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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
FEDERAL, STATE AND LOCAL FISCAL POLICY AND THE ECONOMY
By Eli Asdourian, Nasiha Salwati and Louise Sheiner

Fiscal policy reduced U.S. GDP growth by 4.6 percentage points at an annual rate in the second quarter of 2022, 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 fell at an annual rate of 0.9% in the second quarter, according to the government’s latest estimate.

The fiscal drag on economic growth in the second quarter was driven largely by the waning effects on GDP of federal transfer payments like the unemployment insurance benefit expansions and pandemic-related subsidies to business, which lowered growth by 2.5 percentage points. A rise in federal and state tax collections and declines in real federal, state, and local purchases further contributed to the decline in the FIM, lowering GDP growth by 1.1 and 0.7 percentage points, respectively.

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, and we expect it to remain so through the end of our projection period (the second quarter of 2024). The projection reflects the effects of enacted legislation, including last year’s bipartisan infrastructure bill (the Infrastructure Investment and Jobs Act), but does not include the recently passed CHIPS for America Act or assume enactment of pending proposals such as the Inflation Reduction Act of 2022. We expect that the impact on the FIM of both of these pieces of legislation would be quite small.

While the overall trajectory of the FIM is clear—continued fiscal restraint over the next two years—the exact magnitude and timing are not. There is a great deal of uncertainty about behavioral responses to the legislation enacted since the start of the pandemic. Given the unusual nature of the recession and recovery, estimates of households’ and firms’ marginal propensities to consume are uncertain. Similarly, it is hard to know how state and local governments will adjust their spending in response to the stimulus. Despite unprecedented support from Washington, employment by state and local governments remains about 3.3% below its pre-pandemic level. We assume that state and local governments will boost spending in coming quarters, but it is possible that the adjustment will be slower than we anticipate in light of the surprisingly weak growth thus far. Higher inflation rates for the sector also mean that the support will have smaller effects on real GDP.

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 supply-side effects, such as the possibility that enhanced unemployment insurance benefits impeded labor supply or that the vaccine rollout increased economic activity. 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.»

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