• 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.

For further analysis download the full report 

• Economic Comment: US Fiscal Cliff – 29 November 2012 (PDF 197KB)