Martin Lewis explains in simple terms the current economic chaos

Martin Lewis has said "willy-nilly borrowing" combined with a huge tax giveaway has spooked investors and has plunged the country in a "vicious cycle" of financial chaos.

The economic turmoil sparked by the Chancellor’s mini-budget last week has sent shockwaves across the system.

For many people, the size and scale of the impacts - interest rates, the falling pound, gilts, bond markets - is difficult to fathom.

Lewis has now tried to break down the impact on millions of people and compared it to how we run our household budgets.

It's not an analogy Lewis is fond of - after all, state banks can print money, and the government will rake in extra tax revenue if it gets people to spend more as a result of its policies.

But after the government's mini-budget last Friday, featuring £45 billion in tax cuts fuelled by borrowing, Lewis has compared the Treasury's policies to a family living beyond its means.

The proposals have had Tory MPs turning on Chancellor Kwasi Kwarteng amid fears of unsubstantial public debt, and has sent the value of the pound crashing, which is likely to fuel inflation even further.

Read more: Bank of England takes emergency action to stabilise UK economy, after earlier IMF warning

Read more: FTSE: Boohoo posts £15m loss as cost of living and deteriorating economy hit profits

Speaking to Nihal Arthanayake on BBC Radio 5 Live, Lewis said: "When I talk about whether people should borrow, get a loan, I always have a phrase to say make sure it’s a one-off, budgeted-for and affordable.

“You can sort of see the energy debt as feeding into that. This is a one-off emergency, it is contained for a couple of years, we have an idea in the realms of how much it will be and it’s spending to keep society going. And it was pre-flagged, so it was known.

“But the shock came when, at the same time that we have very large borrowing being announced, a cut in income tax came.

“The other thing I say about debt is, always avoid willy-nilly borrowing just to fill the gaps that you’re lacking in your income.

Read more: Small business defaults a ‘danger’ to future returns, British Business Bank says

“I think the markets are seeing the income tax cuts as that - “willy nilly borrowing” for long-term tax cuts, for long-term income gain, and that’s what they really disliked, that’s what’s spooked the markets."

Lewis said this perfect storm of borrowing and cutting revenue is what has led to the International Monetary Fund urging the government to reconsider its plans, and the Bank of England warning of a "material risk to UK financial stability".

The UK's central bank may end up raising interest rates to 6% by March as a means to cool down the economy and get inflation under control, which is likely to cause more turmoil in the housing market.

“The markets are not always right; we do not know that they will be right. But the markets are not dispassionate observers,' added Lewis. "The markets are dealing with real money and are betting one way or another.

“So the consequence of the markets not liking this – whether they’re right or wrong – is that the pound has dropped, which means imports get more expensive, which feeds back into inflation... and that the cost of government borrowing has gone up.

“So whether you like the markets or not, whether you want to castigate them as 'city boys and girls playing with finance and we shouldn’t listen to them' – unfortunately their view has genuine real impact in the real world on all of us.

“Our borrowing will get more expensive, and it will feed into inflation, which will mean even higher interest rates in the future, so we’re in a vicious cycle.

“That is the picture of why we’ve got the mortgage market in a turmoil like we’ve never seen it before. These unprecedented times are almost become precedented because we seem to move from one crisis to a catastrophe to a turmoil one after the other.”