On what Britain’s tax cutting spree means for us
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?