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 Eli Asdourian, Louise Sheiner, and Lorae Stojanovic
We have updated the FIM to account for the supply-side effects of the CHIPS and Inflation Reduction Act and for the effects of the suspension (and resumption) of student loan payments, which we had not previously included.
Fiscal policy decreased U.S. GDP growth by 0.2 percentage point in the second quarter of 2023, the Hutchins Center Fiscal Impact Measure (FIM) shows. The FIM translates changes in taxes and spending at federal, state, and local levels into changes in aggregate demand, illustrating the effect of fiscal policy on real GDP growth. GDP increased at an annual rate of 2.1% in the second quarter of 2023, according to the government’s latest estimate.
The waning effects of transfer programs lowered the FIM by 1.5 percentage points, while the decline in tax collections over the last year and the supply-side effects of the CHIPS and Inflation Reduction Acts raised the FIM by 1 percentage point.
As the FIM shows, fiscal policy provided significant support to economic growth when large swaths of the economy were shut down in 2020 during the COVID-19 pandemic. The FIM turned negative in the second quarter of 2021 as fiscal support waned. The negative impulse from fiscal policy peaked in mid-2022 and has since diminished.
We expect the FIM to be negative through the end of our forecast period, reflecting the waning effects of CHIPS/IRA and the resumption of student loan payments. This projection assumes that discretionary spending increases at the rate specified in the recent debt ceiling agreement between the White House and Congress.
The FIM tracks the influence of fiscal policy on GDP growth rates. It measures only the direct impacts of fiscal policy on demand (including both discretionary fiscal policy and automatic stabilizers). It doesn’t include fiscal multipliers nor any potential effects of fiscal policy on aggregate supply. For an analysis that includes multipliers, as well as a more detailed breakdown of the components of the FIM, read our explainer on how pandemic-era fiscal policy affects the level of GDP, which includes a comparison of actual GDP with our estimate of what GDP might have been had fiscal policy failed to respond to the pandemic.»