Together, the sweeping tax cuts enacted in the United States at the end of 2017 and the spending package enacted in February of this year are expected to add $276 billion in fiscal stimulus to the US economy this year, or 1.4 percent of GDP. But the actual impact on US economic growth may turn out to be lower than meets the eye. As we explain in this blog, the impact of fiscal stimulus on economic activity and output varies with the business cycle. Existing projections of the impact of the Trump stimulus measures—the "multiplier" effects—miss (or ignore) the fact that the US economy is operating at nearly full potential. Based on the current state of the US economy, we predict that the Trump fiscal stimulus will yield an extra boost to GDP of 0.5 percent by 2020, instead of 2.1 percent if this dimension is not taken into account.
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