Fiscal Policy Starting to Drag on Growth: Analysis

Fiscal Policy Starting to Drag on Growth: Analysis

Fiscal policy played an important role in providing a cushion as the Covid-19 pandemic took hold, pumping trillions of dollars into the economy through direct payments, enhanced unemployment benefits, small business loans and tax credits. But that support is fading, and as a result, fiscal policy is becoming a drag on economic growth, according to the latest analysis by the Hutchins Center Fiscal Impact Measure at the Brookings Institution.

“Fiscal policy reduced U.S. GDP growth by 2.6 percentage points at an annual rate in the second quarter of 2021,” the Hutchins Center says. “The drag on economic growth in the second quarter was primarily the result of a decline in federal transfer payments as the two rounds of rebate checks ended. This included the $600 per person from legislation enacted in December that was paid in January, and the $1,400 per person from the American Rescue Plan Act that was paid in the last few weeks of March. A reduction in state and local purchases (net of purchases financed by federal grants) further contributed to the drag on growth.”

Assuming no new legislation is passed by Congress, the negative effect will continue in the coming quarters, the Hutchins analysts say.