Why Fixing the UK Is So Hard

Key Takeaways

Spare a thought for 19-year-old Larry. >> Larry, the Downing Street cat, [music] has outlasted David Cameron, Theresa May, Boris Johnson, Liz Truss, Rishi Sunak, >> [music] >> and maybe now even Keir Starmer. >> The knives are now well and truly out. [clears throat] >> Dozens of MPs call for the UK Prime Minister to get ready to step down. >> And this [music] is what's got people asking, what on earth is going on in the UK? >> If you speak to any of the last few Prime Ministers, [music] they might tell you that Britain is ungovernable. >> Well, except the current one. >> No, I don't think Britain is ungovernable. >> The rhetoric stems from a reality that over 7 years, Britain has churned through five Prime Ministers, while lack of growth and a cost of living crisis have stubbornly stayed put. >> Voters and other politicians are so impatient to see change and improvement that the immediate [music] thought goes to, well, let's change the Prime Minister. >> Are you going to stand for leader? >> And would-be successors are lining up again. But voters may be overlooking another permanent presence in British politics, less furry than Larry, and much less forgiving. >> Just seeing the bond vigilantes waving their pitchforks and coming out for blood. >> Wow, gilts are really [music] exciting. >> Oh, they are. And here's the proof. Britain saw the yield on 30-year government bonds, known as gilts, hit new highs in May. >> Although this is primarily a [music] political battle, there's no getting away from the fact that the bond market looms large over the whole drama. >> So, this is a story of how Britain's political crisis collided [music] with economic reality. What that means for Keir Starmer, the country, and number 10's longest-serving resident. How quickly everything can change. >> 14 years of Conservative Party rule has come to an end. >> It was a landslide victory for Labour back in 2024. [music] >> A huge opportunity for the left of British politics to govern [music] for the first time since Tony Blair and Gordon Brown. >> Less than two years later, the landslide looks more like a sinkhole. >> The UK has just wrapped a pivotal vote that could put Prime Minister Keir Starmer's party [music] and his job at risk. >> The local election results in May were dire [music] for Starmer's Labour party, losing seats left, right, and center, literally. The right-wing threat from Reform UK led by Nigel Farage, the left-wing threat [music] from the Greens led by Zack Polanski, Labour turning on itself, blaming the leader for not [music] being able to connect with voters. >> Keir Starmer hasn't even had two years in the job, and people have already decided they've had enough of him. >> So, what went wrong? The first thing to remember is that Starmer wasn't exactly elected on a groundswell of public opinion in his favor. >> It was really a sort of negative vote against the [music] Conservatives after years and years of chaos, really, that brought Brexit, Boris Johnson, [music] Liz Truss, roiling markets. People had had enough of the Tories and wanted [music] a change, and that was the pretty much one-word slogan of Keir Starmer's election campaign. >> Then came the fiscal reality check. Within days of taking office, his Chancellor, Rachel Reeves, said public [music] finances were far worse than feared. >> And she came out with a very controversial cut for [music] pensioners, which caused a battering for the Labour party in the [music] opinion polls, for which they've never really recovered. >> Next came 40 billion pounds of tax rises focused on businesses. It prompted critics to argue Labour had put its growth pledge at risk in a way that would ultimately impact jobs, and it did. Unemployment has risen since Starmer took office. Both payrolls and the number of vacant jobs have decreased, and businesses have pointed to higher employment costs as a reason. >> The other events preceding those local elections that weaken Starmer have been the revelations around the Peter Mandelson ambassador to Washington and his dealings with the [music] disgraced financier Jeffrey Epstein. >> Bloomberg News investigation revealed in 2025 [music] that Peter Mandelson's relationship with Jeffrey Epstein was far deeper than anyone had previously [music] known. Starmer sacked Mandelson off the back of that story. >> I should not have appointed Peter Mandelson, and I apologize again to the victims of the pedophile Jeffrey Epstein, who were clearly failed by my decision. >> Behind the very visible Westminster drama sat a harder problem, rising welfare costs, weak productivity, and precious little spare cash. >> The UK has been a low-growth economy [music] for some time now and really has struggled to get itself out of >> [music] >> the situation since the global financial crisis. >> In that time, there was this, then COVID, Ukraine, the energy shock, that infamous Liz Truss mini-budget, and now the war in Iran. >> It's left Keir Starmer [music] facing really almost insurmountable challenges. >> Chief amongst them, this. The cost of long-term UK government borrowing had been falling. Now, it's [music] risen to the highest level since 1998. So, why is that so consequential for ordinary people? >> So, if the [music] consumers arise in government borrowing cost matters because if the government's spending more on servicing its debt [music] and paying its interest cost, that's less money that the government can be spending on things like investment and boosting growth. >> And some analysts are now pricing in the chance that Starmer is replaced by someone more willing to borrow [music] into already expensive markets. >> There is a high demand for [music] spending given the geopolitical situation, a requirement for higher defense spending, and yet taxes at levels not seen since [music] the Second World War. >> It's been a tricky couple of months for government bonds globally. That's been the case since the [music] outbreak of war in the Middle East. That's fueling new fears over another inflationary wave, and that's seen government bonds from all over the world [music] to sell off sharply. >> You see Japanese yields to the highest level since '97 on some maturities, in the UK since '98, German yields 2011 on some maturities again. The US the highest close so far this year. >> A worldwide issue then, but one being felt acutely in Britain. These are 30-year yields for each of the G7 nations since January. They're all elevated, but it's only when you add the UK that you begin to see the increasingly costly premium that investors are demanding to lend it what it needs. >> Global bond yields are higher as a reaction [music] to higher expected inflation because of higher energy prices, but then layer on top of that the political uncertainty. All of that making UK government debt [music] less attractive to international investors. >> And Britain comes into this having borrowed a lot already. >> The UK debt, if calculated relative to economic output, is above 90%, which is pretty bad. The more debt you have, the more vulnerable you are to rising interest rates because that makes it more expensive [music] to issue and to service your debt. >> More spent on interest means less left for anything else. In the most recent fiscal year, the government spent about 100 billion pounds on interest alone. That's pretty close to the UK's entire annual education budget. And this is exactly what people wanted to see change, more money for crumbling institutions. But it gets worse. >> The UK has a chronic inflation problem. >> Prior to the war in Iran, the Bank of England had forecast inflation to do this. Yes, hit a 2% target for 2026. That made interest rate cuts look possible and could have eased borrowing costs over time for people and government alike. But in March, it was revised upwards. >> Middle East war, oil prices have been higher. Inflation is higher in the UK as an importer of energy. >> To be fair, the economy has grown on Starmer's watch. But after inflation, wage gains have dropped. So for many households, growth still feels theoretical. >> All of that pressure on gilts feeds into the Westminster bubble that we seem to be seeing with repeated prime ministers. Though I would [music] point out, this is somewhat different. For Starmer, the bond market seems [music] to be defending him. >> The bond market really wants Keir Starmer and his Chancellor of the Exchequer, Rachel Reeves, to stay. This market [music] thinks that they are uh the fiscally disciplined politicians. They've sort of set out these fiscal rules and reiterated [music] time and time again that they are going to abide by them. >> Whoever leads Labour will command a majority in Parliament, but only do so until the next general election, expected in 2029. And inside the party, attention is already turning to one man. >> The key person over the coming weeks and [music] months, and potentially years, in the Labour Party is Andy Burnham. >> He's decided to leave his job as Mayor of Manchester to stand for a parliamentary seat in Westminster, from where he's expected to challenge Starmer for the top job. [music] And he has a very different view on how to solve Britain's fiscal deadlock. >> He said that Westminster shouldn't be in hock [music] to the bond market. >> That really spooked investors because it suggested that he wouldn't really care if bond markets sold off. He He would just sort of plow ahead with big spending [music] plans, which even though he's tried to walk those comments back, is something that the bond vigilantes will have a hard time forgetting. >> The rules are there for a very important purpose, to [music] give confidence to investors the rules will stay in any in any context. >> The best case scenario for Labour is [music] that voters take to Andy Burnham and that he has policies that are bold enough to make a difference for the country. The difficulty is [music] a lot of these economic problems particularly are structural and immense and very difficult to change [music] in a short period of time. And also, the next Prime Minister will be operating, let's face it, in the world of President Trump [music] where there is constant international instability and there's really very little any Prime Minister can do about that. >> So, whoever walks through that black door next will discover the same thing. Changing the PM doesn't reset Britain's problems. And perhaps that the only truly safe route to securing a long-term occupancy of this place is to be a [music] cat. >> [music]