Markets are treating the UK as if it's a developing economy after the government's plan for tax cuts deepened the risk of 'policy disaster,' top economist Paul Krugman says

• "British markets aren't acting like those of an advanced country," Paul Krugman said in an op-ed for the NYT on Friday.
• After announcing tax cuts last week, the pound plunged in value, a sign markets are losing confidence.

Markets are now treating the UK as if it's a developing economy, a sign that confidence has plunged after Britain floated a plan to cut taxes, according to Nobel Laureate Paul Krugman.

The top economist pointed to the turmoil last week, when the pound plunged after new Prime Minister Liz Truss announced she would be implementing tax cuts, including a 5% cut on top wealth holders and slashing planned corporate tax increases.

"British markets aren't acting like those of an advanced country," Krugman said in an op-ed for the New York Times on Friday.

The government acknowledged the plan would require heavy borrowing to cover budget deficits. Typically, advanced countries in a budget deficit see the value of their currencies rise as investors expect their central banks to raise rates to offset inflationary effects, he noted.

But Britain's markets are "behaving like those of a developing country, in which investors tend to see budget deficits as a sign of irresponsibility and a harbinger of future policy disaster," Krugman said.

The tax cuts are all part of Britain's plan to spur growth amid tight economic conditions. But investors fear the cuts would not only increase the government debt but also fuel inflation, spurring the Bank of England to hike interest rates more aggressively and potentially drag the UK economy into a deep recession.

Cutting taxes in the hopes of fueling economic growth is a "zombie" idea, Krugman said, arguing that they have failed in practice and should be dead but continue to live on. Meanwhile, the US economy took off during the Clinton administration, which raised taxes.

"But officials still insisted, despite all the historical evidence to the contrary, that their tax cuts would do great things for the British economy. Obviously, I don't believe their assurances. More importantly, neither do financial markets," he added.

But the chaos in Britain's markets could be an overreaction, but it is a testament to the "crisis of confidence" Truss has set off overseas, which could be an omen for the British economy in the near-future, Krugman noted.

"There is no reason anyone who isn't a right-wing apparatchik, sealed in a hermetic intellectual bubble, should believe that tax cuts for the rich are the answer to what ails us," he said.