In broad macro terms, the tax bill that has been passed is quite similar to the tax policies that we have incorporated in our forecasts since last December. We began with assumed cuts of $1.4 trillion and more recently have assumed cuts of $1.2 trillion; the tax bill that will be enacted clocks in at roughly $1.45 trillion. As a consequence, the magnitude of the accompanying fiscal stimulus will likely be only a bit larger than that of the tax package we have been assuming. Nevertheless, there are some notable differences in composition. The final bill is more heavily weighted toward personal rather than corporate income taxes, suggesting some shift in the composition of the boost to aggregate demand. We continue to see the principal macro effects as coming on the demand side, though it’s plausible that the tax bill will have positive supply-side effects as well.
We will fully incorporate this tax package in our next forecast, which will be published before the January FOMC meeting, and will elaborate on its role in our forecast. In addition to a tax cut, we have also been assuming an increase in discretionary spending, mostly defense, beginning in the second half of 2018 and amounting to $40 billion per year. We’d seen our assumed package as adding roughly six-tenths to the level of real GDP by the end of 2020, with the increase in spending contributing about a tenth. The bottom line is that the finalized tax policy doesn’t look likely to substantially change the outlook over the next few years. We see it as roughly consistent with our forecast, which featured 2½% growth in 2018, a rate well above trend, followed by more moderate growth closer to 2% in 2019 and 2020 (See Macro Views). As such, we continue to expect the FOMC to raise the fund’s rate target four times in 2018.