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 increased U.S. GDP growth by 0.1 percentage point in the second quarter of 2024, 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 3.0% in the second quarter of 2024, according to the government’s latest estimate.
A decline in tax collections since 2022 and an increase in investment from the Inflation Reduction and CHIPS Acts (which we include as negative taxes) increased the FIM by 0.4 percentage point in the second quarter. The combined effects of federal and state purchases increased the FIM by 0.2 percentage point. This was offset by the waning effects of pandemic-era transfers and subsidies, which decreased the FIM by 0.5 percentage point in the second quarter; these effects will subside by the end of this year.
We expect the FIM to become roughly neutral in the fourth quarter of 2024, then become negative through the end of forecast period in the second quarter of 2026. This projection assumes that the provisions of the 2017 Tax Cuts and Jobs Act that are set to expire at the end of 2025 are extended. Without this assumption, the FIM would be more negative in 2026.
The Bureau of Economic Analysis’s annual revisions to the national accounts had only small effects on the FIM—with the average change close to 0 and the largest quarterly change a negative 0.3 in the fourth quarter of 2023.
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 also includes our estimates of the supply-side effects of the Inflation Reduction Act and CHIPS and Science Act. It doesn’t include fiscal multipliers. 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 ».