Tim Graf (TG): This is Street Signals, a weekly conversation about markets and macro, brought to you by State Street Markets. I'm your host, Tim Graf, head of macro strategy for Europe. Each week, we talk about the latest insights from our award-winning research, as well as the current thinking from our strategists, traders, business leaders, clients, and other experts from financial markets.

If you listen to us and like what you're hearing, please subscribe, leave us a good review, get in touch, it all helps us to improve what we offer. With that, here's what's on our minds this week.

How likely do you see these inner-party tensions contributing to another general election before 2029, when we have to have one?

Helen Thomas (HT): There will definitely be one before 2029. It will almost certainly be in the next 18 months. The market will force the hands on this. It's a irreconcilable fiscal and political constraint that is operating, because even when, and it will be when, Starmer is replaced, even the next leader isn't going to have the whole of the Labour Party on their side.

TG: That's Helen Thomas, CEO of BlondeMoney and my guest this week, talking with me about UK politics, how it's intersecting and driving financial market outcomes, and what a bigger picture view of the state of populist politics now looks like, and what we can expect not just in the coming months, but in the years ahead.

Sterling and UK gilts face especially heavy scrutiny from markets at the moment, ahead of a budget process that culminates later this November, and amidst a series of political upheavals that will inform and complicate all that lies ahead. And this interaction between politics and markets sits at the heart of what Helen and her team at BlondeMoney focus on. You can find her at blondemoney.co.uk. Her work's always worth a read. It's as timely and as well informed as you could hope for. And as you've already heard, she's not afraid to make a bold call, which is what we always love on the podcast. So it's awesome to be able to welcome her back as a returning guest.

HT: Hello.

TG: How are you?

HT: I'm very good, how are you doing?

TG: I'm excellent, I'm excellent. It's great to see you.

HT: Very nice to see you too. Am I sounding okay?

TG: Sound perfect, yeah. Very professional for not being at home. And you managed to actually get into London.

HT: Yeah, I came yesterday. Otherwise, I think that would have been it. So where are you? You in the office?

TG: So I sit just off the FX trading desk, like literally on it, but about four desks away.

HT: Fantastic. When did we do our last podcast?

TG: That was right before the election. So I'm guessing it would have been June.

I remember when I first reached out to you, I was like, maybe it's not going to be at the moment…Yeah, it's at the moment.

HT: Well, yeah, because actually on Thursday, we're going to have the deputy leadership contest. In fact, I'm just looking. Oh yeah, nominations close at 5 p.m. Thursday. For the next deputy leader of the Labour Party, so.

TG: Yeah, so I guess the big picture question is, there's a lot of numbers for the UK that aren't wildly different than a lot of other developed economies like Germany, France, Japan, the US. Spread widening has actually not really been that bad compared to the mini-budget episode from a couple of years ago. Yield curve steepening is happening everywhere.

And maybe it's a local bias thing, but why does it seem like the UK is getting this level of attention for its fiscal situation when it's kind of in the same boat as these other countries?

HT: Well, I think it is in a worse position even though there has been a general trend. So if you look at, say, the UK 10 year yield versus an average of the other G7 nations, it is the highest and has been up the highest. Now, the big move, as you suggest, took place 2022 to 2023. But I think the worry has been that there has not been a retracement or a shift in that after this Labour victory in the election.

Because this is the thing, I think, that you come in with a big new government with a huge majority, drawing a line in the sand, we're going to do things differently. And the market is trying to give them the benefit of the doubt, but every step they've taken has gone wrong for them, basically.

And actually, I want to quote, and I'm just looking here at my notes, because there's a good quote from last year's Labour Conference, where Rachel Reeves, the Chancellor, said, “We were elected because for the first time in almost two decades, people looked at us, looked at me, and decided that Labour could be trusted with their money.”

And that's the thing. I think that, you know, they were new, they'd been out of government a long time. They took a chance on a Labour government, which historically has had some difficulties in managing finances. And initially, it seemed that the mood music was positive, but what they've actually done in terms of actions has been quite unfriendly to business and not helpful for growth.

So I think it's that dichotomy between what they said they were going to do and what they are doing that is causing them quite so much of a problem.

TG: Do you think the market has muscle memory as well? It always seems like, and I thought about this in the context of the ERM crisis of 92, the UK, and we're going to get to talking about OBR as well, which is really my bugbear on all of this, I think.

Is that setting yourself to a standard that sometimes you can't really possibly even want to adhere to and the market wanting to always push the UK, does that play into it at all?

HT: I'm going to take issue a little bit the characterization because I think what is happening is this huge debt issuance which was always coming. We've had the pandemic, everybody swelled the debt. This year, I think OECD is talking about $17 trillion worth of issuance versus $14 trillion the prior year. There's been a big jump up in issuance. Everyone has to look at debt.

I talk about it as being like we had the recovery and now we're having the reckoning. And it was always going to come at some stage. There's a contest going on amongst global investors where do you want to put your money? And so that's why they have to assess each country on its own terms. There is a lot of debt out there, are a lot of countries who are indebted. But this UK government is not convincing them.

I mean, I remember a gilt investor said to me, right from the very first thing Rachel Reeves did, which would have been summer last year, when they awarded public sector pay rises and she removed the winter fuel allowance, which went on to become quite a dramatically poor decision politically. But this gilt investor said, you know, why am I financing pay rises for train drivers? It just didn't chime with, okay, well, that's a coherent view of where I see the productive capacity of the British economy. So they have been the architect of their own demise.

TG: And that's where I actually wanted to talk about the welfare reform process that we went through, or the attempt that was attempted, I think, two months ago to the day was the, oh no, not to the day, but two months ago and a bit was the parliamentary session where that all kind of ended in tears quite literally. And can you walk through why that, well, I think it was a pivotal moment in it. It showed kind of the inability to make even modest adjustments to the trajectory of spending.

But can you talk about just the process and why that really kind of ran aground? Really, what was responsible for that?

HT: The welfare reform is for those who weren't, who may be not familiar, this was all to do with the vast amount of money that is projected to be spent on disability benefits in the UK, where something like one in four adults has some kind of disability. This obviously ranges from physical to mental, various types. There was a measurement. You got a number of points to receive something called a personal independence payment, the PIP. And there was a talk of like, let's restrict the payment only to the most severe people with the highest numbers on that score.

And it led to this kind of an insane situation where actually even the OBR was doing this analysis on how many adults could wash themselves below the waist. These kinds of things, which is, you know, it seems like this to the extent of the tweaking and the tiny little changes they were trying to make, that you were actually getting a fiscal forecast and looking at that kind of thing.

And of course, it led to some very emotional responses from disabled MPs within parliament, let alone their constituents, let alone their voters, saying, oh my goodness, why are you doing this? Why are you trying to take money off the disabled, is how it looked. And all it was trying to do was because of that projected growth in those benefits, if they could have shaved some percentage points off the rate of growth, this isn't cut the spending, this was just cut the growth rate of spending.

TG: Exactly.

HT: It would have saved this five billion. And five billion, as we know, is actually a drop in the ocean of what needs to be done. With any big change, you're going to need to get your party onside, your voters onside. And it's actually a microcosm of the main issues for this government, which has been it's got a majority, but not a mandate for what it has done.

So if they had come in and said, that is the very first thing we're going to do, and this is why we're doing it for social justice reasons, and it's going to save some money, for example, everyone would have known about it, been on board and understood. But instead, it was rushed as a response to the spring statement, which actually was only supposed to be a statement where the OBR would update its forecast, not a relitigation of the budget and we have another hole to fill on how we're going to fill it. And that's what happened was that there was an extra fiscal gap. The OBR ran its numbers and said, without it, they have a pre-measure and post-measure number check on the fiscal rules. Pre-measures, the government was not meeting one of its fiscal rules. So it needed to do something to meet these rules, or at least that's what the chancellor judged she had to do.

So it was right, what can we do? We were going to do these welfare reforms, right, let's get them done, let's rush them through.

Just to be technical for a second, it was called a money bill and a money bill is considered one where it becomes effective within 30 days, even if the House of Lords had some amendments to make. So it was quite clearly designed to be a pretty quick response to that gap having opened up within the OBR's forecasts. And it's always difficult to get controversial reforms through if you don't have buy-in.

And it was mishandled the whole way through. It came from this obsession with meeting OBR fiscal rules. It came from the Chancellor driving things without necessarily having all of her party on board. It came from an election win that was not very clear about what the party was actually going to do other than change things. And it's really indicative of the mess. And I'm glad you pointed out that it is pivotal. And it is very much a microcosm of the problem the government's facing.

TG: We're going to get more to the politics of it. But in this specific instance, you mentioned the government had a big majority, but it's never been a popular government. And that was even pointed out on the election day, really. That this was still a pretty lightly supported Labour Party, even if in Parliament, it's a very large parliamentary majority. So I'm thinking about the internal party politics, because we were talking about this this morning. And I sort of in my mind thought about it and then alluded to, you know, you had conservative infighting through the last five or six years of the various administrations that ultimately was their undoing.

What is the calculation being made by those within the Labour Party who pushed back on this and really forced it to fail?

HT: So you have to look at the dogma and ideology of people who become Labour MPs and what they have been through over these last, well, 15 years, but what they consider 14 years of conservative rule, where a lot of them were really motivated by the austerity measures that took place in the wake of the financial crisis, blaming a lot of the crumbling public services as they would see it and the woes of the country on that austerity program. So they have waited 14 years to do the right thing in their mind, a lot of these MPs, and austerity or anything that smacks of austerity simply could not be swallowed by those MPs. That is not what they came into government for.

And where this seems to have gone so badly wrong has been that the Chancellor and the Treasury have failed to prosecute their vision alongside the Prime Minister, of course. That some restraint might be needed for reasons of fairness, but it would deliver some kind of sunlit uplands in the future.

But as I say, if you boil it all down to arguing about how disabled a person is, then look, you had a government in its first year that took benefits off pensioners, this idea of freezing pensioners in their house. There's now even talk about special needs children who are being taxied to different schools. That's costing a lot of money. Can they look at that?

But can you imagine being a Labour MP, having waited 14 years where you consider an evil, nasty Conservative Party has made all the wrong decisions, has not invested in public services, and now you've come in with a huge majority and it looks like you're being asked to do the same thing.

And they just cannot cope with that. It is more than they ever thought they would ever be asked to do. That's why it's so difficult for them to get over it. And the key thing, of course, of those welfare reformers, by the way, for those who weren't being a nerd like you or me and watching this debate in parliament, they were pulled, they were gutted at the last minute, just moments before the vote in order to actually get the vote through. So the vote through basically said we're going to, we'll look at this, we'll do a commission, we'll talk to disability groups, we'll find a different way to do this.

But it did not obviously get passed in the form of actually making savings. I can't express to you how unusual it is for any government legislation to be gutted on the floor of parliament as you're about to go and vote for it, let alone one with a historic landslide majority. This does go to the heart and soul of the Labour Party, and this ideology and what they're in power to actually achieve.

TG: When it comes to the market and building market confidence, we are going to have the budget in late November, I think. Is that right? That's right.

HT: 26th, yep. 26th November.

TG: Okay. You know, this is going to be a focus between now and then. I'm super happy I get to talk to you now, rather than just ahead of then, so we can let this digest for a little while. The market is clearly, I think, teetering. There's enough confidence for now. We've had, you know, as long as it's not been the very, very long end of the gilt curve, we've had decent demand for gilts, but it is obvious that this is in focus. You know, we are talking about it and it's not going to go away.

What do you think are measures that can create that or rebuild that confidence in the market that can also contribute towards that sustainability? Basically, I'm asking you, what do you think is going to come out of this process that will fly both politically and for the market?

HT: There is nothing that can come out of this government that will please both their MPs and the market, which is why I believe we're in the beginning of a rolling fiscal crisis, which I think is underappreciated as a risk at the moment. Because we started this conversation by saying, so far the market's a bit wobbly, but it's given the benefit of the doubt to the government, even though it's had a few knocks.

For example, in the spring statement, I can remember gilt investors telling me very happily, oh, well, if they can't, they'll definitely cut spending. Okay, well, then they couldn't get that done. Okay, well, they'll definitely raise taxes. Okay, but we're already at a very high post-war tax burden. There's not a lot more of the pips to squeeze. So there are no easy solutions here. And I think we're now in the final stages of the market thinking, oh, well, they'll come up with something, they're not crazy.

But failing to understand some of that deeply felt ideological split within the Labour Party about what governments should do. And so I'm actually glad we're speaking now because I think the next bout of volatility happens before the budget, and then it will unleash more from that period forward.

TG: I learned the phrase or re-learned the phrase, I think, “kite flying,” you know, kind of some of the ideas that are being thrown out there. But I think some of them are probably just trial balloons.

Do you have a sense specifically what types of those measures will actually fly whether it's, you know, a more robust property tax system that replaces council tax or hikes in the marginal rate of tax or hikes in VAT? What do you think is coming down the pipe basically?

HT: Two things here. One is, I said, they cannot come up with a budget that really pleases their own MPs and the markets. So they will err on the side of their MPs. Therefore, the measures will need to involve a degree of traditional Labour Party dogma, such as a kind of a tax on the more wealthy.

So I could well imagine something like a mansion tax in inverted commas, where the number just has to be big enough that most of Britain would consider that a big number. So a million pound house, that might sound a lot. It doesn't get you a lot necessarily in London, but to the country at large, that's a big number. So there could be some annual property tax that's been talked about. May very well be cancellation of reliefs on pensions, because again, if you're wealthy enough to save, then you can pay.

But there won't be the cuts in spending because they can't do that. And quite frankly, those tweaks are unlikely to really deliver a big enough revenue raising impact. Because as I said, there's not that much more pips left to squeak in the tax system. They will likely have to break a manifesto promise and raise the basic rate of income tax, but they may well raise the top rates by more. So we could go back from 40 and 45 percent could go to 45 and 50 percent. If at the bottom people are having to pay one penny more on their income tax.

Now, I said I'd say two things, because that's point one, because point two is the way the budget process works, and why we are now in a really key phase over this next six weeks. So this isn't how it used to operate. But since Rachel Reeves came in and effectively deified the OBR, she doesn't know what she could do yet because the OBR have to run their forecast model of the economy, and then they spit out the number which is the gap that has to be filled in order to meet the fiscal rule.

Now you've heard already lots of discussions about how big that could be. The National Institute of Economic Social Research considers 50 billion. I've seen some banks putting 20 to 30 billion out there. Of course, market participants will know that prices can move. And there is usually, I think, it's a 10 working day period or 12 working day period that the OBR takes into account. I believe it will run up to October the 15th.

That is when they'll set the market parameters. So of course, it is quite dependent on what happens to yields in that time. It's also dependent on the OBR's opinion of productivity growth. They've been a bit optimistic on productivity growth. They might tip it down a bit, and that will make the hole even bigger.

Anyway, the upshot is even the Chancellor doesn't yet know what she has to do because she doesn't know what the number is she has to meet. So the OBR give her that number. She then says, I'm going to do XYZ to fill it. It goes back to the OBR and then they run the numbers again. And then they say, okay, pretty good, but you're still missing, you know, you still got a gap of 10 billion you need to find. It goes back to the Treasury and then the Treasury come back to the OBR. On and on it goes till about a few days before the budget.

Now, it was bad enough last year, I don't know if people remember, but there was a lot of kite flying. And actually the kite flying is somewhat deliberate because the Treasury write a long list of things that you could do to raise revenue. But of course, this isn't just an economic question of meeting the number, then you have like, if you want to think about it as an optimization of constraints formula, you need to look at the political element.

So you could have an economic shift on the tax rate, but then what would it do behaviorally to a person, wealthy people, what might it do to the working man if they have to pay an extra penny on income tax? So it's a mess.

And then fly these kites to see, well, you know what, if that doesn't raise us very much, or it's got hugely unstable assumptions and everyone hates it, maybe we don't do that one. Maybe we do this one instead. That would be messy enough, by the way. This time around, even messier, because of that split that's growing in the Labour Party.

Now, the debate will be taking place, not just between the Treasury and Rachel Reeves and the OBR, there will be number 10, because Keir Starmer has now got his Chief Economic Advisor, so he's going to have an input. And all the disaffected left of the Labour Party, who will hear something leaked and then become outraged, you can't do that, why aren't you slapping taxes on more non-doms or private equity or banks or whoever they decide they want to get more money out of?

And so I'm afraid it's going to be a very unstable run into that budget. And you might say to me, oh, hang on, if the market really has a visceral negative response to something that's leaked, oh, it'll be off the table. Well, no, because the people who've proposed something that might look irrational to the gilt market will be the sort of people who say, no, no, we need more of it. So the people who want the wealth tax will say, tax the wealthy more. That's why you've got a gap and gilt yields have moved. Great. More money from the rich. And I'm afraid that's what we're headed for the next six weeks.

TG: But then, of course, and this is where I want to talk about OBR a bit more. And for those listening, I apologize for us getting down to the weeds, but the Office of Budget Responsibility is the one who, as Helen has pointed out, sets a lot of the parameters for this and really gives the headroom that the government has. But of course, in that time and in that market reaction, the headroom potentially vanishes because it's all dependent upon financing costs.

And the big picture question I have and really, I think the top question I wanted to ask you this week was, how does any government move away from this constraint? And is it possible without, I mean, you're talking about a rolling fiscal crisis. So the short answer, I'm guessing, is no. But is it possible without creating just massive disruption in the gilt market?

HT: You need to have a government with a mandate and a majority. So Liz Truss's problems, one of the big ones, she didn't actually have a mandate from the people. I mean, she'd won the conservative membership vote, but nobody was aware in the wider public of some huge plans on subsidies for energy and tax cuts and what she wanted to do on spending cuts. That was a big issue.

This government has that majority, but what's its mandate for? So the other thing that really upset the market was in that very first budget, this rise in national insurance costs, which has added to inflation and has been a drag on growth and jobs and business. They didn't say they were going to do that. So that's where you really get into the issues, because it's only when you have a mandate and majority.

I mean, look at Trump, where maybe people don't agree with it or markets don't like it. But it's pretty clear. People say he's very uncertain and it's very unstable, which is bizarre because actually he's doing exactly what he said he was going to do and has said for 40 years. And he got a mandate and a majority to do it. Again, people might be very unhappy with it, but it's quite clear that that's the situation.

In the UK, it's far more of a mess, and it will continue to be a mess until we frankly have a fresh election. But I want to just touch on the OBR element of this. There is, and in fact, Darren Jones, who was until recently Chief Secretary to the Treasury, he was number two to Rachel Reeves, he's now gone in the reshuffle across to number 10 to be the Chief Secretary to Prime Minister, new role. He said in the run-up to last year's budget, oh, I think the market, oh no, it was in January when the gilt yields were rallying. The market has PTSD about Liz Truss.

The thing is, it's not really the market, it's more the politicians. I cannot tell you, I do a lot of work in Westminster. Every single MP of every kind of party was shocked. Of course they were, that you could lose your job and be kicked out by the market. Not the voters, not your colleagues, not your activists, but the market could end it for you. And that really scared them, not just because that is so, it can happen so quickly, but because they don't really necessarily always understand how it happened, because markets have often been something that a lot of politicians have not really very well understood.

So what happened was this PTSD about Liz Truss, therefore what is the necessary and sufficient condition to reassure markets, oh, you must have a beefed up OBR. And it's not a necessary and sufficient condition. It's one thing you want to be looking at. But again, you could set out your, you could win the mandate, you could win the majority, the OBR could do the forecast and say, no, no, no, you're not going to meet your fiscal rules. And you say, I don't care. I've been elected to do this. That's what I'm doing. Fine.

But there's become this, you know, they have literally legislated to deify the OBR. And I might add, always a risk in markets, if you create a target for your own back. We know markets love a data point. They love non-farm payrolls. They love a Fed meeting. Well, now they've got a date for a budget and an OBR forecast. It's kind of funny really, because actually, they could run their own models and see from day to day, from minute to minute, if Rachel Reeves is breaking fiscal rules. But when you create it around an event like that, all the hedge funds love it. Everyone wants to focus in on it. That's the day. Is this the day where this works or doesn't work? Binary outcome, go for it. And so they really have created a target for their own back.

TG: Yeah, it's sort of Goodheart's Law in action across an entire economy. The Bank of England, through all of this, I think is a key actor. And this is something else we talked about today in terms of what they might do if the process continues to be as volatile as we're talking about it potentially could be. There's actually not much priced for the Bank of England now because of inflation, which is due to some of the factors from the previous budget that you alluded to.

Assuming there is volatility of some degree or other, maybe it's mild, maybe it's serious, what part do they have to play in not necessarily supporting the government, but much the same way they stepped in during the mini-budget crisis? What steps can they take?

HT: This is a very key difference between any wobbling that can happen from this point forward versus what happened in the wake of the mini-budget. Because the Bank of England has to keep an eye on financial stability, but it is not there to in any way prop up a government.

There will be a rational repricing of gilts, which if the Bank of England were to in any way intervene or prevent, it would undermine its own institutional credibility. Also, much more difficult is once it began, how would it stop? How would they ever know when they could step away? How would it impose discipline on the politicians?

So, this is a much harder situation, potentially, for the Bank of England. Over the LDI episode, there was an actual market dysfunction. The convexity of gilts became so extreme that there was a rapid sell-off. There was also a rapid rally back.

So, the key question here is, they would try and use some financial stability tools. Interestingly, they conducted something called a system-wide exploratory scenario over the last two years, the SWES. 50 institutions were involved, and they had to run a scenario of a shock to the financial system. And it's a really interesting paper for those of you who want to look at this sort of thing. It's good the Bank of England have done this.

But what they found was there was stress on the gilt repo market. They have just issued a consultation paper on their proposed changes to that. They have also already come up with something, let me get the acronym right, it's a Contingent Non-Bank Financing Tool, which basically means that pension funds and insurers could post gilt collateral with the Bank of England if there were another gilt related issue. But it's only envisaged to be a one to two week tool, which is, yes, that would deal with like an LDI type convexity incident, but something that's a long term political rolling crisis wouldn't be so useful.

They also said in their system wide exploratory scenario that there was a risk, a jump to illiquidity in sterling corporate bonds, meaning that yields spreads could widen suddenly on UK credit, which they argue and it would potentially impair the economy further because it would impede business financing. So by the way, you'll be totally reassured to know that they don't actually know what to do about that yet. They're looking at it. Good that they've identified it.

But I think this is the one to get to here is it's not a panacea. The Bank of England can smooth market dysfunction. It's got market maker of last resort capabilities. But in a great many ways, it wouldn't want to get in the way of a rational repricing even if it was a swift repricing because it's the pricing that then imposes the discipline back on the politicians.

TG: Yeah. But can they slow things like quantitative tightening? I think that's being discussed as pretty likely. That they'll stop maybe selling bonds into the market.

But beyond that, and do you have any thoughts about actually how big of an impact is that in the first place and will that really help in the event of a crisis?

HT: Well, it's certainly been something of a vulnerability to the gilt market. They've been doing so much quantitative tightening. It looks quite likely in their meeting that they are going to reduce it or at least remove active sales. Maybe they'll stop it completely.

I mean, actually, the Bank of England have managed to reduce their balance sheet by about 20 percent, which is quite significant compared to a lot of other countries. And I think it's laudable to try and...There's been this ratchet higher and higher all the time on central bank balance sheets getting bigger and bigger over the last 20 years. It's laudable to try and get that down, not least if, as, when there's another crisis, you've got capacity to do more. But yes, that would help at the margin.

There could be interest rate cuts, but then sterling is likely to come under pressure, not least because of foreign holders of gilts, there's such a large proportion of them. And so that would create inflation pass through if the pound dropped. It is tricky for them. To be honest with you, I would say the Bank of England would be in a pretty invidious position, and would not want to rush into doing anything too much too soon.

TG: There's so much more to get to. Let's talk about the politics, though. I think, well, I really always love reading your commentary on it. And of course, last week, we had the stepping down of Angela Rayner as Deputy PM, which you alluded to before, and the process now for her replacement begins this week.

But forgetting about the kind of details of that or leaving it to the side for right now, I mean, how much does this reshuffle that this was part of, how much does that actually inflame some of the tensions in the party you've already talked about with respect to policy?

HT: Oh, absolutely brings it hurtling forwards towards us. I mean, in some respects, it couldn't have been worse because you're going to have a deputy leadership election. There's a party conference coming up, 28th of September is when it begins. So it's an ideal format moment for all these activists and MPs and everyone part of the party to really have this argument about the direction of the party, which was going to happen anyway.

And then at the end of the process, when you get the new deputy leader of the party, they will be a lightning rod for discontent. Because they, talk about mandates. Well, because that's an elected position, there will be a mandate to the person in that role, where they can say quite with some justification that they have the members and the party on their side, when they argue for X, where X is going to be firmly economically to the left of where Reeves and Starmer are trying to put things.

Here's the other thing about reshuffles. I've worked in politics before as well as in markets. Reshuffles always make enemies, always. And Keir Starmer can ill afford any more of them. I'm going to modify this quote that was apparently given to a journalist, but apparently one sacked minister said, “I'm going to F him up,” when talking about Starmer.

Because of course it does, it's what happens to people. And suddenly some people got promoted and other people didn't. And given the party management has been really quite poor, this does not give any confidence that it's going to improve further. So it's rapidly disintegrating. And look at where Labour are in the polls, around about 20 percent if they fall further, which, rather when, they fall further, particularly with this budget, which will please nobody.

I talk about PTSD from the Truss situation. I mean, I can't tell you how MPs feel having gone from, you know, they have 34 percent of the vote in the election to potentially then 15 percent or 17 percent. I mean, those are the levels at which Truss had to go because it's an existential question for the party.

TG: And actually in thinking about this and the possibility of future elections, which is what I want to ask about, I went back and looked and Labour has never polled below 20 percent for any sustained period of time, other than following the financial crisis.

And so with that in mind, but also the sort of expediency of still wanting to actually be in power and have a seat at the table and at least dictate policy, if not necessarily have a mandate, how likely do you see these inner party tensions contributing to another general election before 2029 when we have to have one?

HT: There will definitely be one before 2029. It will almost certainly be in the next 18 months. The market will force the hands on this. It's a irreconcilable fiscal and political constraint that is operating. Because even when, and it will be when, Starmer is replaced, even the next leader isn't going to have the whole of the Labour Party on their side, because it will still be the same 400 or so MPs.

And we haven't even talked about challenges like slowing growth, potential for a recession. I mean, the US economy is starting to slow. That could easily have, well, it certainly will have pushed back on to the UK economy as well, let alone an even more impaired gilt market and higher yields and steeper curves.

I mean, look, where I see this going is is a de facto splintering in the Labour Party. And you talk about MPs, you know, well, they've got this majority, surely want to stick with the sort of arithmetic that they have. Not if you're polling at 16, 17 percent and an election will be some time in the next few years. It then starts to become rational for you to maybe defect. You could defect, there could be a new wing of the party, could sit like Bernie Sanders in America, actually, you know, he caucuses with the Democrats, but he's independent, not a Democrat.

You could have independents who, well, they already have actually, the Labour Party removed the whip from four MPs that didn't back that welfare vote. So you could have a budget that squeaks through with a swathe of Labour MPs with a whip removed. They then say, hey, we're going to sit under a different name. A number of them might want to go to the Greens or the new Corbyn Party.

Let's not rule out Reform. You know, people seem to think it'll only be people on the right that want to go that way, but people on the left could go that way as well. So it's funny really, people seem to think that the political risk had disappeared on this big Labour win. Actually, it is still rumbling through.

TG: You mentioned Reform, which is where I certainly wanted to get to, because the siphoning of support from Labour as well as the Conservatives has primarily gone to the Reform Party led by Nigel Farage, and would seemingly be in the best position politically and to have that mandate in another general election.

But I'm curious, and I don't know as much about this, what their ground game is like, whether they can mount a full scale campaign where, you know, last year's general election, they were, but they got a few seats. Is it different this time around? And is there that ability to win the hearts and minds of previous diehard Conservative and Labour voters?

HT: Well, we just had the Reform Conference, and the sense was that it was a real party conference. You know, this wasn't one where previously, Nigel Farage's party conferences have been held at a, you know, a race course or something like that.

TG: The pub!

HT: Yeah, exactly. This was a proper corporate event, Birmingham's NEC, Heathrow Airport was sponsoring the corporate lounge. Okay, it wasn't on the scale of a Conservative or Labour event, but considering how new this party is, and, you know, the membership numbers are up, you know, a couple of hundred thousand, I think they say. I mean, it's, they're getting the ground game in. They did very well in those local council elections. But I do think if we do get an election within 18 months, it would catch them on the hop organizationally.

I think, you know, Farage actually said in his speech at the conference that, you know, I think he said prepare for, I think he said 2027, partly because I think he wants to make sure they have the whole mechanics ready. But, you know, let's not forget in this day and age, how many people answer the door to somebody canvassing for their vote versus how many people see a Facebook advert or a Twitter advert or a TikTok advert.

So there are easier ways, as we know, to reach voters than there were. And look, I mean, they're already on 30 percent in the polls. They're soon be polling at the same level as both the Conservatives and Labour combined. And as you said, they haven't even kind of got there yet. So just imagine a budget that really upsets people. Frankly, I mean, I said at the start of the year, they'll be, the Reform would be regularly topping the polls.

I think they'll be headed up towards 35 to 40 percent of the vote pretty soon. And then what happens is, you get the money. And then when the money comes in, organization comes in, top quality people come in, and that starts to change things. That's what we should watch for.

TG: In your potential timeline, though, is that enough for a parliamentary majority, or is it still a hung parliament, assuming the ground game isn't quite there in 18 months time?

HT: And of course, it's technically 650 candidates that you have to find, and that is a lot. I think actually that will be a challenge a bit too far, but this is where I think defections come in. So either, you know, what if 20 Labour and 20 Conservative MPs decide, you know what, I'm not going to run, if there is an election happening, I'm not going to run under that banner, I'm going to run under Reform. Or if we actually properly, when we get to the election campaign, I should say, when we get to the election campaign, the Conservatives could say, actually, we're going to join up, we're going to do this together, we've got the experience and expertise, maybe Reform say, no, no, we don't need it. But actually, you get counted as standing under a joint banner, maybe even the Reform Conservatives are going kind of that Canadian route for the people who remember what happened there with the…

TG: For the guy who listens, who follows Canadian politics.

HT: Yeah, exactly.

TG: That guy, Dave.

HT: That guy, for that guy, you'll have it. Shout out to you. So, but I guess what I'm saying is, yes, it will be a challenge for reform, but it is not an insurmountable one. For them to actually be the next government.

TG: Thinking more broadly and not just in the UK, but Europe as well, because of course, we have a lot of, we could do this podcast, I think almost verbatim, just changing the names for France, potentially for Germany at some point. I had a general question about populism though, and movements like Reform or AFD in Germany, RN in France.

How do you assess where populism is right now? Let's start with the UK, but just how far along in this political process is the populist movement?

HT: Let me take a slightly historical perspective to all of this, because we're only really beginning, in fact, at the foothills for some of the more extreme parties to get into government.

And the reasons for that are 2008 happens, suddenly you get - every time you have a huge economic crisis, you get a political realignment. That's what happens. That one in wake of 2008 was an anti-establishment versus establishment break.

Now, then fast forward to the pandemic, the only authority that could get the vaccine in your arms and reopen the economy was the government, was the authoritarian element to this. So then there was this like fracturing of, well, who do I want in charge here? Do I want the government in charge of me or am I in charge of me? And that's where you get this authoritarian-libertarian split.

So electorates have fragmented from two quadrants to four, if you like, which is why, by the way, in a first-past-the-post system like in America or the UK, you only need 25 percent of the vote plus one and you can win a huge majority. And then you see in more proportional systems like France or Germany that, you know, you don't get a stable government because everyone's fractured to the extremes and they can't work with one another. So that's not going to change anytime soon. So we should expect this fragmentation splintering to continue.

I've got to say, if we were talking, and I hope we are in 20 years time, Tim, it won't be a podcast, it'll probably be some kind of virtual thing where you put some glasses on and you're sitting around next to us.

TG: Oh, that'll be great.

HT: It'll be brilliant. It'll be fantastic. It'll be like a beach in the background. We'll have virtual gin and tonic.

But basically, when we look back, let's just think of how everybody was locked up and kids missed school. People couldn't see elderly relatives who sadly then passed away. I mean, hideous things that occurred. The whole global economy shut down, couldn't fly anyway, couldn't get certain goods. And then all reopened and then you had a war and massive inflation for the first time in 40 years. I mean, it's no wonder people are furious. It would be bizarre if people were not furious about that. I'm kind of more surprised that there isn't more anger, frankly, about all of this stuff.

So we're only just beginning to see some of that anger and it will continue at least for the rest of this decade, if not beyond, to be felt and reverberate in politics. Which is why I fully anticipate Le Pen's party will ultimately form a government in the National Assembly and her candidate will win the presidential election and AFD will form part of the government in Germany.

Look at the Sweden Democrats. They were a sort of right wing party that everyone refused to work with in Sweden and then eventually they did. And then they said, you can have confidence and supply with us on certain issues, et cetera, et cetera. It has to be that way. If one third to a half of the electorate are on the extremes, for that mandate I've been talking about through this whole thing, for them to be a mandate, they have to be part of the ruling government.

Now, whether they then actually succeed long-term or force in kind of a centripetal force, everyone back to the center, that's a subject for the next decade.

TG: That’s a really good note to end on.

HT: There you go.

TG: Even though I have about 85 more questions. I can't think of a better way to end it, Helen. That's a perfect ending. Thank you so much, as always, for joining a repeat guest talking all UK politics. It's been great to have you on once again.

HT: Thank you very much. Lovely to talk to you, Tim.

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