Ray Dalio’s Prescription for U.S. Fiscal Deficit: Three Steps to Bring the Deficit-to-GDP Ratio Down to 3%

TradingKey - Although Trump’s tax and spending bill has narrowly passed the House of Representatives, concerns over the U.S. fiscal deficit continue to unsettle global investors.

Ray Dalio, founder of the world’s largest hedge fund Bridgewater, believes that the U.S. government should aim to reduce its annual budget deficit from around 7% of GDP down to 3%—a level he considers manageable and historically effective.

Dalio has long warned that unchecked fiscal deterioration could eventually lead to economic catastrophe.

He argues that the path to reducing the deficit includes three key tools :

1. Cutting government spending
2. Raising taxes
3. Lowering interest rates

Among these, interest rates are the most critical lever.

Why 3% Is the Target

Dalio emphasized that a 3% deficit-to-GDP ratio is an effective and sustainable target—one that has worked well in many economies. A strong historical example is the U.S. between 1991 and 1998, when fiscal discipline led to a period of economic stability and market confidence.

However, the feasibility of his first two proposed solutions—spending cuts and tax increases—remains questionable in today’s political climate.

Trump’s Department of Government Efficiency (DOGE), led by Elon Musk, has made some progress in trimming federal expenses, but the scale of savings is far from sufficient to meet deficit-reduction goals.

Both parties have largely avoided serious discussions on expenditure reductions—whether during the 2024 presidential election cycle or in the current Republican-led push for deep tax cuts.

Dalio pointed out that if Congress were to take fiscal discipline seriously, it would send a powerful signal to bond markets—a view echoed by U.S. Treasury Secretary Scott Bessent, who has remained relatively quiet since the House approved the tax cut bill.

As for raising taxes, that option appears even more unrealistic. Trump continues to push for massive tax cuts to stimulate growth and business innovation—making any increase in tax revenue politically unlikely.