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 Eli Asdourian, Nasiha Salwati and Louise Sheiner
Fiscal policy reduced U.S. GDP growth by 2.9 percentage points at an annual rate in the third 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 increased at an annual rate of 2.6% in the third quarter, according to the government’s latest estimate.
The fiscal drag on economic growth in the third quarter was driven largely by declines in real federal transfer payments, which lowered growth by 2.1 percentage points. This reflects, in large part, the waning effects of the pandemic’s unemployment insurance benefit expansions and higher inflation. A rise in tax collections further contributed to the decline in the FIM, lowering GDP growth by 0.6 percentage point. Purchases by federal, state, and local governments had a small positive effect on the FIM.
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 third quarter of 2024). This projection includes the effects of the CHIPS for America Act, CBO’s updated score of the Inflation Reduction Act of 2022, and the effects of student loan forgiveness (treating the cash flow savings from loan forgiveness as we do other direct aid to households).
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, including the extent to which the generous fiscal support is still contributing to consumption today.
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 potential effects of fiscal policy on aggregate supply. 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 ».
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
By Eli Asdourian, Nasiha Salwati and Louise Sheiner
Fiscal policy reduced U.S. GDP growth by 2.9 percentage points at an annual rate in the third 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 increased at an annual rate of 2.6% in the third quarter, according to the government’s latest estimate.
The fiscal drag on economic growth in the third quarter was driven largely by declines in real federal transfer payments, which lowered growth by 2.1 percentage points. This reflects, in large part, the waning effects of the pandemic’s unemployment insurance benefit expansions and higher inflation. A rise in tax collections further contributed to the decline in the FIM, lowering GDP growth by 0.6 percentage point. Purchases by federal, state, and local governments had a small positive effect on the FIM.
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 third quarter of 2024). This projection includes the effects of the CHIPS for America Act, CBO’s updated score of the Inflation Reduction Act of 2022, and the effects of student loan forgiveness (treating the cash flow savings from loan forgiveness as we do other direct aid to households).
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, including the extent to which the generous fiscal support is still contributing to consumption today.
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 potential effects of fiscal policy on aggregate supply. 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 ».
