What Is Fiscal Policy? Did Pandemic Relief Cause Inflation?

In the 12 months to September 2020, the US government spent $6.52 trillion. It took in $3.42 trillion, mostly in taxes. The gap of $3.10 trillion was 14.5% of the economy's output. That was the highest share since 1945.

Most of the extra spending came from pandemic relief laws, which sent cash to households and firms. Consumer price inflation then peaked at 9.1% in June 2022. This guide explains fiscal policy and its tools. It then weighs whether that spending caused the inflation.

Fiscal policy covers what the government spends, what it collects in taxes and what it borrows to cover the gap. In the US, Congress writes the spending and tax laws. The President signs or vetoes them. The federal fiscal year runs from 1 October to 30 September, so fiscal 2020 ended in September 2020.

Monetary policy is run by the Federal Reserve, which sets interest rates and buys or sells bonds. We explain its role in What Does the Fed Do? In 2020 the two pushed the same way. Congress spent more while the Fed held its policy rate near zero.

When spending exceeds receipts in a year, the gap is the budget deficit. The government covers it by selling Treasury bonds.

The chart shows the federal budget balance each fiscal year as a share of Gross Domestic Product (GDP), the value of everything the economy produces. From 1960 to 2019, the deficit averaged 2.6% of GDP.

The orange bars are fiscal 2020 and 2021. At 14.5% and 12.0% of GDP, they were the largest deficits since the Second World War. The latest year with final figures is fiscal 2025. The deficit was $1.77 trillion, or 5.9% of GDP.

Fiscal policy has three tools:

More spending or lower taxes add to demand. This is called expansionary, or loose, fiscal policy.

Some of this happens without any new law. In a recession, incomes and profits fall, so tax receipts fall. More people claim unemployment benefits. The Congressional Budget Office (CBO), the budget scorekeeper for Congress, calls these automatic stabilisers. They prop up household spending in a downturn. They also widen the deficit. In fiscal 2009, federal receipts fell 16.6%.

Congress passed three relief laws in 2020 and 2021. The first was the CARES Act, which stands for Coronavirus Aid, Relief and Economic Security. The table lists all three.

Source: Congressional Budget Office; Pandemic Response Accountability Committee

CBO put the combined cost at about $4.4 trillion of extra deficits. The CARES Act was billed at $2.2 trillion. That headline included up to $454 billion to back emergency lending by the Fed. CBO expected that lending to roughly pay for itself, so its $1.7 trillion cost leaves it out.

Stimulus payments came to up to $3,200 per eligible adult across three rounds. By the end of 2021, payments worth $814 billion had gone out.

The chart shows federal spending and receipts since 2000. Spending jumped 46.5% in fiscal 2020, from $4.45 trillion to $6.52 trillion. Receipts were $3.42 trillion, against $3.46 trillion in fiscal 2019.

The Personal Saving Rate is the share of after-tax income that households do not spend. The Bureau of Economic Analysis publishes it each month.

Each round of payments shows up as a spike. The rate hit 31.8% in April 2020. That month the first payments went out, while lockdowns cut spending. It rose to 19.5% in January 2021 and 26.2% in March 2021, as the second and third rounds arrived. From 2015 to 2019, it averaged 6.1%.

Households saved much of the money first, then spent it. Excess savings are savings above the pre-pandemic trend. Economists at the San Francisco Fed estimate they peaked at $2.1 trillion in August 2021. As households drew them down, the Personal Saving Rate fell to 2.4% in June 2022, its lowest since April 2008. In August 2026 it was 4.1%.

Fiscal spending can raise inflation when it pushes demand beyond what the economy can produce.

The case for a large fiscal role. In a March 2022 Economic Letter, San Francisco Fed economists compared the US with rich countries that gave less support. They estimated that US fiscal support "may have" raised inflation by about 3 percentage points by the end of 2021. Inflation on the Consumer Price Index (CPI) was then 7.0%. The authors say the estimate carries "considerable uncertainty". In a 2025 blog post, written as his own view, St. Louis Fed economist Fernando Martin went further. He argued that inflation "was primarily the product of the fiscal deficits incurred in response to the pandemic."

The case for other causes. In a 2023 study, Ben Bernanke and Olivier Blanchard found that most of the surge came from shocks to prices: energy, food and shortages. Energy prices in the CPI rose 41.6% in the year to June 2022, after Russia invaded Ukraine. The New York Fed's Global Supply Chain Pressure Index hit its highest reading on record in December 2021.

A contrast with 2009. A large deficit does not always bring inflation. The deficit was 9.8% of GDP in fiscal 2009, yet CPI inflation averaged 1.6% a year from 2009 to 2014. Unemployment reached 10.0% in October 2009. The economy had a lot of spare capacity, meaning idle workers and equipment that could meet extra demand.

The verdict. The relief did push inflation up, by about 3 of the 7.0 points at the end of 2021 on the San Francisco Fed estimate. Energy, food and supply shocks explain much of the rest. The estimate stops before the 9.1% peak in June 2022.

The Fed kept its policy rate near zero until March 2022, so monetary policy did not lean against the spending until then. Higher rates then cooled prices, as we show in Interest Rates and Inflation. The role of new money is covered in Does Money Printing Cause Inflation? and the wider causes in What Is Inflation?

A few habits help:

Fiscal policy is how Congress and the President use spending and taxes to steer the economy. The 2020–21 relief lifted demand while supply was squeezed. One Fed estimate puts its effect at about 3 of the 7.0 points of inflation at the end of 2021. Energy and supply shocks drove much of the rest.

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