NEW YORK - Although government spending supported the economy during the Great Recession, tightening purse strings will hold back economic expansion in "the next couple of years," according to an economic letter from the Federal Reserve Bank of San Francisco, released Monday.
"In aggregate, state, local, and federal fiscal policy was unusually expansionary during the Great Recession, but has since reversed course," according to the authors of the economic letter, research associate Brian Lucking and senior economist Dan Wilson. "Overall government spending and the combined state, local, and federal deficit have been declining over the past year more rapidly than would be expected given the slow pace of recovery and the typical countercyclical pattern of fiscal policy. Moreover, CBO projections suggest that fiscal policy, at least at the federal level, will become increasingly contractionary over the next couple of years compared with normal cyclical patterns. This suggests that the tailwinds fiscal policy provided to economic growth during the Great Recession and the first few years of recovery have shifted direction. Going forward, the forecast calls for fiscal headwinds."