Introduction to the U.S. Budget and its Impact on Mexico
Once upon a time, there was a large and beautiful U.S. budget that didn’t sit well with many, including Mexico. This grandiose proposal included a 5% tax on remittances, which was met with disapproval in Mexico. It also suggested significant cuts to medical assistance for low-income individuals and tax reductions for those with higher incomes. Neither the poor nor the wealthy were satisfied.
Moody’s Downgrade and its Implications
Moody’s, a leading credit rating agency, does not view the situation as grand. They recently lowered their assessment of the U.S. sovereign debt, citing an increased fiscal imbalance due to the proposed budget by Donald Trump. This budget implies significantly less revenue and more expenditure, potentially increasing the U.S. national debt by $3 to $5 trillion over the next decade, averaging $300,000 to $500,000 million annually.
The Remittance Tax: A Closer Look
In Mexico, we’ve focused on one aspect of this vast budgetary puzzle: the remittance tax. This 5% levy on money transfers to several countries aims to collect $22 billion annually. While this amount is minuscule compared to the $300 billion deficit, it can be framed as a patriotic tax by Trump to cover public services used by migrants and demonstrate fiscal responsibility. However, this is misleading; it’s essentially a wealth redistribution act, similar to Robin Hood, taking from the poor and giving to the rich.
Concerns and Implications of the Remittance Tax
The remittance tax stirs both anger and concern. Anger, as it targets vulnerable groups; concern, as it could disproportionately affect Mexico’s poorest regions. This tax might lead to the resurgence of costlier, riskier money transfer methods for the 5 million Mexican households sending or receiving remittances, about one in eight Mexicans. This issue isn’t isolated but part of a broader context, including other harsh measures against migrants and recent decisions aiming to pressure the Mexican government, creating uncertainty.
Prospects for Remittance Tax Cancellation
There was a minor legislative rebellion over the weekend to halt or modify the “Beautiful and Grand” proposal from the White House. It failed, irking Trump, who has intensified efforts to pass the budget without substantial changes. He needs to prove his omnipotence, dismissing Moody’s warnings and blaming Biden for all woes.
Why Moody’s Message Matters
Moody’s downgrade is the last of the three major rating agencies to lower the credit rating of the U.S. It serves as a reminder that U.S. debt now poses a greater risk than before, warning that the U.S. government has less room to respond in emergencies or recessions. It signals that perhaps we’ve reached the end of an era where large U.S. fiscal imbalances didn’t significantly impact debt costs.
Market Reactions
Markets have started reacting. The long-term U.S. debt interest rate has risen, and the dollar’s value against other currencies has fallen. The Mexican peso is now below 19.30 per dollar, not due to Mexico’s economic performance but reflecting dollar weakness and distrust in Trump’s economic management.
Mexican Delegation’s Visit to Washington
I observe with interest news of a Mexican legislative delegation traveling to Washington to persuade U.S. congressmen against approving the remittance tax. Curiously, I wonder how many will lose their visas on this mission. I’m intrigued by their outcome, believing they’ll return empty-handed but with phones full of photos documenting this legislative exploits.
Complex Situation in the U.S.
The situation in the U.S. is complicated. Those sympathetic to migrants lost the election. Mexico’s soft power is waning, and the bilateral relationship is a friction factory. Can they convince those who won to cancel potential $22 billion revenues? What will they offer in return? What’s the future of the peso exchange rate?
Key Questions and Answers
- What is the relevance of the 19.30 peso rate? The peso’s current value below 19.30 against the dollar isn’t due to Mexico’s economic performance but reflects dollar weakness and distrust in Trump’s economic management.
- How does Moody’s downgrade of U.S. debt affect Mexico? It serves as a reminder that U.S. debt poses greater risk, potentially impacting global financial markets and investor confidence, including those in Mexico.
- What are the implications of the proposed U.S. budget on Mexico? The budget, including the remittance tax, could negatively impact Mexico through increased costs for remittances, potential economic instability, and strained bilateral relations.
- Why is a Mexican delegation visiting Washington? The delegation aims to persuade U.S. congressmen against approving the remittance tax, which could affect millions of Mexican households.
