The Hutchins Center Fiscal Impact Measure shows how much local, state, and federal tax and spending policy adds to or subtracts from overall economic growth, and provides a near-term forecast of fiscal policies’ effects on economic activity.
FEDERAL, STATE AND LOCAL FISCAL POLICY AND THE ECONOMY
By Chase Parry, Zixun Tan, and Louise Sheiner
Fiscal policy subtracted 0.2 percentage points from U.S. GDP growth in the second quarter of 2026, according to the Hutchins Center Fiscal Impact Measure (FIM). The FIM translates changes in taxes and spending at the federal, state, and local levels into changes in aggregate demand, showing the effect of fiscal policy on real GDP growth. Real GDP rose at an annual rate of 1.5% in the second quarter, according to the latest government estimate.
Real federal spending subtracted 0.4 percentage points from GDP growth in the second quarter while state and local spending subtracted 0.1 percentage points. The combined effect of all other factors—including underlying taxes and tax cuts in the One Big Beautiful Bill Act (OBBBA), transfers, tariffs, and supply side factors—boosted GDP by about 0.3 percentage points. (See the Fiscal Impact Breakdown spreadsheet in the Downloads section.)
We expect fiscal policy to be moderately restrictive over the remainder of 2026, as continuing weakness in government purchases and the effects of tariffs are partially offset by the stimulative effects of the tax cuts in the OBBBA.
In 2027, we project the FIM will become more restrictive as purchases continue to be weak and supply side effects—notably the equipment purchases we assume had been spurred by the CHIPS and Inflation Reduction Acts—turn negative.
Our forecast assumes current law and does not anticipate new tax or spending legislation. We also assume that tariff rates remain near their second-quarter levels over the forecast horizon. This reflects our expectation that Section 232, 301, and 338 tariffs (invoked against Canada over alleged discrimination against U.S. commerce) will almost fully replace the revenue collected under the IEEPA tariffs.
The FIM tracks the influence of fiscal policy on GDP growth rates. It measures the direct impacts of fiscal policy on demand (including both discretionary fiscal policy and automatic stabilizers) and includes our estimates of the supply-side effects of legislation and uncertainty as well. It does not include fiscal multipliers. For further analysis on the effects of fiscal policy, read our explainer on the impact of federal, state, and local tax and spending policy on the level of GDP since the onset of the pandemic. For more on the FIM, see our methodology ». You can also read our Guide to the FIM »
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