In the new year, several laws which have raised spending and cut taxes will automatically expire. This will cause taxes to rise and spending to be capped, causing a fiscal tightening of $560bn, equivalent to 3.5 per cent of GDP. The Congressional Budget Office - a non-partisan government agency - has warned that this would cause a recession, with GDP falling during 2013.
Economists and investors had hoped that Congress and the President would agree to avert this prospect by agreeing to extend some of the tax breaks and spending rises. But the prospect of continued gridlock after the November elections - with Republicans controlling the House of Representatives and Democrats the White House and Senate - and the failure of presidential candidates to discuss the issue during the election campaign have dampened these hopes. Ethan Harris at Bank of America Merrill Lynch says there's a "growing risk" that the economy will fall over the fiscal cliff. A poll by economic consultants Lombard Street Research found that its clients expect fiscal policy to tighten by 2.6 per cent of GDP next year.