The national debt just sailed past the $40 trillion mark, with nothing but red ink as far as the eye can see.
Our abject disregard of financial discipline this century has now foreclosed some options that were previously available. Since the last surplus in 2001, the debt has exploded so dramatically that balancing the budget is no longer an option. We have already saddled our children and grandchildren with a massive obligation that will diminish their standard of living. That ship has sailed. The question now is whether we are willing to alter course sufficiently to avoid running aground.
The budget deficit for 2026 will exceed $2 trillion, which amounts to 6% of the total U.S. economic output or GDP.
To illustrate the magnitude of that imbalance, recall that 75% of federal spending is allocated to Social Security, Medicare, Medicaid and other automatic programmatic expenditures, plus the $1 trillion in interest on the debt. The remaining 25% is called discretionary spending, including all outlays for defense, homeland security, the State Department, Health and Human Services and all other government services.
Even if we eliminated the entire U.S. military and wiped out all 15 cabinet departments, we still could not balance the budget.
However, it is possible to slow the rate of growth in the debt over a longer horizon to avert an impending crisis.
A storm is already brewing in the bond market, as potential buyers of U.S. treasury bonds are demanding higher returns, driving interest rates to 20-year highs. Failed attempts by the Treasury to manipulate the Japanese yen and U.S. bond yields have cost Secretary Scott Bessent some credibility with Wall Street as well.
If a crisis of confidence in the dollar does materialize, it will start in the bond market, and it won’t be pretty.
A sensible approach offered by some analysts is to set an intermediate target for future deficits that would stabilize the national debt at a manageable level. Congress could establish a goal of reducing the annual deficit from 6% of GDP to 3% over the next 10 years, a target that would require shared commitment but is at least attainable.
Holding the deficit below the nominal rate of economic growth would stanch the bleeding and then gradually reduce the burden as a share of the overall economy.
The Congressional Budget Office estimates that on the present trajectory, the debt will swell from the current 100% of GDP to 190% by 2060. This alarming scenario does not account for future wars, pandemics or recessions. A more realistic projection would be well over 200%.
A 3% deficit target attained over a 10-year runway and holding that level would reduce the national debt to 90% of GDP by 2060, still astronomical by historical standards but at least sustainable, according to the Committee for a Responsible Federal Budget. In addition to heading off a fiscal disaster, such a plan would also boost economic growth by reducing interest rate pressure and providing a bit more flexibility to respond to the next crisis.
It is self-evident that achieving a 3% fiscal target over a decade will require a mix of additional revenue and spending reductions. More precisely, accelerating the growth in tax revenues and slowing the growth in spending.
The deficit problem emerges by comparing taxes and spending as a share of the economy. Fiscal 2026 projected outlays represent around 23% of GDP, with revenue at about 17.0%. Narrowing that 6% gap to 3% would entail bringing spending down to 21.5% and boosting revenues to 18.5% of GDP by 2036. Doesn’t sound too intimidating, but the devil is in the details.
Slowing the growth in spending. Since 75% of the outlays are essentially on autopilot, a course correction is in order. First order of business: tackle the looming insolvency in Social Security and Medicare. Solutions here are well known, including a gradual increase in the retirement age, means testing benefits for wealthier retirees, and some hard choices regarding the costly and inequitable healthcare delivery system in the U.S. Major rework of the Medicaid program must also be on the table to address fraud and abuse but also to devolve the majority of the responsibility to the states.
Discretionary spending must also be on the table, of which over half is defense related.
Boosting revenue. Several rounds of tax cutting are responsible for over a third of the increase in debt since 2001. It is time to retire the false narrative that tax cuts can “pay for themselves” and embrace a more holistic reform of the tax structure a la President Ronald Reagan’s 1986 Tax Reform Act. That popular and effective reform eliminated virtually all loopholes and deductions in exchange for lowering marginal tax rates. Within a few short years, Congress had restored many of the breaks and even dreamed up a few more.
Reform should also consider eliminating or scaling back the step up in basis at death and preferential treatment of capital gains that distort capital allocation and exacerbate intergenerational inequality.
Accelerate economic growth. Expanding the economy faster cannot fix the debt problem, but it can certainly help. Tax reform (not tax cuts) can stimulate growth by removing non-investment related distortions. Reducing the deficit also relieves pressure on interest rates and the crowding out of private business borrowing.
Also, current tariff and immigration policies and the Iran war are costing the U.S. economy around 1% in annual growth. For example, due to the demographic decline in the citizen workforce and the shortage of workers with technical degrees and skills, America needs more, not fewer, immigrants to support faster economic expansion.
It is too late in the game to return to balanced budgets. However, all is not lost. Adopting a 10-year fiscal target, enacting it into law and holding elected leaders accountable for its implementation can stabilize the debt and forestall an existential financial reckoning. It won’t be easy and will require shared sacrifice, but we have faced greater challenges before.
Christopher A. Hopkins, CFA, is a cofounder of Apogee Wealth Partners in Chattanooga.
