The UK is in a “debt doom loop” of high taxes, low growth and a ballooning debt pile, according to one of the world’s most renowned investors, who also warned that the need to raise taxes will only drive more wealthy residents to leave.
Ray Dalio, the billionaire who founded US hedge fund giant Bridgewater Associates, said bond markets were being overly complacent about western governments’ addiction to borrowing, warning that risks of defaults and other traumatic events were not sufficiently priced in.
“The UK is in a debt doom loop” that is emitting signals starting to “flash and flicker”, he told The Master Investor podcast.
The Chancellor has opted against trying to bear down on ballooning public spending during her first year in charge of the public finances, and instead adopted new fiscal rules that allowed her greater room to borrow for investment.
Government borrowing has also continually overshot estimates in the past year. Official figures last week showed the cost of public services and interest payments on debt outstripped the increase in tax contributions in June by the second-highest amount since records began over 30 years ago.
Tax hikes on wealthy not the solution to debt difficulties
But Dalio, who is worth a reported $16bn (£11.9bn), also warned that any attempts to shore up the public finances with a crackdown on wealth and high-earners would be likely to backfire.
“The debt doom loop is also affecting capital flows,” he said. “The necessity for creating taxations that are then driving people away. A deterioration in conditions, as the financial problems and the social problems worsen, [is] having the effect of causing people with money to leave.”
Dalio said any acceleration of the exodus of wealth from the UK will be especially damaging for the country’s fiscal picture, saying that if half of the country’s top five per cent of earners were to leave Britain, the Exchequer would miss out on 35 per cent or more of tax revenue.
His comments precede the autumn Budget from Chancellor Rachel Reeves in which she is expected substantially to hike taxes in order to keep the UK finances from breaching her “ironclad” fiscal rules.
Ministers have suggested those tax rises will be borne by taxpayers “with the broadest shoulders”, despite warnings that any further tax hikes on high-earning Brits are likely to increase the number of departures to low-tax jurisdictions like Dubai and Italy.
But the UK fiscal picture is one reflected across most western governments, according to Dalio, who branded comparisons between most developed countries’ finances “an ugly contest”.
As a result, the investment grandee, 75, told savers to invest in cryptocurrencies and “hard currencies” like gold or bitcoin as opposed to so-called “fiat currencies” used in economies worldwide. Central banks and governments are likely to try and devalue their currencies in the face of their debt piles, Dalio said, adding that portfolios with a “neutral” position on the global landscape should comprise roughly 15 per cent gold or bitcoin.