Well, that didn’t take long. Briefly, the pageantry of the royal funeral had made Britain look like a world power again. But last Friday’s package of tax cuts and borrowing announced by the UK’s new Chancellor, Kwasi Karteng, has spooked investors, caused markets to tumble, and sent the pound crashing to its lowest level against the dollar since 1985. The UK is in the grip of a right wing mania for tax cuts so extreme that Britain plans on borrowing the money to finance them, but without having the economic growth necessary to repay it. Fears are being raised that the Bank of England will now have to intervene later this week to shore up the currency with an emergency hike in interest rates.

There have been ripple effects. The British tax cuts debacle and its remedies – central banks raising interest rates even further –has heightened the existing fears of a global recession, and those fears have accelerated the flight of investors to the safe haven of the US dollar. As a result, small currencies continue to be clobbered. The Kiwi dollar for example, has just plunged to a paltry 56.3 cents against the greenback - a dismal level we last reached during the Global Financial Crisis nearly 15 years ago.

As a result, the cost of everything – from oil to food to consumer goods to the technology we need to grow the economy - is going to skyrocket. Luckily, the prospect of a global slowdown is already pushing down the price of oil on world markets – but our fading currency will mean that none of the benefits will flow on through to Kiwi motorists. Finally, the rising price of imports will fuel inflation, thus posing a tricky decision for the Reserve Bank – should it keep on raising interest rates to curb inflation, or will the relentless hiking of the cost of investment succeed only in stopping economic growth in its tracks?

Chances are, if we’re all well and truly headed for a global recession next year, the demand for New Zealand’s export goods is going to fall among consumers abroad. Quite soon, central bankers will have to decide whether it’s really such a good idea to save the global village from inflation by burning it to the ground with a series of interest rate increases.

The fuss over Truss

Meanwhile in Britain, it's a train wreck. Safe to say, the media headlines over our long weekend were not a ringing endorsement of the ‘trickle up’ theory that tax cuts for the rich provide a golden path to economic growth. “Sterling plunges to record lows against the dollar as tax cuts plans alarm investors” (the Guardian.) “Kwasi’s mini-Budget sends shock waves through the market” (Daily Mirror) “Kwarteng has shaken investor confidence in the UK” (UK Financial Times) “ Markets Reel after Kwarteng mini-budget” (the Independent…) And so on.

Nor have the bad reviews been limited to the British media. As the US Bloomberg news service noted last night, …The unfunded tax cuts will give the British economy a sugar rush, followed by ballooning debt and spiralling inflation. Former US Treasury Secretary Larry Summers – never a left winger – had this to say:

It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market.. [With] these fiscal policies, I think Britain will be remembered for having pursuing the worst macroeconomic policies of any major country in a long time.”

As Bloomberg added for good measure:

Truss’s government has set out the most radical package of tax cuts for the UK since 1972, reducing levies both on worker pay and companies in an effort to boost the long-term potential of the economy. Economists are concerned the package is unaffordable, and will trigger a currency crisis over concerns about rising debt.

A lot of the ingredients of this self-inflicted disaster will sound familiar to New Zealanders, who have endured more than their share of this kind of nonsense over the past few decades:

1. In both countries, the centre-right – the Conservatives in Britain, the National Party in New Zealand – has placed a lunatic level of faith in tax cuts and business de-regulation as an engine of economic growth, despite the lack of any empirical evidence whatsoever to support this thesis.
2. In both countries, the centre-right is showing the same readiness to address the cost of living crisis by pouring the gasoline of tax cuts for the rich onto the fires of inflation.
3. In both countries, there is the same belief that government is always the problem, and never the solution. Given the history of New Zealand – where every significant piece of national infrastructure has been built and maintained by the government, which continues to pay the lion’s share of the private sector’s research and development costs - – this is a particularly bizarre notion.

Unfortunately, failure has consequences. We have got to the point where our decades of experience with these crackpot beliefs has now undermined public faith in the competence of governments per se. Even so, we can only hope that the New Zealand media will be asking some hard questions in the coming days of Christopher Luxon and David Seymour e.g, about what the awful precedent unfolding in Britain means for their own plans and policy prescriptions.

In all likelihood though, Luxon will be spared the embarrassment of being questioned too closely about (a) the parallels between his own recipe for growth and what Truss is enacting, and (b) the lessons we should be taking from Britain’s current disastrous experiment in neo- liberal extremism. Too bad. Because if elected, there is every sign that Luxon and Seynour are willing to go full throttle Thelma and Louise in the same fashion, and drive our economy off the cliff.

Footnote One: In related news… Last week, the Nobel Prize winning economist Paul Krugman used his New York Times column to once again demolish the tax cuts myth. Krugman demonstrated (with compelling graphs) how US economic growth had virtually stalled during the tax-cutting hey-day of Ronald Reagan. By contrast, the Bill Clinton era began with tax increases, partly to make up for lost revenue. The result of the Clinton tax increases? Well, it certainly wasn’t the Armageddon predicted by right wing economists:

Bill Clinton effectively undid the original Reagan tax cuts, amid many predictions of imminent disaster. The economy actually grew somewhat faster than it had under Reagan, and by the end of the Clinton years it was above the level it would have reached if you just extrapolated the 1973-1989 trend.

Meaning: You can have tax increases to meet social needs and pay for essential infrastructure and have economic growth as well. (As shown during the immediate decades, post war.) Yet regardless, the naive faith by Truss and her acolytes in the magic properties of tax cuts persists to the present day. As Krugman put it:

I’ve written a lot over the years about zombie economic ideas — ideas that have failed repeatedly in practice, and should be dead, but somehow are still shambling around, eating policymakers’ brains. The pre-eminent zombie in American economic discourse has long been the belief that cutting taxes on the rich will create an economic miracle.

That belief, Krugman said, is still out there:

Even as its infrastructure was collapsing to the point that its largest city no longer had running water, Mississippi tried to raise its economic fortunes with … a tax cut. But in America, zombie economics has lately been overshadowed by zombie beliefs about election fraud, the impact of immigration and so on.

Britain, he added, hasn’t (yet?) had an equivalent of the MAGA movement. “What it does have instead”, Krugman said “ is Liz Truss, a new prime minister who seems to be an ardent believer in economic fallacies from the Thatcher/Reagan era.” In Christopher Luxon and David Seymour, New Zealand seems to have two keen members of the same cult.

Footnote Two: Any action by the Bank of England to raise interest rates in the UK in an emergency move to stem the plunge in pound sterling is unlikely to succeed for long. The last time European central banks tried similar action was with the so-called Plaza Accord in 1985, which successfully shielded the European currencies from a rampant greenback. This was followed by the Louvre Accord of 1987, which corrected the impact that the Plaza deal had upon the US dollar. Here’s why similarly co-ordinated central bank efforts would be unlikely to succeed today.

Among the key reasons being mentioned…. The strong US dollar is being weaponised by the Biden administration against a weakening Chinese economy. Bloomberg, again:

Rolling over debt in a domestic market is hard enough. As Latin America in the 1980s showed, rolling over foreign-currency loans is more life threatening altogether. The higher the US currency goes, the more painful it becomes for Chinese companies to pay off their dollar-denominated debt. That, of course, is the point.

The Bank for International Settlements estimates that China’s banks alone owe $800 billion to foreign banks. Andrew Hunt, an independent economist, says that is a vast underestimate, with the Bank of China owing that much on its own. The total amount for China's biggest banks, Hunt says, is more like $3.5 trillion. Worse still for Chinese borrowers, foreign banks are shrinking their overseas lending. And not just the big American ones, which have been reducing their offshore dollar exposures for a few years now and are the main suppliers of offshore dollars. So, too, are their Japanese and European counterparts. These pressures are only likely to intensify as year-end approaches. So is demand for dollars, however much other countries bleat.

Bleat on, Kiwis to no avail. So… As New Zealanders line up to pay more for all of our imported goods, we may (or may not) take consolation from the fact we’re also serving as unpaid fighters in the battle between the US and China for global economic dominance.

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