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 Sarah Ahmad, Chase Parry, and Louise Sheiner
Fiscal policy added 0.8 percentage points to U.S. GDP growth in the first quarter of 2026, according to the Hutchins Center Fiscal Impact Measure (FIM). The FIM translates changes in taxes and spending at the federal, state, and local levels into changes in aggregate demand, showing the effect of fiscal policy on real GDP growth. Real GDP rose at an annual rate of 2.0% in the first quarter, according to the latest government estimate.
Real federal spending contributed 0.4 percentage points to GDP growth in the first quarter, reflecting a bounce back from the fourth quarter’s six-week government shutdown amid generally weak underlying federal spending growth. (Real federal spending in 2026 Q1 was about 2% below its level in 2025 Q3, reflecting continuing declines in federal employment.) State and local spending subtracted a bit less than 0.1 percentage points from GDP in the first quarter, while all other factors—tax cuts in the One Big Beautiful Bill Act (OBBBA), underlying decline in transfers, effects of tariffs, and supply side factors—boosted GDP by about 0.7 percentage points. (See the Fiscal Impact Breakdown spreadsheet in the Downloads section.)
In response to the Supreme Court’s February tariff decision overturning President Trump’s use of the International Emergency Economic Powers Act (IEEPA), we have penciled in a total of $150 billion in tariff rebates over Q2 and Q3 of this year. We assume that these rebates will go primarily to businesses, and so will have relatively modest effects on activity. We have also lowered our tariff projections from our last projection by about 25%, assuming that the President’s use of Section 122 and 232 tariffs will replace about half the lost IEEPA tariffs.
As a result, we expect fiscal policy to be slightly restrictive for over the remainder of 2026, as continuing weakness in government purchases is about offset by the reduction in tariffs and the stimulative effects of OBBBA.
In 2027, we project the FIM will turn more restrictive as purchases continue to be weak and supply side effects—notably the waning effects of the equipment purchases we assume had been spurred by the CHIPS and Inflation Reduction Acts—turn negative.
Our forecast assumes current law and doesn’t anticipate further changes in tariffs or any tax or spending legislation.
The FIM tracks the influence of fiscal policy on GDP growth rates. It measures the direct impacts of fiscal policy on demand (including both discretionary fiscal policy and automatic stabilizers) and includes our estimates of the supply-side effects of legislation and uncertainty as well. It does not include fiscal multipliers. For further analysis on the effects of fiscal policy, read our explainer on the impact of federal, state, and local tax and spending policy on the level of GDP since the onset of the pandemic. For more on the FIM, see our methodology ». You can also read our Guide to the FIM ».
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