Billionaire investor Ray Dalio has warned the U.K. risks a “debt death spiral” if it doesn’t act soon as borrowing costs reach levels last seen during the global financial crash.
The Bridgewater Associates founder told the Financial Times the U.K. needs to cut its budget deficit through either tax rises or spending cuts before the cost of borrowing becomes insurmountable.
The U.K.’s 10-year gilt hit a 16-year high of 4.9% in December as borrowing costs rose across the globe on the back of fears over resurgent inflation and high levels of government borrowing in many major economies.
Higher bond yields have increased debt servicing costs for the U.K. government, which the Office for Budget Responsibility forecasts to hit £89 billion in the 2024/25 financial year.
“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,” said Dalio.
Dalio says the U.K., in addition to the U.S., should reduce its deficit to 3% of GDP. The U.K. faces an expected deficit of 4.8% for 2025, while the U.S. deficit is forecast to hit 6.2%.
Rising borrowing costs have placed deep scrutiny on the Labour government’s budget, delivered in October as gilt yields were rising. Chancellor Rachel Reeves has faced calls to resign from the Conservative opposition, though she has held firm that the U.K.’s rising gilts is part of a global issue, not a domestic one.
The U.K.’s struggles have drawn parallels with the budget delivered by Liz Truss’s Conservative government in the autumn of 2022 when a promise of aggressive tax cuts forced the largest one-day selloff of U.K. government bonds in its history.
In response to that crisis, Dalio said the budget suggested incompetence among decision-makers who should have factored in soaring government debt.
“The panic selling you are now seeing that is leading to the plunge of UK bonds, currency, and financial assets is due to the recognition that the big supply of debt that will have to be sold by the government is much too much for the demand,” Dalio tweeted at the time.
Investors have cautioned that the U.K.’s current high borrowing costs aren’t comparable to the 2022 crisis. However, that has not reduced the urgency called for among investors to address it.
Billionaire investor Dalio has joined many of his contemporaries in also calling for the U.S. to address its high debt levels.
Dalio said the U.K. should focus on either increasing taxes or cutting spending, while accepting these policies could negatively affect economic growth.
He said that “cutting the budget deficit is depressing for growth and inflation, (but) it will lead to lower interest rates and those lower interest rates have a big stimulative effect while also reducing the budget deficit.”
Goldman Sachs expects the U.K.’s borrowing costs to decline by the end of the year with the Bank of England expected to cut the main policy rate.
