Billionaire hedge fund investor Ray Dalio explains why UK government faces debt ‘death spiral’
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Ray Dalio, the billionaire founder of hedge fund organisation Bridgewater Associates, says the UK’s borrowing is leading to a “debt death spiral” which self-fulfils to become worse over time.
Speaking to the Financial Times this week, Dalio explained the UK government’s continued rise in borrowing, which hit almost £18bn last month, coupled with rising cost of paying off that debt, meant the only viable outcomes were to cut spending, raise taxes – or take on even more debt to pay against the earlier amounts. The US is increasingly facing a similar issue, he believes.
“This looks like a debt death spiral in the making because it will either require more borrowing to service the debt that will have to be serviced, squeeze out other spending or require more taxes,” Dalio said.
Aligned with a recent gilt sell-off which saw yields spike, the 75-year-old investor said the situation suggested the market wasn’t fully able to accept the financial decision-making at the top.
“When you get to the point that you have to borrow money to service the debt and interest rates are rising, so that debt service payments rise, so you need to borrow more money to pay them, you’re in what the markets call a death spiral,” he added. “Those risks […] create a self-reinforcing debt deterioration cycle.”
While Chancellor Rachel Reeves has so far resisted calls to change plan, last week’s slight dip in gilt yields and surprise 0.1 per cent growth for the UK economy definitely appeared well-timed small wins for extra breathing space.
Reeves yesterday insisted that growth was more important than green concerns amid rows over a planned expansion at Heathrow airport, as the government continue to chase improved economic conditions.
The UK government’s deficit is expected to hit 4.5 per cent of GDP this year, the FT reports, while Dalio has called for it to be reduced to three per cent. Likewise, the US should be reduced the same level, he says, rather than its current status at above 6 per cent.
Managing the country’s enormous debt burden is the “first big issue” for Donald Trump as he starts a second term in office, Dalio added.
In terms of lowering the budget deficit, Dalio acknowledged it’s “depressing for growth and inflation, but leads to lower interest rates and those have a big stimulative effect [on spending] while also reducing budget deficit.”
Dalio, who is estimated to be worth around $15.4bn (£12.5bn), ranked just outside the world’s top 100 richest people last year on Forbes’ annual list. He still sits on the board at Bridgewater, though stepped down as chair in 2021.
