Economic Comment: US Fiscal Cliff

The fiscal cliff refers to the large fiscal contraction that will occur early in January 2013 due to increases in taxes and reductions in spending under existing law. Given the state of the economy and the limited ability of monetary policy to respond

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  • The fiscal cliff refers to the large fiscal contraction that will occur early in January 2013 due to increases in taxes and reductions in spending under existing law.
  •  Given the state of the economy and the limited ability of monetary policy to respond, if the full legislated fiscal consolidation were to occur there would be a large negative impact on the economy, potentially taking it back into recession.
  • Negotiations to scale back the size of the fiscal cliff are underway. The most likely outcome is a deferral of much of the fiscal contraction, but not all. Agreement may not be reached until early next year.
  • Backdrop to the fiscal cliff debate is that the spending and taxation policies operating at this moment are not sustainable. It is not a question of when the US will have to tighten its budget but when, at what pace, and how.

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