 3% Solution.” While the proposal lacks detailed steps for reaching its goal, the fact that so many representatives now acknowledge the urgency—spurred by fiscal projections that have worsened much faster than anticipated—signals a significant shift in the national conversation.

Growing Support from Influential Voices

Even before the House took action, prominent policy organizations such as the Commission for a Responsible Federal Budget were already championing the 3% deficit target. In recent weeks, support has accelerated. In February, hedge fund leader Ray Dalio publicly endorsed the idea on X, noting that while bipartisan agreement is rare, this is one area where both sides align. Editorial boards at major publications like the Washington Post and Bloomberg have also voiced their approval. These endorsements have reignited discussions about deficit caps, echoing earlier calls from figures like Warren Buffett, who has long argued that 3% is the right benchmark.

Unexpected Advocates and Political Challenges

Surprisingly, Scott Bessent, President Trump’s chief economic advisor, is also a strong proponent. Bessent has consistently advocated for a “3-3-3” plan: achieving 3% GDP growth, increasing oil output by 3 million barrels per day, and reducing the deficit to 3% of national income by 2028. However, current fiscal policies have moved in the opposite direction, and President Trump has largely sidestepped Bessent’s recommendations. In his State of the Union address, Trump celebrated economic achievements but did not address the pressing need for fiscal restraint.

The Daunting Path to a 3% Deficit

America’s spending habits, especially since the pandemic, have created a fiscal challenge that will be difficult to overcome—even with immediate, stringent measures. According to the Congressional Budget Office, federal spending is projected to reach $7.449 trillion in fiscal year 2026, with revenues at $5.596 trillion. This results in a deficit of $1.853 trillion, or 5.8% of GDP. By 2036, the deficit is expected to widen to 6.7% of GDP, and some experts believe this estimate is optimistic. Complicating matters, a Supreme Court decision has reduced tariff revenues, and interest payments on the national debt are set to more than double over the next decade, eventually surpassing Medicare costs and becoming the second-largest federal expense after Social Security.

What It Would Take to Halve the Deficit

Reducing the deficit by half by 2036, as many experts recommend, would require shrinking the gap from $2.144 trillion to $1.4 trillion—a reduction of about one-third. Achieving this could involve a 12% increase in income and payroll taxes above current projections, combined with limiting entitlement spending to 12% below its expected level in ten years. Alternatively, if revenues grow as currently forecasted without new taxes, federal spending would need to remain flat for a decade, not even keeping pace with inflation, to meet the 3% target.

Lessons from the Past: PAYGO and Fiscal Discipline

The U.S. has previously managed to balance its budget, most notably from 1998 to 2001. This was largely due to the Budget Enforcement Act, which introduced “pay-as-you-go” (PAYGO) rules requiring that any new spending or tax cuts be offset elsewhere in the budget. If not, automatic spending cuts would be triggered. However, over time, Congress found ways to circumvent these rules, and their effectiveness diminished as they were weakened or allowed to lapse.

Risks of Inaction and Potential Solutions

While PAYGO provides a framework for fiscal responsibility, there is a risk that no action will be taken while the economy remains strong. If deficits continue to grow unchecked, the U.S. could face a scenario where foreign investors lose confidence, forcing the Treasury to offer higher interest rates to attract buyers for its debt. In a crisis, the government might resort to implementing a national sales tax or value-added tax (VAT), a measure common in other developed countries but not yet adopted in the U.S.

Notably, both former House Speaker Paul Ryan and economist Paul Krugman have suggested that an emergency VAT could become necessary—Krugman even called it inevitable. While such a tax would help cover rising government expenditures, it would also signal a permanent shift toward a larger government role in the economy, funded by higher taxes, rather than a balanced approach of spending restraint and revenue increases.

The Political Stakes

President Trump would be wise to heed Scott Bessent’s warnings. In 1992, Ross Perot’s campaign focused on the dangers of mounting debt and interest payments, helping to shape the political landscape and contributing to Bill Clinton’s victory. By ignoring the deficit issue in his State of the Union, Trump may have overlooked a threat not only to the economy but also to his party’s electoral prospects. If concern over deficits gains traction with voters, as it did in the early 1990s, failing to address the issue could prove costly.