Markets Are Treating the UK Like a Developing Economy: Paul Krugman

  • “British markets are not behaving like those of an advanced country,” Paul Krugman said in an op-ed for the NYT on Friday.
  • The pound tumbled following last week’s announcement of tax cuts, a sign that markets are losing confidence.
  • That’s because tax cuts to boost growth are a “zombie” idea, Krugman said, which could be disastrous for the UK economy.

Markets are now treating the UK as if it were a developing economy, according to Nobel Prize winner Paul Krugman, a sign that confidence has plummeted after the UK unveiled a tax cut plan.

The top economist pointed to the turmoil over the past week as the pound tumbled after new Prime Minister Liz Truss announced she would make tax cuts, including a 5% cut for top wealth holders and a slash of planned corporate tax hikes.

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“British markets are not behaving like those of an advanced country,” Krugman said in an op-ed for the New York Times on Friday.

The government acknowledged that the plan would require large amounts of borrowing to cover budget deficits. Typically, advanced countries with budget deficits see their currencies appreciate as investors expect their central banks to hike interest rates to offset the effects of inflation, he noted.

But UK markets “are behaving like those of a developing country, where investors tend to view budget deficits as a sign of irresponsibility and a harbinger of future political disasters,” Krugman said.

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The tax cuts are all part of Britain’s plan to boost growth amid tight economic conditions. But investors fear that the cuts will not only increase government debt but also fuel inflation and spur the Bank of England to more aggressively raise interest rates and potentially push the UK economy into a deep recession.

Tax cuts in hopes of spurring economic growth are a “zombie” idea, Krugman said, arguing that they have failed in practice and should be dead but live on. Meanwhile, the US economy picked up speed during the Clinton administration, which increased taxes.

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“But officials, despite all the historical evidence, still insisted their tax cuts would do great things for the UK economy. Obviously I don’t believe their assurances. More importantly, neither do financial markets,” he added.

But the chaos in UK markets might be an overreaction, but it’s a testament to the “crisis of confidence” Truss has unleashed abroad, which could bode well for the UK economy in the near future, Krugman noted.

“There’s no reason anyone who isn’t a right-wing apparatchik locked in a hermetic intellectual bubble should think that tax cuts for the rich are the answer to what’s plaguing us,” he said.

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