Opinion: Fiscal Storm Is About To Hit Us

By John Hood

RALEIGH — You may not be interested in federal deficits, but federal deficits are very interested in you.

Okay, so I’ve reworked an already-hackneyed joke into an awkward opener, but bear with me. I’m not really attempting to personify federal deficits into having interests, you among them. The people in question are those who buy and hold securities of the federal government. Washington has sold them lots of IOUs. They expect Washington to pay them back, with interest — which is to say, they expect you and me and other federal taxpayers to pay them back, with interest.

The Congressional Budget Office just issued new estimates and forecasts for federal revenues, expenditures, deficits, and accumulated debt. During the fiscal year that ended September 30, 2025, Washington spent about $7 trillion and collected $5.2 trillion in revenue, borrowing the difference ($1.8 trillion) from creditors.

A quarter of last year’s federal budget, in other words, was financed with debt rather than cash. The 2025 deficit came to 5.9% of America’s gross domestic product, representing the difference between spending (23.1% of GDP) and revenue (17.2%). As of last year, the total amount of federal debt held by the public — that is, excluding liabilities owed by one part of the federal government to another — is right at 100% of GDP.

I know, I know, just a bunch of numbers. But they correspond to real and abnormal realities. The federal government has never run deficits of such magnitude in the absence of large-scale wars or extreme national emergencies. Federal spending is well above its 50-year average (21.2%) while federal revenue is close to its 50-year average (17.3%).

Unfortunately, according to all realistic scenarios, our fiscal mess is about to worsen dramatically. CBO forecasts that a decade from now, the federal deficit will be $3.1 trillion (6.6% of GDP), reflecting the difference between $11.4 trillion (24.4% of GDP) in spending and $8.3 trillion (17.8% of GDP) in revenue. Along the way, Social Security’s notional “trust fund” will disappear, producing some combination of across-the-board cuts in monthly benefits and additional issuances of federal debt.

Washington’s bondholders aren’t benefactors. They are creditors. They want to be paid. As the accumulated debt rises toward 120% of GDP by 2036, some will reasonably wonder whether future congresses and presidential administrations will seek to evade these obligations by inflating the currency. Interest rates will rise as a result, compounding Washington’s debt woes and imposing new burdens on investment and growth.

Because I focus primarily on North Carolina politics and public policy, let me spell out some consequences. First, because our economy can’t be walled off from the rest of America’s, North Carolinians will share the burden of costlier loans, stingier raises, and weaker job creation.

Second, future governors, state legislators, and local officials will have to make some tough calls of their own. Health care, education, transportation, social services — any public service that gets federal funding is going to get a lot less federal funding. The notion that someone else would finance North Carolina’s multi-billion-dollar Medicaid expansion was always fanciful. Soon it will become clear that Washington isn’t going to finance future roads, bridges, water systems, or transit projects, either.

In the past, North Carolina politicians would recognize all these risks in theory but ignore them in practice, assuming either that Washington would fix its fiscal problem (hah!) or that they’d be out of office long before the bill came due (boo!). Those days are over. The General Assembly elected this November will have to close budget holes in Medicaid and SNAP. Municipal and county officials elected in 2026 and 2027 will have to craft operating and capital budgets that assume federal grants will shrink, not grow.

There will be no deus ex machina. Hiking taxes only on billionaires and multi-millionaires won’t get anywhere close to closing the gap. Neither will AI-driven economic growth. Because bondholders will be paid, most of us will either pay higher taxes or get fewer services.

John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy with American history (FolkloreCycle.com).