NC leaders should pay attention to fiscal warning sign from DC
For only the second time in American history, the federal debt held by the public exceeds the size of the nation’s economy. The other time this happened was at the end of World War II. This should serve as a fiscal warning sign to state policymakers, particularly as North Carolina has become increasingly dependent on federal funds.
The fiscal crisis
Gross domestic product (GDP) is the value of all goods and services produced within the United States annually. Simply put, it represents the total size of the domestic economy in a given year. The federal debt held by the public represents all the money the federal government owes to external creditors.
So, the debt-to-GDP ratio compares the amount the federal government owes to external creditors to the size of the American economy.
The chart below illustrates the United States’ historic debt-to-GDP ratio from federal fiscal years (FY) 1790–2025, along with projections made earlier this year by the Congressional Budget Office (CBO) for FY 2026–2040.
As depicted in the chart, the debt-to-GDP ratio has reached 100%. Throughout history, the debt-to-GDP ratio has spiked during periods of national crisis — wars, depressions, and recessions — but has receded once stability was restored.
Each time, fiscal restraint and economic growth brought the ratio back under control. The one historical example of the debt-to-GDP ratio exceeding 100% came in the aftermath of the Great Depression and World War II.
Today, we are approaching a similar critical juncture. The Great Recession and the COVID-19 pandemic left the United States with an elevated debt burden. Yet, unlike the 1940s, this spike is not the result of global war or national reconstruction — it reflects a habitual pattern of fiscal irresponsibility dating back to the turn of the century.
The last time the federal government generated a budget surplus was in FY 2000–01. Since then, the federal debt held by the public has increased from $3.4 trillion to $30.3 trillion, representing a staggering 790% increase. Moreover, when accounting for intragovernmental debt — the money the federal government owes to its own trust funds, such as Social Security — the total federal debt rises to nearly $38 trillion.
The impacts of this fiscal crisis have already materialized. By printing trillions of new dollars to finance massive deficit spending during the pandemic, the worst inflation in 40 years was unleashed during the Biden administration. Households across the country have been slammed by dramatic spikes in the cost of living, particularly in groceries, rent, and energy.
As the federal government’s budget has ballooned, so have the federal funds that have trickled down to North Carolina. Between 2000 and 2024, the share of the state’s General Fund revenues sourced from federal funds has surged from 30% to 46%. This means that nearly half of the state’s total General Fund budget is being funded by the federal government. Meanwhile, the federal government is orchestrating the worst fiscal crisis of the nation’s history.
Fiscal policy recommendations
Now is the time to start positioning the state financially to withstand this federal fiscal crisis. State leaders can’t control Washington’s spending habits, but they can ensure North Carolina is prepared to weather the consequences. To safeguard the state’s long-term fiscal health, lawmakers should focus on the following priorities:
1. Reduce the size of the FY 2025–26 budget
Decrease the FY 2025–26 net state General Fund appropriations from $32.6 billion to $32 billion. Spending $32.6 billion would represent a 34% increase over six years. Now is the time to slow down the COVID-19 spending surge, and a $32 billion budget would be a step in the right direction.
2. Moderate personal income tax rate reductions
Decrease the size of the future annual personal income tax rate cuts beyond 3.99% from 0.5 percentage points to 0.25 percentage points. This more closely aligns with previous successful rate cuts and would help to mitigate the possibility of a revenue shortfall.
3. Rebuild the Savings Reserve
More than $1 billion has been spent from the Savings Reserve since Hurricane Helene. Making annual contributions to the reserve is essential to ensure the state is prepared for natural disasters, recessions, and reductions in federal funding.
4. Refocus Medicaid on the truly vulnerable
During the first partial year of Medicaid expansion, in which coverage was extended to able-bodied adults, total Medicaid spending in North Carolina increased by 29%. Reform is needed to return Medicaid to its original mission — to protect society’s most vulnerable.
5. Improve the solvency of the State Health Plan
As of the end of FY 2023–24, the Retiree Health Benefit Fund’s unfunded liabilities exceeded $34 billion, highlighting the urgent need to strengthen the State Health Plan’s long-term solvency.
6. Eliminate pork, corporate welfare, and venture capital projects
The purpose of state-level taxation is to generate revenue for core government services, not to fund local pet projects, give handouts to multinational corporations, or to speculate on the future of innovation. In an era of looming fiscal constraints, every dollar spent on cronyism is one less available for essential services and future reserves.
Closing thoughts
With the federal debt now equaling the size of the entire national economy, North Carolina can no longer assume that Washington’s money will keep flowing freely. The federal government is currently shut down over financial disputes. The recently passed One Big Beautiful Bill includes provisions that may withhold billions in federal support for North Carolina’s Medicaid expansion. When the federal government faces its inevitable fiscal reckoning, states that depend most on federal funds will feel the sharpest impact.
By acting now — keeping the budget lean, rebuilding reserves, and focusing resources on essential priorities — North Carolina can minimize the impact of the unfolding crisis. Fiscal discipline today is not just prudent policy; it is an act of stewardship for future generations.
“NC leaders should pay attention to fiscal warning sign from DC” was originally published on www.carolinajournal.com.
![[WBT107.9FM] app promo graphics 2025](https://wbt.com/wp-content/uploads/sites/84/2025/12/17653898024341.jpg?quality=80&strip=all&w=150&crop=0,0,100,150px)
