30 SECOND GUIDE: U.S. FISCAL CLIFF

By DAILY MAIL CITY & FINANCE

Updated: 04:40 EST, 5 October 2012

The Daily Mail City team explains the looming tax rises and spending cuts in America.

The what?

IT is the term used to describe the looming £370billion of tax rises and spending cuts which come into force in the US next year.

Why?

The Budget Control Act, which was signed into law by President Barack Obama in August last year, brought an end to the US debt-ceiling crisis which threatened to lead to the country defaulting.

Countdown: Barack Obama signed the Budget Control Act which will see a series of tax hikes and spending cuts due in 2013

The debt-ceiling – or the country’s maximum debt – was raised immediately in exchange for efforts to tackle the deficit in future.

A series of tax hikes and spending cuts are due at the start of 2013 unless a new deal can be struck.

What will it involve?

A series of tax cuts and tax breaks introduced by President Bush expire.

At the same time, a number of automatic spending cuts kick in, with the defence budget among those in line for deep cuts.

Is it important?

Very. It amounts to around 4pc of US economic output and would be enough to send the American economy, the biggest in the world, back into recession.

Ratings agency Fitch says it is ‘the single biggest near-term threat to a global economic recovery’.

IMF chief Christine Lagarde says sorting it out is ‘vital for the world’ – but there is no guarantee that the political stalemate in Washington will be broken.