The 3% Target: Restoring Fiscal Discipline in US
The United States is not in an immediate debt crisis, but it is facing a credibility problem that will continue unless certain structural issues are addressed. For decades, deficits have been treated as a mainstay rather than a measure during recessions to “prime the pump” as Keynesian economics originally intended. Instead of shrinking in periods of growth, deficits have become normalized even during the expansion and peak phases of the business cycle.
For FY26, the Congressional Budget Office projected a $1.7 trillion deficit which would represent 5.5% of GDP, while interest payments on debt held by the public increased by 14% to $22 billion in the first two months of FY26. The conversation is starting to shift, but that shift matters more than most people realize, while we are focused on issues not as catastrophic as this looming debt balloon. Getting the federal deficit back toward 3% of GDP is about preserving growth, protecting US financial dominance, and avoiding slow, self-inflicted economic decline.
What makes this moment different is that the US budget deficit is no longer a theoretical concern, it is now tied to interest rates, capital, and the global role of the USD. Protecting USD hegemony is of upmost importance in today’s globalized but competitive world to maintain financial supremacy, favorable trade environments, and the use of economic actions to project US interests. Every additional dollar of borrowing crowds out private investment, raises debt-servicing costs, and tests the demand of global investors to absorb the ever-growing supply of US treasuries.
This is where responsible fiscal and monetary leadership from the Treasury matters, and under Secretary Scott Bessent, the stated goal has been to restore confidence in US fiscal management. The emphasis has not been on fine-tuning or undermining growth, but on signaling that the US understands that it must get its fiscal house in order. A deficit around 3 percent of GDP has been viewed as a level that allows an economy to growth without debt rising faster than the ability to service it, and an idea that has been relentlessly pushed for by Bessent and Ray Dalio. Especially during a time where fiscal policy has become increasingly polarized, a decrease in the Deficit to GDP ratio combined with economic growth could improve the ability to service debt.
The danger of running consistent, elevated deficits is not only harmful to consumers through inflation which is a “hidden tax on consumers” as Milton Friedman argued. But also crowding out private investment, as when the Federal government absorbs a larger share of available capital it leaves less room for growth in the private sector. This shows up in the long run as weaker productivity growth, slower wage gains, and a heavier reliance on fiscal fine-tuning than real expansion.
There is also a global component that often gets overlooked but is one of the most important tools the US benefits from. Which is the US dollars role as the worlds primary reserve currency. That status relies on confidence in US assets that will hold value over time, and if deficits are structurally permanent then demand for these assets becomes more conditional. This in turn can show up as raising borrowing costs across the US economy, harming private investment, home ownership and credit markets.
Addressing this problem requires confronting spending and taxes, and while neither are politically feasible it is necessary. On the spending side, the issue of long-term entitlement growth must be confronted. Ignoring the looming reality does not protect beneficiaries but shifts the burden of risk to future Americans when it will become more painful and less flexible.
Regarding taxes, the question is not just rates but also the structure of the tax system. Currently the US tax system discourages investment, work, innovation and undermines the growth needed to stabilize the debt path. “Taxing the rich” or raising headline rates will not fix the issue, instead the focus should be on reducing loopholes, simplifying the code for all US taxpayers, and incentivizing capital investment and wealth building rather than suffocating it.
The uncomfortable truth is that fiscal discipline is not optional, letting deficits continue to grow higher may feel easier in the short run but it quietly erodes the future for Americans of my own generation by raising costs, reducing mobility, and weakening confidence in the US economy.
As JFK said, “We do these things not because they are easy, but because they are hard.” Getting this right will not be easy and it will certainly require sacrifices, but the alternative is slower growth, higher interest burdens, and a shift away from the US as the reserve currency.
The US is the leader of the free world, and a clear commitment to stabilizing deficits near 3% of GDP signals that the US intends to manage its finances without sacrifice the role as the world’s economic anchor.