Panicked investors pull their money out. The currency tanks, long-term interest rates rise. The International Monetary Fund criticises the foolishness of the government. The central bank takes emergency steps to stabilise the financial system.

Which country was this? If you asked this question to an economist, they would assume it was Argentina, Indonesia, Brazil or Turkey - a developing country. They would be shocked - and indeed were shocked - to discover that the country in question was the United Kingdom.

The United Kingdom has the 29^th highest gross domestic product per capita in the world, measured at purchasing power parity. It is far from being a developing country. But this is what makes it even more remarkable that financial markets are now treating it like one.

When an advanced economy like the United States undertakes a fiscal expansion - either tax cuts or increased spending - interest rates rise and the currency appreciates.

The reason is straightforward. Governments fund their fiscal expansion by borrowing savings from the public by selling bonds. The increased demand for a limited pool of savings pushes up interest rates. Money from overseas flows into the economy to enjoy those higher interest rates which causes the currency to appreciate.

This is exactly what happened in the United States when Trump undertook big tax cuts in 2017 and when Biden announced big spending since he took office. Interest rates rose and the dollar went up.

When developing countries do the same thing, the opposite happens. A fiscal expansion causes investors to panic. They pull their money out of the country, the exchange rate plummets and interest rates rise due to lack of savings and the risk premium investors now demand to invest in that relatively more risky country.

This is what we saw happen to the United Kingdom. International financial markets put the United Kingdom in the developing country bucket. It's a remarkable fall from grace for the country that once ran the world.

How did the United Kingdom get itself into this position?

It's self-inflicted. It's the result of a string of stuff-ups by successive governments, both short-term and long-term, and there are lessons for Australia.

The short-term stuff up was having a big fiscal expansion while the central bank was trying to fight historically high inflation. Any sensible government in this environment would be contracting fiscal policy not expanding it.

Expanding fiscal policy just adds more fuel to the fire. It puts more money in people's pockets who then go out and spend it, adding to demand, pushing up prices and worsening inflation further. It means the government and the central bank are pulling in opposite directions.

And then there was the fiscal expansion itself. Financial markets may have been more forgiving if the fiscal expansion was the result of investments in productivity-enhancing infrastructure.

But it wasn't. The expansion was about giving $74 billion of tax cuts to the rich.

Even the International Monetary Fund criticised it, warning it would worsen inequality and was bad timing. The government has now abandoned most of its plan. But the damage is done.

Then there's the long-term context. The United Kingdom has struggled for 15 years with weak productivity growth (the driver of long-run living standards), rising debt and worsening inequality. Then they hit themselves with Brexit.

Withdrawing from the EU meant deliberately restricting access of UK businesses to their biggest market. Less trade and a higher cost of capital means even lower productivity growth and a worse standard of living for their children, to say nothing of the chaos it has caused for businesses and households in the short-term with trucks lined up at the border.

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Nor has the government learned anything. The government is still planning what The Economist calls "a bonfire of EU laws" in 2023. This will make it even harder for UK businesses to do business in Europe.

Things are bad in the motherland. Is this a warning for Australia? It's hard not to notice the similarities. Australia has similarly struggled with weak productivity growth, rising inequality and growing budget problems for more than a decade. And we've got big tax cuts coming through which overwhelmingly favour the richer of the rich.

Australia should take two lessons from the United Kingdom's experience.

First, we need to address our long-term growth problem. This means lifting productivity growth. The best way to do that is through reform: tax and welfare reform, competition reform, industrial relations reform and trade reform, like scrapping all our remaining tariffs.

Second, the government needs to get smarter in how it uses its budget. Creating an independent fiscal authority is a great way to achieve this.

An independent fiscal authority could rigorously assess proposals to spend money or to cut taxes. It could analyse the costs and benefits of each proposal, including how else that money could be used.

Elected politicians would make the final decision, but transparent advice from a fiscal authority would help politicians and the public to better understand the trade-offs, implications and alternatives.

The people of the United Kingdom are in pain. Morning television shows used to give away holidays and fun prizes. Now they offer to pay for people's energy bills. Online recipes used to offer tips on how to impress your guests with a fancy dessert. Now recipes offer tips for surviving the cost-of-living crisis.

Australia often follows trends from the United Kingdom. Let's give this one a miss.