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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, Kadija Yilla and Louise Sheiner

We have incorporated the package that Congress passed in late December in this FIM projection, using revenues and outlays estimated by the Committee for a Responsible Federal Budget.

The fiscal policy response to the pandemic had a large impact on GDP growth in the third quarter, boosting it 3.6 percentage points at an annual rate, but the lift from fiscal policy was smaller than in the second quarter, according to the latest reading of the Hutchins Center Fiscal Impact Measure (FIM). GDP increased at an annual rate of 33.4 percent in the third quarter, according to the latest government estimate.

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. The only higher reading of the FIM, going back to 1973 (the earliest year for which we have data), occurred in the second quarter of this year, when fiscal policy pushed up GDP growth by 14 percentage points. Taxes, subsidies, and transfer programs account for the largest component of the increase in the FIM since the pandemic began. This reflects the boosts to consumption from CARES Act’s payments to households, expanded unemployment benefits, and automatic stabilizers—the reduction in taxes and increases in unemployment and Supplemental Nutrition Assistance Program (SNAP) benefits that occur automatically when an economy falls into recession.

Government-financed purchases by both federal and state and local governments, on the other hand, were a restraint in the third quarter—holding down GDP growth by 0.5 and 0.7 percentage point, respectively. State and local expenditures have been declining steadily since the beginning of the pandemic, in response to tight budget conditions and the different staffing needs during the pandemic. (See this analysis of the effects of the pandemic on state and local employment and revenues.)

Looking forward, we estimate that the fiscal package passed by Congress at the end of December, along with the lingering effects of last spring’s legislation, will boost economic growth in the first quarter of 2021 by 7 percentage points. Taxes, transfers, and subsidies are again the largest component of the stimulus—capturing the effects of the $600 per person rebate checks, the $300 increase in unemployment benefits, and the second round of the Paycheck Protection Program (PPP) forgivable loans to employers. In addition, increases in federal grants to state and local governments—which appear in the FIM as federal purchases, since the federal government finances them—also are projected to boost GDP notably in the first quarter. The FIM turns negative in the second quarter as the effects of fiscal stimulus begin to wane, subtracting 3.4 percentage points from GDP in Q2, 5.8 percentage points in Q3, and 2 percentage points in Q4. If widespread vaccination allows the economy to get back to normal by mid-2021, the drag from waning fiscal policy in the second half of 2021 will likely be offset by increased demand arising out of the end of social distancing.

We estimate that the recently-passed fiscal package will directly increase the level of real GDP by 1.7 percent in 2021 and 0.7 percent in 2022. Using the same fiscal multipliers as in this analysis with Wendy Edelberg, we estimate that the total effect of this package (direct effect plus indirect effect) is to lift real GDP by roughly 2.4 percent in 2021 and 1.3 percent in 2022 above the level it would have been without the legislation.

While the overall trajectory of the fiscal policy measured by the FIM is clear—a near-term boost to the economy followed by several quarters of restraint—the exact magnitude and timing of the effects are not. As always, we’ve had to make assumptions about behavioral responses to the legislation. For example, the impact of taxes and government transfers on the pace of GDP growth depends on the marginal propensities to consume (MPCs)—for instance, how much households spend versus how much they save out of the $600 per person checks and the additional $300 per week in unemployment benefits in the recent fiscal package.

Estimating the impact of the PPP on GDP is particularly difficult, as it requires knowing what share of those grants go to businesses that would have otherwise laid off employees—in which case the PPP funding operates much like unemployment insurance—and what share should be viewed like standard business tax cuts that have only small near-term effects on business spending. Evidence from the first round of PPP grants suggests that employment increased only for a small minority of recipients, and so we assumed only a modest amount of stimulus from the first set of PPP grants. This second round of PPP is better targeted to firms in need—smaller businesses, and those experiencing large COVID-related losses such as movie theaters, live venues, and cultural institutions—and so we’ve increased the pace and amount of spending out of the PPP money.

For more on the FIM, see our methodology ». You can also read our Guide to the FIM ».
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