The US may slip into recession if it were to fall off the fiscal cliff at the end of the year, the country's Congressional Budget Office (CBO) has warned.
Ahead of a series of urgent meetings to be held in the US, the CBO has warned politicians if they fail to resolve the fiscal cliff it would knock 3% off GDP, plunging the US back into recession.
The CBO's report - which is assessing the damage the end of a series of Bush-era tax cuts would have on the economy - also warned unemployment would rise to 9.1% by the end of next year if nothing was done.
Such is the risk posed to the US economy that many commentators expect politicians to come up with a solution to the fiscal cliff before the end of the year.
However, there remains a chance the Democrats and the Republicans fail to agree a deal to prevent the economy from falling back into recession.
According to the FT, the CBO analysed a number of solutions to the crisis, assessing what the effect would be if certain tax breaks were removed.
The CBO said that raising taxes on higher income individuals would lower output by just 0.1%, but mean 200,000 fewer jobs at the end of next year.
While scrapping tax cuts for upper incomes has a modest effect on output, scrapping all of them would lower output by 1.4% and jobs by 1.8m next year.
Automatic spending cuts on defence and non-defence spending that are part of the cliff would each lower output by 0.4% and jobs by 400,000, while letting temporary payroll tax cuts and unemployment benefits expire reduces end-of-2013 output by 0.7% and jobs by 800,000.
Fears over the fiscal cliff have come to the fore since the election this week saw President Obama elected for a second term.
With the election hype out of the way, the reality of what must be agreed is sinking home to investors, with many taking profits from a market which has delivered double-digit returns in the last 12 months.
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