The US faces a deadline to agree new legislation that could make or break the global economic recovery.

The so-called "fiscal cliff" has been on the horizon for two years, but now the 31 December deadline is almost here.

Policymakers are holding meeting after meeting to try to work out a solution. Negotiations are expected to continue right up to, or even slightly beyond, the end of the year.

Why are we here?

President Obama's administration has been at loggerheads with Congress over the level of government spending and tax rates. Congress refused to raise the US government's borrowing limit, which is set by statute.

But other legislation passed by Congress commits the federal government to spending and defines its ability to raise tax revenues which threatens to push it through the statutory borrowing limit.

In a bid to break the stalemate, both sides agreed in August 2011 to set up a bi-partisan committee to find ways of capping US government spending over 10 years, plus find another $1.2tn (£758bn) in savings over the period.

The committee set its own ticking timebomb. Fail to reach a deal by 31 December, and automatic spending cuts would be triggered. The committee failed.

What is the fiscal cliff?

On 31 December, a raft of temporary tax cuts is due to expire, just as huge automatic spending cuts are introduced.

This is the fiscal cliff that the US is staring over. Individuals and companies will be hit simultaneously with tax rises and reductions in government contracts, benefits and support.

Some $607bn of cuts and tax rises are planned, including reductions in the defence budget, the end of an employee tax holiday, changes to Medicare allowances and higher personal taxes.

The lower-paid will lose some child and income credits, while the long-term unemployed will lose their right to continue drawing benefits.

The political intention behind the cliff is that both sides have too much to lose: Republicans are loath to allow the Bush tax cuts for high income earners to expire or defence spending be slashed; Democrats want to maintain President Obama's temporary measure to help the unemployed and low income earners, and to avoid deep cuts in non-defence spending.

What are the origins of the crisis?

The roots of the current crisis date back to 2001, when President George W Bush's administration was trying to pass a programme of tax cuts worth $1.7bn.

Failure to secure the required majority in Congress meant the measures were pushed through under a rule that would result in the tax cuts expiring in 2011. In 2010, two years after Barack Obama was elected President, a deal was struck with the Republican-controlled Congress to extend the deadline for two years.

Other tax changes and temporary spending measures were added to the legislation, which President Obama hoped would bolster an economy that was sinking into recession and losing jobs at a rapid rate.

Why does it matter?

Analysts have painted a grim picture of the consequences for the world's largest economy, with some warning that the impact could push the long-running eurozone debt crisis into the shade.

"The US fiscal cliff represents the single biggest near-term threat to a global economic recovery," the Fitch ratings agency said recently. "The dramatic fiscal tightening implied by the fiscal cliff could tip the US and possibly the global economy into recession.

"At the very least it would be likely to halve the rate of global growth in 2013."

The IMF has warned that even the uncertainty raised by the fiscal cliff has hit global investment and job creation. If the US actually fell off the cliff it could knock possibly four percentage points of growth off the US and undermine the fragile confidence in the rest of the world, it said.

How will individuals suffer?

JP Morgan economist Michael Feroli has estimated that more than $550bn could be sucked out of the economy. "In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that," he said.

The US-based Tax Policy Center (TPC) estimates that the average annual tax bill for each American would rise by $3,500. The super-rich face an average tax rise of $120,500 a year, while the lowest earners will see an increase of about $412.

For the middle earners - about 60% of the population - the TPC estimates that the average annual tax rise would be about $2,000.

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