A tax-slasher's Bill of not-quite rights
On Thursday, Donald Trump moved a step closer to realising his economic agenda after the US House of Representatives narrowly cleared - and you can't make this up - the 'One, Big, Beautiful Bill' (OBBB). The tax-slash bill awaits senate approval, which will come with modifications. But the legislation will broadly remain regressive and inflationary. Bond market sentiment is grim after last week's Moody's downgrade, and is anticipated to push back against tax changes that will add more than 12% to already swollen US government debt over the next decade. US debt servicing is already running ahead of its military spending, and Trump's tax cuts could contribute to geopolitical instability as the US preoccupation with its economy rises.
Trump's fiscal stance makes the Fed's job of lowering interest rates much more complicated. The Fed is in watch mode since the US imposed retaliatory tariffs against the rest of the world to bring down its trade deficit. Interest rate cuts are on hold, and could be delayed further when the tax-cut bill is enacted. Compounded effects on inflation of tariffs and tax giveaways will most probably result in stagflation, hobbling the scope for monetary easing despite Trump's exhortations for cheap money. These effects will be felt across emerging-economy equity and debt markets as global liquidity tightens.
OBBB bankrolls broader action against illegal immigration - including an ambitious programme of deportation - adding another dimension to US inflation. Proposal to tax remittances will affect flows to principal recipients such as India, where these constitute a significant channel of capital inflows. Alongside hardening credit costs, outflows from equity markets and a trimmed merchandise export surplus, Indian policy will have to adjust to pressure on US remittance inflows. Adjustments for each of the variables changed less than six months into The Trump Show, Season 2, comes at a cost to India's growth and inflation management. Their combined impact on monetary and fiscal stability is not inconsiderable.
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