Britain is stuck in a ‘doom loop', warns hedge fund chief

Telegraph

2 days ago

Britain is stuck in a 'doom loop' of rising debts, higher taxes and slower growth, one of the world's most influential hedge fund managers has warned.
American billionaire Ray Dalio has issued a stark warning about the health of the UK economy, as he said that raising taxes to cover mounting borrowing costs will only lead to more people leaving.
Referring to Britain's 'debt doom loop', Mr Dalio said there is a 'necessity for creating taxation that is then driving people away…[resulting in] a deterioration in conditions'.
Speaking on The Master Investor Podcast with Wilfred Frost, the founder of hedge fund giant Bridgewater Associates said: 'The financial problems and the social problems worsen, having the effect of causing people with money to leave.'
The threat of wealthy people quitting the country is significant for Chancellor Rachel Reeves, as the top 10pc of earners pay 58pc of all income tax, according to HM Revenue and Customs (HMRC).
There are already signs that an exodus is under way, with some analysts predicting that the UK will lose more millionaires than any other country this year.
As well as the impact of ballooning debts on taxes, Mr Dalio said they can also feed through to higher interest rates, which again increase strain on the public finances.
Fixing Britain's debt crisis means 'difficult choices are going to have to be made', Mr Dalio said.
It comes amid mounting pressure on Ms Reeves ahead of her upcoming autumn Budget, as some economists predict that she is facing a black hole of up to £20bn.
Mr Dalio's warning comes just days after the International Monetary Fund (IMF) said the Chancellor must take radical action if she is to have any hope of repairing Britain's balance sheet.
It raised the prospect of raising taxes on 'working people', such as income tax, National Insurance and VAT, which Labour ruled out in last year's manifesto.
Alternatively, it said this or future governments must consider scrapping the triple lock or charging wealthier households to use the NHS.
Mr Dalio's comments are particularly pertinent as the IMF noted the Government's growing reliance on hedge funds to finance the country's £2.9tn debt pile.
'More patient investors, like pension funds and insurers, which have traditionally tended to hold longer-term gilts, have scaled back their exposure in recent years,' the IMF said.
'Hedge funds are, by nature, more speculative, leveraged and tend to have concentrated positions; and thus could amplify volatility and liquidity shortages in case of a stress event.'
Meanwhile, economists at the EY Item Club said the impact on Ms Reeves's National Insurance tax raid is now severely impacting the jobs market.
Unemployment will rise to 5pc by the end of the year, EY said, up from 4.7pc according to the latest official figures.
That increase would represent the highest unemployment rate since February 2021, when the country was still battling the pandemic.
EY's latest report also indicated that inflation is set to stay above 3pc for the rest of this year, in part due to higher energy bills, and will only return to the Bank of England's 2pc target in late 2026.
Separately, EY Item Club upgraded its growth forecasts for the year after the economy expanded by an unexpected 0.7pc in the first quarter. The analysts now expect UK GDP to grow by 1pc in 2025, up from its previous projection of 0.8pc.
However, growth will slow again to 0.9pc in 2026 amid the volatility of Donald Trump's trade war.
Matt Swannell, the EY Item Club's chief economic adviser, said: 'The UK's economic position remains challenging, and tightening fiscal policy and the lagged effect of interest rates, with some households still due to refinance their low-rate fixed mortgages in the coming year, will restrain growth.
'US tariffs, high bond yields and recent changes to welfare legislation will have increased spending and reduced tax revenues, shrinking the Government's already-thin fiscal headroom.
'This challenge could be even more significant if the Office for Budget Responsibility downgrades its growth assumptions at the autumn Budget, or if the Government is required to accelerate defence spending before the end of this parliament.'
A government spokesman said: 'The best way to strengthen public finances is by growing the economy – which is our focus.
'Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8bn and cut borrowing by £3.4bn.'