The government sector contributed modestly to growth in first-quarter Gross Domestic Product, according to the latest reading from the Hutchins Center on Fiscal and Monetary Policy’s Fiscal Impact Measure (FIM) released today — roughly in line with its performance over the past year.
State and local spending rose at a moderate pace in the first quarter, increasing real GDP growth by about 0.3 percentage points, while federal spending and tax and transfer policies were small negatives for GDP growth. Overall, fiscal policies were responsible for about 0.1 percentage point of the 0.5 percent GDP growth experienced in the first quarter. Over the past 4 quarters, fiscal policy has contributed about 0.2 percentage points to the overall 2 percent GDP growth. The FIM was negative for the four preceding years amid federal tax increases and across-the-board spending cuts and state and local belt-tightening.
Today’s Fiscal Impact Measure reading shows that the government sector – after years of being a drag on economic growth – now appears to be an essentially neutral factor.
The Fiscal Impact Measure estimates the effect of federal, state and local spending and taxes on inflation-adjusted growth in the Gross Domestic Product (GDP) and has three major components:
- spending by the federal government;
- spending by state and local governments;
- taxes and transfers at all levels of government combined.
It includes both the direct effects of government purchases as well as the more indirect effects of government taxes and government transfers. When FIM is positive, the government is contributing to real GDP growth, and when it is negative, it is subtracting from it.
For more on what goes into FIM and how it’s calculated, see here.