![]() 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.»įor more on the FIM, see our methodology ». 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. It measures only the direct impacts of fiscal policy on demand (including both discretionary fiscal policy and automatic stabilizers). The FIM tracks the influence of fiscal policy on GDP growth rates. Higher inflation rates for the sector also mean that the federal support will have smaller effects on real GDP. 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. Despite unprecedented support from Washington, employment by state and local governments remains about 3% below its pre-pandemic level. Similarly, it is hard to know how state and local governments will adjust their spending in response to the stimulus. Given the unusual nature of the recession and recovery, estimates of households’ and firms’ marginal propensities to consume are uncertain. There is a great deal of uncertainty about behavioral responses to the legislation enacted since the start of the pandemic. While the overall trajectory of the FIM is clear-continued fiscal restraint over the next two years-the exact magnitude and timing are not. We also incorporate 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). This projection incorporates the revisions from BEA’s Annual Update of the National Economic Accounts, which had small effects on the FIM over the past few years but no significant effects on its contour. 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). 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 1.2 and 0.6 percentage points, respectively.Īs 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 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 3.1 percentage points. GDP fell at an annual rate of 0.6% in the second quarter, according to the government’s latest estimate. 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 growth by 4.9 percentage points at an annual rate in the second quarter of 2022, the Hutchins Center Fiscal Impact Measure (FIM) shows. FEDERAL, STATE AND LOCAL FISCAL POLICY AND THE ECONOMYīy Eli Asdourian, Nasiha Salwati and Louise Sheinerįiscal policy reduced U.S. ![]() ![]() Source: Hutchins Center calculations from Bureau of Economic Analysis data.
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