Fiscal Policy Still Boosting the Economy, but Not For Long

Fiscal Policy Still Boosting the Economy, but Not For Long


Tax and spending policies at the local, state and federal level boosted economic growth in the fourth quarter of 2019, according to the newly updated Hutchins Center Fiscal Impact Measure from the Brookings Institution.

Fiscal policy added 0.7 percentage points to GDP in the last three months of the year, relative to its long-run potential, and is projected to add about 0.5 points to GDP in the first quarter of 2020.

“Fiscal policy has been boosting economic growth modestly for several quarters, and the FIM [Fiscal Impact Measure] is now near its highest values since 2010, when the American Reinvestment and Recovery Act was supporting the economy,” the new Brookings report says.

Starting in the second quarter of 2020, however, fiscal policy is expected to start acting as a drag: “Looking forward, tax and spending policies at all levels of government are expected to be slightly contractionary in 2020 and 2021.” One reason for the negative fiscal impact is that tax payments are expected to rise as a share of GDP in 2020, Brookings says.