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By Jason Stipp and Robert Johnson, CFA | 10-10-2012 12:00 PM

Measuring the Fiscal Cliff

Morningstar's Bob Johnson details the components of the upcoming so-called fiscal cliff, suggests a possible smaller-cliff scenario, and weighs the potential economic impact of both.

Jason Stipp: I'm Jason Stipp for Morningstar.

As we head into the fourth quarter, concerns about the so-called fiscal cliff coming up at the end of the year and the beginning of 2013 are intensifying, but what exactly is this fiscal cliff? What's the potential impact? And what are some likely scenarios?

Here to offer some very important context around the fiscal cliff is Morningstar's Bob Johnson, our director of economic Analysis.

Bob, thanks for joining me.

Bob Johnson: Great to be here.

Stipp: This is a very important topic. We've been hearing a lot from readers about it. We see a lot in the press about it. The fiscal cliff, we hear about it, but what exactly is the cliff? What comprises that big potential drop-off that we could see at the beginning of 2013?

Johnson: It's a fairly large number of items that are happening with the tax code and various spending programs that are scheduled to take effect 1st of the year, and they're very big numbers. We're talking about $719 billion or so on a calendarized basis for these numbers; that's a large number relative to GDP. It's about 5%. So it is a huge number.

Stipp: So this fiscal cliff was part of an agreement made earlier, that these automatic cuts would essentially take place at the beginning of 2013 if some action isn't taken.

So, what are some of those things? It's a combination of things with the tax code and budget cuts. What comprises those?

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