Brookings Report
TL/DR –
The Hutchins Center Fiscal Impact Measure (FIM), which tracks the influence of fiscal policy on GDP growth, increased U.S. GDP growth by 0.1 percentage point in the second quarter of 2024. The increase in FIM was due to a decline in tax collections, an increase in investment from the Inflation Reduction and CHIPS Acts, and the combined effects of federal and state purchases; however, these were offset by the decrease caused by the waning effects of pandemic-era transfers and subsidies. The FIM is expected to become neutral in the fourth quarter of 2024 and then turn negative through the end of the forecast period in the second quarter of 2026, assuming that the provisions of the 2017 Tax Cuts and Jobs Act are extended.
The Hutchins Center Fiscal Impact Measure
The Hutchins Center Fiscal Impact Measure (FIM) analyzes the effect of federal, state, and local tax and spending policy on the overall economic growth, offering near-term forecasts of fiscal policy’s impact.
Federal, State, and Local Fiscal Policy’s Impact on the US Economy
In Q2 2024, fiscal policy boosted U.S. GDP growth by 0.1%, reveals the FIM. Translating tax and spending changes at all government levels into aggregate demand changes, the FIM illustrates fiscal policy’s influence on real GDP growth. The latest government estimate reports a 3.0% annual growth rate in the same quarter.
Since 2022, a decline in tax collections and increased investment from the Inflation Reduction and CHIPS Acts (treated as negative taxes) raised the FIM by 0.4%. Federal and state purchases’ combined effects increased the FIM by 0.2%, offset by the diminishing effects of pandemic-era transfers and subsidies decreasing the FIM by 0.5%.
Projections predict the FIM turning neutral in Q4 2024, then negative through Q2 2026, assuming the 2017 Tax Cuts and Jobs Act provisions set to expire at the end of 2025 are extended. The FIM would be more negative in 2026 without this extension.
Only minor effects on the FIM resulted from the Bureau of Economic Analysis’s annual national accounts revisions, with the average change close to 0 and the largest quarterly change a negative 0.3 in Q4 2023.
The FIM quantifies Fiscal policy’s influence on GDP growth rates including direct impacts on demand and supply-side effects of the Inflation Reduction Act and CHIPS and Science Act. For a comprehensive breakdown of the FIM and an analysis incorporating multipliers, read our explainer on how pandemic-era fiscal policy affects GDP levels. For more information on the FIM, refer to our methodology and Guide to the FIM.
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