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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
FISCAL POLICY AND THE ECONOMY, 2020 THROUGH 2022
By Manuel Alcala Kovalski, Sophia Campbell, Tyler Powell, Louise Sheiner

After boosting U.S. GDP growth by 3.3 percentage points in 2020, fiscal policy is expected to add 1.6 percentage points to GDP growth in 2021, according to the latest reading of the Hutchins Center Fiscal Impact Measure (FIM). 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.

Looking to the quarterly pattern, we estimate that fiscal policy will boost economic growth by about 11.0 percentage points, at an annual rate, in the first quarter of 2021, largely the result of the two rounds of rebate checks (the $600 per person from legislation enacted in December that was paid in January, and the $1400 per person from the American Recovery Plan Act (ARPA) that began to be paid in the last few weeks of March). In addition, increased federal spending on goods and services is expected to boost GDP in the first quarter. Fiscal policy will provide a further boost to growth in the second quarter of 2021, increasing real GDP growth by 1.3 percentage points. In the third quarter, the FIM is projected to turn negative, as the waning effects of last year’s stimulus are a drag on household spending.

The FIM reflects the combination of the drag on growth from the waning of the (March 2020) CARES Act provisions and the boost to growth from recent legislation. The figure below isolates the effects of the ARPA on GDP. (The FIM only includes the direct effects of fiscal policy on GDP; for an analysis of a similar plan that includes both the direct and indirect effects, using fiscal multipliers, see here.) We estimate that the legislation will boost GDP growth by about 1.9 percentage points in the first quarter, 5.8 percentage points in the second, and lesser amounts in the third and fourth quarters.

Contribution of the American Rescue Plan Act to real GDP growth The ARPA’s positive impact on GDP growth in the first quarter is driven primarily by the distribution of rebate checks near the end of March. In subsequent quarters, growth is boosted by the higher support to household consumption from federal taxes and transfers (including rebate checks, child tax credits, unemployment insurance and other aid to households) and increases in federal purchases of goods and services. Note that the FIM relabels state and local purchases—as measured in the National Income and Product Accounts—as federal purchases if those purchases are funded by federal grants. Thus, the large increase in federal grants to state and local governments in the ARPA shows up as higher federal purchases in the FIM.

Contribution to real gdp growth of American Rescue Plan Components While the overall trajectory of 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 made assumptions about behavioral responses to legislation. For example, the impact of taxes and government transfers on the pace of GDP growth depends on the marginal propensities to consume (MPCs), such as how much households spend versus how much they save from the $1400 per person checks included in the recent fiscal package.

This update of the FIM also incorporates the latest release of Bureau of Economic Analysis data for the fourth quarter of 2020. We estimate that federal, state and local fiscal policy had a negative impact on GDP growth in the fourth quarter, lowering it by 3.1 percentage points at an annual rate. The negative reading is driven primarily by the effects of fiscal policy on consumption, which subtracted 2.6 percentage points from GDP growth, and largely reflects the waning effects on household spending of the CARES Act’s rebate checks and increased unemployment benefits. Government-financed purchases were also a restraint on growth. Federal purchases held down GDP growth by 0.2 percentage point; state and local purchases held it down by 0.3 percentage point.

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