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, Georgia Nabors, and Louise Sheiner
Fiscal policy decreased U.S. GDP growth by 0.6 percentage point in the first quarter of 2025, 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 decreased at an annual rate of 0.3% in the first quarter of 2025, according to the government’s latest estimate.
The 0.6 percentage point decrease in the first quarter was largely the result of a decline in federal purchases, reflecting a step down in defense spending after two strong quarters as well as the effects of recent actions taken to reduce the federal workforce. (Workers who were placed on administrative leave or who accepted offers under the deferred resignation program continued to receive pay but were not working, which boosted the federal deflator and lowered real purchases.) Net transfers increased the FIM by less than 0.1 percentage point. We expect the FIM to remain negative in the next quarter and through the end of our forecast period (the first quarter of 2027).
The sharp decline in our forecast of the FIM over the next four quarters reflects the effects of tariffs and heightened uncertainty surrounding tariffs and other federal policies, including those related to federal grants to universities and other non-profits. Although these effects are difficult to quantify, we judge them to be substantial. Accordingly, we have marked down the FIM by one percentage point for each of the next four quarters as a rough approximation of their magnitude.
This projection also assumes that the provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that are set to expire at the end of 2025 are extended. Without this assumption, the FIM would be more negative in 2026. This projection does not reflect any other future legislation, including any additional tax cuts beyond those in the TCJA and any potential cuts to Medicaid and other spending.
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 the Inflation Reduction Act and CHIPS Act. It doesn’t 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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