One of of the world’s most successful investors has warned that the UK is stuck in a “debt doom loop”.
Hedge fund manager Ray Dalio, who founded Bridgewater Associates, was speaking as UK debt as a percentage of GDP (gross domestic product) rose to 101%.
Long-term borrowing costs are higher than they have been at any point this century, giving the Chancellor Rachel Reeves little room to borrow more to fund spending, and thus requiring a focus on raising taxes instead.
Mr Dalio told the ‘Master Investor’ Podcast with Wilfred Frost she risked alienating the very people who could help get the country out of its fiscal bind – mirroring concerns expressed by the boss of Goldman Sachs last week.
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“The debt doom loop is affecting capital flows. So the necessity for creating taxations that then drive people away.
“As the financial problems and the social problems worsen, having the effect of causing people with money to leave.
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“That’s a problem because, I don’t know the exact numbers in the UK, but they’re analogous to the US, where 75 % of income taxes are paid by the top 10%.
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“So you have this financial deterioration, that precedes social and economic deterioration that has caused migrations all around the world and so on. And there is only one way to deal with that. Both of our countries need a strong leadership of a strong middle. They have to have the war between those of the left and those of the right begin to end because difficult choices are going to have to be made, you know, like our countries had in World War II.
“The deficits for the central government, have to be lowered to about 3 % of GDP. That is what would be sustainable rather than having this compounding effect.” The UK deficit is currently 5.1% of GDP, while in the US it is 6%. “They have to do it equally in spending cuts and taxation. And if that is done interest rates will come down not rise.”
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Dalio outlines the process around the debt cycle in his new book How Counties Go Broke.
And while many people are broadly aware of the debt problems advanced nations now face, he said that bond markets are complacent to the looming risks.
“You get this complacency. So now the question for you or for your audience is, is it priced into the markets? Well, I’ll answer the question and say, no, it is not priced into the markets.”
The Master Investor Podcast with Wilfred Frost is available across multiple podcast platforms
