Allianz Chief Economic Adviser and former IMF Deputy Director Mohamed El-Erian joined Sky’s Wilfred Frost to discuss the state of global borrowing costs and what he expects from the Chancellor’s Budget this month.
El-Erian says it will be an “unpopular budget”, but argues that the best thing the Chancellor could do for the UK economy is to deliver “a major growth effort”.
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Questions asked in this interview
12
0:42Our borrowing costs are higher, and is it almost harder to put the genie back in the bottle when everyone's costs are rising than if it was just a UK-specific problem?
1:43Why do we have a high-beta reaction to all of this?
2:04What are the risks that we make things even worse in the short term?
3:03Of those two options, which is better for the British economy?
3:22What would be at the top of your list for that?
3:51Have we got the space to deliver on those on a 12-month time horizon, or are these things that will either derail the economy based on the tight position we're in, or going to come years from now once the growth has been solved first?
4:49Would it be okay for the economy if they did the right ones?
6:37Is there a lot of risk priced in those indices?
7:08Do you see any end in sight of that, or are we expected to see, you know, an extended period of elevated inflation even if there was some kind of peace in the Middle East?
I think the main factor is that so many people are looking for bond financing — governments, hyperscalers. Just to give you a sense of the difference compared to last year: the hyperscalers borrowed $200 billion last year; they're going to borrow a trillion this year. So that's pushing up rates at a time when the normal buyers are not as reliable because they've got things going on at home. So you've got an imbalance, plus inflation, plus central banks increasing interest rates, and all that is quite a potent cocktail for yields.
We talk about whether it's, you know, UK-specific or not. At the start of the war, the spreads kind of did gap up, and we're energy-dependent — that might be a reason. The spreads are perhaps narrowing a bit at the moment. Is that sort of irrelevant as you look at the UK-specific issues? Our borrowing costs are higher, and is it almost harder to put the genie back in the bottle when everyone's costs are rising than if it was just a UK-specific problem?
It absolutely is. The UK competes on global markets for financing, so it cannot have low yields when everybody else has high yields. But the UK is what's known as a high-beta economy. Every time yields go up in the US, they go up by a lot more here. The UK recently has given up that role to France, but that's not a good thing, because what France is doing is turbocharging. So today, for example, the reason why UK yields at the 10-year are above 540 is because French yields are much higher, and you talked about it earlier this morning.
Because we have limited fiscal space — that's the first issue. Secondly, our productivity growth is less than it can be. So if you look at the debt dynamics, the numerator is more vulnerable and the denominator is more vulnerable, and therefore every time there's a shock globally, we get hit harder.
We're obviously approaching the budget. What are the sort of risks as we go into it — that either taxes go up, or borrowing goes up, or spending comes down, which clearly impacts GDP growth in the short term? What are the risks that we make things even worse in the short term?
So this is an extremely difficult budget — extremely difficult. The fiscal headroom, at least half of it, probably more like 70% of it, is gone. So the chancellor is going to have to decide whether and how much he wants to restore. He has to accommodate higher defense spending. There's a limit on the three tax levers, so he has two choices: cut spending, and/or lots of small taxes all over the place. It's going to be an unpopular budget, but we are so far from the first best. Well, you have no idea — I mean, this is a really, really difficult budget.
I think you're going to end up with a mix. What's better for the UK economy is that we see a major growth effort, and the UK can grow a lot faster. There's a lot of potential for productivity growth if there's a comprehensive growth program put in place.
So three things. One is continue to deregulate in areas where it's clear that regulation is stifling growth. Two is stress innovation — this is an innovation country that doesn't scale up its innovations, so the innovations go abroad. And third, regionalization, as you're seeing this concept of growth in every postcode. It's possible; it just requires sustained implementation.
Whether or not it's this budget or early next year, I mean, there's some big spending items on the agenda — social care, defense spending, the list goes on. Have we got the space to deliver on those on a 12-month time horizon, or are these things that will either derail the economy based on the tight position we're in, or going to come years from now once the growth has been solved first?
14 more exchanges in this transcript
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El-erian, M. (2026, October 7). Mohamed El-Erian | What should the chancellor do as the budget looms? [Interview transcript]. Mornings With Ridge & Frost. CEOInterviews.AI. https://ceointerviews.ai/interview/2997336/
MLA
Mohamed El-erian. "Mohamed El-Erian | What should the chancellor do as the budget looms?." Mornings With Ridge & Frost, 7 Oct. 2026. Transcript, CEOInterviews.AI, https://ceointerviews.ai/interview/2997336/.
BibTeX
@misc{elerian2026_2997336,
author = {Mohamed El-erian},
title = {Mohamed El-Erian | What should the chancellor do as the budget looms?},
howpublished = {Interview transcript, Mornings With Ridge \& Frost. CEOInterviews.AI},
year = {2026},
month = {oct},
url = {https://ceointerviews.ai/interview/2997336/},
note = {Speaker-attributed transcript with timestamps}
}
