Bigger Tax Refunds Likely to Power the Economy

Summary

Heather Berger of Morgan Stanley's U.S. Economics team discusses how the One Big Beautiful Bill Act should lead to 15-20% larger tax refunds in 2026, boosting personal income and consumer spending power early in the year. She expects most refunds to be saved or used to pay down debt, improving household balance sheets, while some spending flows to everyday needs, travel, clothing, and home improvements. The tax bill is expected to support U.S. GDP growth in 2026 but become a drag later as spending cuts take effect. Near-term risks include tariff-driven inflation and the expiration of ACA credits, particularly for low-income consumers.

• Tax refunds are expected to be 15-20% larger on average due to retroactive tax cuts in the One Big Beautiful Bill Act.
• Higher refunds should boost personal income and spending power in the first quarter of 2026.
• Surveys suggest consumers will mostly save refunds or pay down debt, improving balance sheets.
• Refund spending, when it occurs, tends to go to everyday needs, travel, clothing, and home improvements.
• Near-term spending headwinds include tariff-driven inflation and ACA credit expiration affecting low-income consumers.
• The bill is expected to support GDP growth in 2026, then become a drag in later years as spending cuts phase in.
• The speaker expects steady growth in real consumer spending as the labor market stabilizes and inflation decelerates.