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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 Manuel Alcala Kovalski, Sophia Campbell, Louise Sheiner

Fiscal policy reduced U.S. GDP growth by 2.3 percentage points at an annual rate in the third 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 2.1% in the third quarter, according to the government’s latest estimate.

The FIM shows that, when large swaths of the economy were shut down because of the COVID-19 pandemic, fiscal policy provided significant support to economic growth. The FIM turned negative in the second quarter of this year, and we expect it to remain so through the end of our projection period as the effects of the support wane. Our forecast includes the effects of the recently enacted infrastructure bill, which had only small effects on the FIM over our projection period. However, our forecast does not include effects from additional legislation Congress may enact in 2021.

The drag on economic growth in the third quarter was driven by a decline in federal transfer payments as the unemployment insurance benefit expansions and the two rounds of rebate checks ended. This included the $600 per person from legislation enacted in December 2020 that was paid in January 2021, and the $1,400 per person from the American Rescue Plan Act that was paid in the last few weeks of March 2021. A reduction in state and local purchases (net of purchases financed by federal grants) further contributed to the drag on growth in the third quarter. (The FIM reallocates state and local purchases financed by grants to federal purchases).

Federal spending excluding transfers also had a slight negative impact, reflecting a decline in federal non-defense purchases after the processing and administration of Paycheck Protection Program loan applications ended 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 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 from Washington, employment by state and local governments remains about 4.7% 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 tracks the influence on 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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