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Hutchins Center Fiscal Impact Measure

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.


Hutchins Center Fiscal Impact Measure Contribution of Fiscal Policy to Real GDP Growth Components of Fiscal Policy Contribution to Real GDP Growth

  • Four-quarter moving average
  • Quarterly fiscal impact
  • Federal spending on goods and services
  • State and local spending on goods and services
  • Taxes and benefit programs

Source: Hutchins Center calculations from Bureau of Economic Analysis data.

Hutchins Center on Fiscal & Monetary Policy
By Manuel Alcala Kovalski, Sophia Campbell, Eric Milstein, Louise Sheiner

Fiscal policy reduced U.S. GDP growth by 2.8 percentage points at an annual rate in the second quarter of 2021, 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 rose at an annual rate of 6.7% in the second quarter, according to the government’s latest estimate.

The FIM shows that fiscal policy provided significant support to economic growth when large swaths of the economy were shut down because of the COVID-19 pandemic. Looking forward, the FIM turns negative as the effects of this support wane. Our forecast doesn’t assume any additional legislation from Congress in 2021 on infrastructure or other areas.

The drag on economic growth in the second quarter was driven by a decline in federal transfer payments as the two rounds of rebate checks ended. This included the $600 per person from legislation enacted in December that was paid in January, and the $1,400 per person from the American Rescue Plan Act that was paid in the last few weeks of March. A reduction in state and local purchases (net of purchases financed by federal grants) further contributed to the drag on growth. (The FIM reallocates state and local purchases financed by grants to federal purchases.)

Federal spending excluding transfers had a net zero impact, as a decline in federal non-defense purchases (driven by lower administrative costs of the Paycheck Protection Program) was offset by an increase in grants to state and local governments. A drop off in state spending on unemployment insurance programs also had a slight negative impact on GDP growth in the second quarter.

While the overall trajectory of the FIM is clear—continued fiscal restraint—the exact magnitude and timing of the effects are not. There is a great deal of uncertainty about the behavioral responses to the legislation enacted since the start of the pandemic. For example, it is hard to know how state and local governments will adjust their spending in response to the stimulus. Despite unprecedented support, employment by state and local governments remains about 4% below its pre-pandemic level. We assume that state and local governments will boost spending sharply in coming quarters, but it is possible that the adjustment will be slower than we anticipate. Similarly, given the unusual nature of this recession, estimates of households’ and firms’ marginal propensities to consume (MPCs) are uncertain.

The FIM measures only the direct impacts of fiscal policy on demand (including both discretionary fiscal policy and automatic stabilizers). It doesn’t include multipliers, nor any supply-side effects such as the possibility that enhanced unemployment insurance benefits are impeding labor supply or that the vaccine rollout is increasing economic activity. For more on the FIM, see our methodology ». You can also read our Guide to the FIM ».
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