The British pound has been in the headlines this week after it plummeted to a record-low value against the US dollar.
It's the latest strain on the UK economy, which is battling rising living costs, high inflation, and the looming threat of a recession.
It's all prompted the UK government to unveil massive tax cuts, but that's raised concerns from the Bank of England that it will only make inflation worse and force interest rates even higher, while the International Monetary Fund fears it will increase inequality in the country.
Confused about what it all means? Let's break it down.
What happened?
Last week Liz Truss's government unveiled what it called a "mini-budget", the first by new finance minister Kwasi Kwarteng ahead of the proper budget in November.
Its main purpose was to help grow the British economy, which is battling recessionary pressures because of high living costs, with tax cuts featuring as the centrepiece policy.
But cutting taxes comes at a cost to the UK government's bottom line, so it will have to borrow more money to fund the policy.
"Tax cuts demand more money coming out of the government which has to be funded by public debt," says Elvira Sojli from the University of New South Wales's Business School.
But even with the tax cuts, the government still needs to fund its services — which means government debt will likely increase as it borrows more money.
Why did the UK government cut taxes?
It's got to do with the state of the British economy right now.
Like other economies around the world, Britain is feeling pressure from COVID-19 and the war in Ukraine, plus the ongoing effects of leaving the European Union.
That's culminating in the country facing the very real threat of recession, and one way to discourage a recession is by encouraging consumers to spend more.
That's why the UK government is taking a big gamble to try and fend off a recession by jump-starting its economy.
The theory is that by boosting consumer spending, it will offset the other pressures on the economy to prevent it shrinking to the point the UK enters recession.
Dr Sojli says the government's move to cut taxes was also borne out of politics.
"Liz Truss made a campaign promise that she will cut taxes and she did so before some of these inflationary pressures and interest rate pressures came to bear, so she had to stick with her promise," she says.
"So some of it is purely political [and] has nothing to do with economics, she made a promise she could not afford to break."
Could this make inflation worse?
Potentially, and that's why the Bank of England is watching closely — they're concerned that if people are encouraged to spend more, extra demand will push up prices, and therefore drive up inflation.
Currently, inflation is sitting at 9.9 per cent in the UK, but there had been hope that the crisis may be easing, as it dropped from August's high of 10.1 per cent.
But now the tax cuts could reverse that.
"Tax cuts don't keep inflation in check, that's an empirical fact," Professor Sojli says.
"There are now other pressures … which is the depreciating British pound, which is also driving inflation as Britain overwhelmingly imports a lot of products which are getting more expensive.
"There are several directions to which inflation is coming to the UK economy, and the tax cuts are not going to help."
What's this got to do with the pound?
The depreciation of the pound is slightly more complicated than the government just introducing tax cuts last week.
"It has been adjusting downwards for quite a while … and that's more to do with the economic fundamentals of the UK economy," Professor Sojli says.
She says the exchange rate of a country's currency is linked to how well its economy is performing.
"The UK has not been doing great in terms of having very high inflation, [and] growth has been slashed down," Professor Sojli says.
These two things have economists and financial markets worried about where the pound is headed, and what it means for the British economy.
There is the risk that any benefit from the tax cuts could be cancelled out if the central bank steps in with sizeable interest rate increases to ward off inflation.
What can be done? Can it be fixed?
The Bank of England has said it will "not hesitate to raise interest rates by as much as needed" in order to get inflation back to its 2 per cent target in the medium term.
Plus, the Bank of England has form with hiking interest rates this year — it's already raised them seven times this year, and it hasn't ruled out an emergency meeting to raise them again before its next meeting in November.
The International Monetary Fund (IMF) has also urged the UK government to re-evaluate its plans, saying that "large and untargeted fiscal plans" would likely increase inequality in Britain.
“We are closely monitoring recent economic developments in the UK and are engaged with the authorities," an IMF spokesperson told Reuters.
The IMF says it doesn't recommend "large and untargeted" strategies to encourage people to spend more given the higher inflation pressures in the UK.
It also warned against the risk of the government's plans competing with the central bank's objective to control inflation.
"The nature of the UK measures will likely increase inequality," the spokesperson said.
What does it mean for me in Australia?
It's good news if you're planning a holiday to England, because a weaker pound means it's cheaper to purchase British currency, which means your Australian dollars can go further.
But it could also impact the goods and services we export to Britain, because they will become more expensive to the UK buyer.
"So that may reflect itself in lower demand for Australian products, and the UK is a large importer of Australian products," Professor Sojli says.
She says any British investment in Australia could also be vulnerable because of the pound's fluctuating value.
"The largest source of [Australia's] relationship with the UK comes from their real investments, and that may shrink," Professor Sojli says.
"Investments are slow moving variables and economic indicators, but we will probably see it starting first quarter, second quarter next year."
