Blair Versus Starmer - Can the Government Get Out of Britain's Way?

Summary

Podcast Summary:

Merryn Talks Money
Episode: Blair Versus Starmer - Can the Government Get Out of Britain's Way?
Host: John Stepek (filling in for Merryn Somerset Webb)
Guest: Simon French, Managing Director & Chief Economist at Panmure Liberum
Date: May 29, 2026

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Episode Overview

This episode delves into the intersection of markets, monetary policy, and UK politics, focusing on current economic challenges (rising energy bills, inflation, interest rates), the impact of political leadership battles within the Labour Party, and Tony Blair's intervention with suggestions for reform. John Stepek and Simon French provide an insightful discussion about how these factors interact and what they might mean for the UK’s future economic prospects, financial markets, and potential government policy shifts.

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Key Discussion Points & Insights

1. The UK Energy Price Cap and Inflation

[02:01]–[06:54]

• Current Situation: The July hike in household energy bills (average £1,640 per year for dual fuel) will directly impact inflation.
  • Clarification: The cap is per unit usage, not a true maximum bill.
• Inflation Impact: The energy price cap increase contributes ~0.4–0.5% to headline CPI, given energy is ~4% of the CPI basket.
  • Simon French: “...about 4% of the CPI basket is made up from household energy and that going up by 13% quarter on quarter and about 20% on the year will mean at about 0.4, 0.5% headline CPI.” [04:12]
• Bank of England's Response: The BOE views such energy shocks as mostly “transitory”; less likely to hike rates unless second order inflation effects emerge (e.g., wage demands, broader price setting).
• Consumer Demand: The economy isn't strong enough for firms or workers to push through broader inflation (second order effects), so the bank can largely “look through” this energy-led spike.

“I think we're coming on to talk about the bond market and ...when you decompose the movement in gilt yields how much is that is responding to inflation versus political risk. ...Bad economic news probably limits those second order effects and therefore the urgency for the bank of England to have to respond…” — Simon French [05:56]

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2. Gilt Markets, Interest Rates & Monetary Policy

[05:56]–[08:34]

• Interest Rates Outlook: French expects no further hikes this year. The yield curve’s pricing and raised mortgage rates have already “done some of the policy work.”
• Other Tightening Factors: The BOE is in “divestment mode,” selling off gilts, which naturally tightens financial conditions.
  • "The MPC would like the market to do its work for it, so it didn’t have to get its hands dirty...” — Simon French [07:45]
• War Risk & Energy: Uncertainty in the Middle East (e.g., Strait of Hormuz) could still disrupt energy prices but markets and supply chains have proved more resilient than many feared.

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3. The Role (and Danger) of Political Interference in Markets

[09:37]–[11:52]

• Price Signals Matter: French extols the virtues of market price signals in reallocating resources and adjusting demand/supply, warning against government (political) interference (e.g., price controls).
  • “Politicians get in the way of those important price signals at their peril.” — Simon French [09:37]

“It’s an object lesson in the value of price as a signaling mechanism... Interfere with prices at your peril.” — John Stepek [11:52]

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4. Labour Party Politics & Tony Blair’s Intervention

[13:20]–[17:41]

• Blair’s Big Letter: Tony Blair released a detailed letter/manifesto criticizing Labour’s current direction and offering prescriptions on key issues: immigration, Net Zero, UK’s role in the world, and economic reforms.
• Key Policy Points:
  • Stop illegal immigration but encourage skill-based immigration.
  • Prioritize cheap energy over green energy (“drill for more North Sea oil and gas”).
  • UK and Europe must take more responsibility for their security.
  • Welfare reform and a more pragmatic approach to economic growth.

"I am no Tony Blair or New Labour fanboy, but he spoke a lot of sense, I felt in the letter...” — Simon French [13:44]

• Public Perception & Political Framing: Blair’s suggestions wouldn’t seem controversial outside the Labour left—many views echo right-wing populists (e.g., Farage)—but Labour struggles to adopt the same language without backlash.

“Nigel Farage could have said half of this stuff.” — John Stepek [17:41]
“Most of it, yeah.” — Simon French [17:42]

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5. Labour’s Ideological Dilemma & Limits on Radicalism

[18:37]–[20:35]

• Many Labour MPs have “luxury beliefs” formed in an era of zero rates, open borders, and assumed geopolitical stability—all of which are now changing.
• Difficult for MPs to reverse course without appearing inconsistent, even if circumstances clearly demand it.
  • “Keynes said, of course, famously, when the facts change, I change my view... not something that this cohort of Labour MPs show a huge affinity to.” — Simon French [19:51]

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6. Gilt Yields, Leadership Scenarios, and Market Sensitivities

[22:40]–[28:38]

• Burnham vs. Others: Markets currently expect Andy Burnham (viewed as a centrist/pragmatist) to become Labour leader—and UK PM.
  • Markets see less risk in Burnham’s limited economic manoeuvre (“boxed in by the bond market and by Labour’s own left”).
• Market Concerns: If less market-friendly figures like Angela Rayner or Ed Miliband become Labour leader, markets might price in higher inflation risk and unstable policy, raising gilt yields and possibly causing a repeat of the 2022 ‘mini-budget’ crisis.
  • “...policies that those two have been associated with... are all three of them seen as inflationary.” — Simon French [27:33]

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7. What Would a Real Gilt Crisis Look Like?

[26:01]–[28:29]

• French pegs the pain threshold at 5.5% on the 10-year gilt before public finances or the BOE need to step in.
• Markets would “impartially just apply a higher inflation premium” under left-leaning Labour leadership (Rayner/Miliband), triggering a cycle of fiscal tightening or forced policy moderation.

“I think bond markets are the most rational of the financial assets that we look at, and they would just somewhat impartially just apply a higher inflation premium for the UK economy to own sterling assets.” — Simon French [26:45]

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8. Policy Solutions: The Land Value Tax

[29:33]–[32:04]

• French suggests reforming property taxation as the best pro-growth move Andy Burnham could make: Replace “poorly designed” stamp duty and council tax with a progressive, proportional land value tax.
  • “If you swept those away and replaced it with a proportional property tax, you incentivize right sizing of the property stock... and it's a broadly progressive move.” — Simon French [29:51]
  • Recognizes political difficulty, but believes it is key to addressing UK supply side sluggishness and stimulating growth.

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Notable Quotes & Memorable Moments

• “The MPC would like the market to do its work for it, so it didn’t have to get its hands dirty...”— Simon French [07:45]
• “Politicians get in the way of those important price signals at their peril.”— Simon French [09:37]
• “Radical centrism.” — Simon French [13:31]
• “Keynes said, of course, famously, when the facts change, I change my view... not something that this cohort of Labour MPs show a huge affinity to.” — Simon French [19:51]
• “If growth is your primary mission, you don’t add more frictions to generating growth.” — Simon French [32:04]

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Key Timestamps (MM:SS)

• 02:01 — Energy price cap and inflation explained
• 04:12 — Direct impact of energy prices on CPI
• 07:45 — The Bank of England letting the market “do its work”
• 09:37 — The importance and risks of market price signals
• 13:20–17:41 — Analysis of Blair’s open letter and Labour’s policy debate
• 22:40–28:38 — Political risk, leadership scenarios, and effects on market confidence and gilt yields
• 29:33 — Simon French’s case for a land value tax as the single most pro-growth reform

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Conclusion

The episode provides an accessible yet richly detailed discussion of how economic policy, market signals, and political leadership are tightly interwoven in the UK’s current moment. John Stepek and Simon French combine sharp economic analysis with political insight, making the case that both monetary policy and fiscal decisions are currently “boxed in” by weak growth and the realities of global and domestic change. The episode is strongly recommended for listeners seeking to understand the outlook for the UK economy, what investors and policymakers are watching, and what real reforms might look like.

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For feedback on the show, contact: mertynmoneyloomberg.net
Follow: @johnstepek & @FrenchEconomics on X/Twitter

Transcript

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[Simon French]

welcome

[John Stevik]

to the Mern Talks Money Market Wrap, where we talk about the biggest moves in markets this week and what's been driving them. I'm John Stevik, senior reporter at Bloomberg and author of the Money Distilled newsletter. And I'm filling in for Mern this week because she's on holiday. So joining us this week is Simon French, our friend of the POD and also the Managing Director of chief Economist and head of research at Panmure Librum, the UK's largest independent investment bank. Simon, welcome back. It's lovely to have you here, John.

[Simon French]

It's great to be here.

[John Stevik]

We'll start out talking about the UK energy cap because we just got the new cost of our bills coming in. Just a wee chat about what's going to happen with inflation and maybe how that's going to affect the consumer. And then I thought we should have a chat about gilt markets and the Labour leadership battle and Tony Blair's interesting intervention in that. Today he's written a big long letter basically talking about what the Labour Party needs to do to get serious about winning elections and getting the country going. But let's start with the energy cap from July. Household energy bills are going to be going up by a substantial amount. I really just wanted to ask you about what you think that's going to do to inflation and the bank of England and the UK consumer from here.

[Simon French]

Yeah. So bit of context here. The energy price cap for the second quarter of the year, about 1,640 pounds for the average dual fuel household.

[John Stevik]

Yeah. This is important when people talk about this because I think people often get confused and they still get confused. But the energy price cap is for the average household.

[Simon French]

Yes.

[John Stevik]

So the price is actually per unit of electricity and gas that you use. So if you're wanting to know what your bill is going to be, it's going to be that times the amount of energy you use. 1800 pounds is not the maximum, regardless of how much energy you use. So I think that's important for people

[Simon French]

at home who realise that's important for people at home. And also the fact that this gets reviewed every quarter used to be done every six months and therefore obviously the peak energy usage is coming into the winter period and this is for probably the quarter where energy is least used by households. So it is not just this move, and we'll come on to talk about this, but it is movements potentially in Q4 and into Q1 next year that are probably more material for UK household spending and of course for inflation. You ask what the transmission mechanism is here. Well, there's an arithmetic change from the fact that about 4% of the CPI basket is made up from household energy and that going up by 13% quarter on quarter and about 20% on the year will mean at about 0.4, 0.5% headline CPI.

[John Stevik]

Yes, it's quite a big chunk.

[Simon French]

Correct. But to move to the transmission mechanism through to monetary policy is that is a known effect and it's the type of thing which the bank of England will be quite comfortable looking through as something relatively, I'm going to use the word transitory, what we worry about, what banks, central banks worry about certainly now and did worry about in their defense back in 2022, the last time we had an energy price shock is those second order effects. And when you're trying to understand how high inflation will go and monetary policy has to respond, it's whether those second order prices in manufacturing and construction and services feed off the initial impulse. So companies, do they have the pricing power to retain their margins? Do workers have the negotiating power to raise their wages to maintain their value in real terms? Is demand strong enough to withstand all this? And I think that is where when trying to get to the conclusion why central banks, the bank of England particularly, are unlikely to respond anything like the same way as they did in 2022 because the demand conditions are much softer particularly as the excess savings that a lot of households, not all households but a lot of households have built up during the pandemic that is no longer the backstop to their demand. That was very prevalent at the start of 2022.

[John Stevik]

I said basically we would need a stronger economy to generate second order inflation. So the kind of bad news is good news element is that the economy is just not strong enough to have people companies pushing through the prices and people able to manage higher wages. That's why the bank will look through it.

[Simon French]

I think that's right and I think we're coming on to talk about the bond market and there's a vigorous debate. I know you and me sometimes engage on this in social media is when you decompose the movement in gil yields how much is that is responding to inflation versus political risk. Clearly looking at the likely bank of England response will influence the short end of the gilt curve. And we have seen as to your point on bad news is good news when we saw some pretty soft jobs data out of the UK economy last week illustrating certainly weakness in hiring intentions amongst firms that started to price out some of the rate increases that have been pencilled in. And if you'd interpreted literally the yield curve of the short end for the second half this year that makes the point that bad economic news probably limits those second order effects and therefore the urgency for the bank of England to have to respond to this kind of energy led inflation.

[John Stevik]

Do you think the bank of England will just be able to get away with no interest rate hikes this year?

[Simon French]

I think so.

[John Stevik]

What's your central view on it?

[Simon French]

It's my central case I think that prior to the last Monetary Policy Committee meeting was my view. I haven't heard anything from the MPC who of course now produce and I think it's a very welcome development. Qualitative comments from each of the nine on how they interpret the inflation and the growth picture. Most of the MPC members talked about financial conditions the curve doing some of the heavy lifting. Because if you take listeners back to the start of the year the curve was pricing in a couple of rate cuts from the bank of England and therefore it's something of a whipsaw to start pricing in rate increases. And of course the the real interest rates faced by businesses and households in terms of offered rates from lenders have responded to that. So mortgages have become the offered interest rates have moved higher and that is doing some of the policy work that otherwise would be required of bank rate. We also need to acknowledge that four years on from the last time we had this energy price shock, the balance sheet of the bank of England is in divestment mode. It's reducing the amount of held gilts by about £100 billion a year. the time of the last energy price sh, it was still accruing assets, it was still buying gilt. So again, that transmission through to tighter financial conditions is doing some of the heavy lifting. The MPC would like the market to do its work for it, so it didn't have to get its hands dirty to be. They're never going to say this at least that explicitly in the minute, but that's the subtext, isn't it?

[John Stevik]

Yeah, I suppose it's fairly obvious because the mortgage market rates have gone up a lot. Although I suppose the point now is that it sounds as if that's likely to settle down for the rest of the year, assuming that the Iran war aspect doesn't get any worse. I mean, have you any thoughts on that? I mean, obviously you don't have any idea any more than the rest is whether the Strait of Hormuz is going to open or not, but is there any signs of. I guess, you know, there are elements. I've noticed there's a lot of infrastructure being built that kind of helps to bypass the Strait in some ways. Lot of discussion about. Well, I don't think we're using quite as much energy. I mean, it's interesting the EasyJet came out and mourned the other day that, you know, summer bookings haven't been brilliant and that's, you know, on the one hand you can see that's consumer weakness, but on the other hand, it looks as if a lot of it is simply down to people not really knowing what to do and not wanting to, you know, take a flight whenever there's a war on. Not that far away.

[Simon French]

Well, can we take a moment to celebrate something? I know you think or you celebrate as I do, the role of prices, the role of markets, of sending signals to destroy demand, to encourage supply. They send really crucial signals. I know later in the podcast we're going to talk about politics, but I think politicians get in the way of those important price signals at their peril. And what have events in the Gulf and indeed events in Ukraine done? They have sent messages to agents across the world in both energy markets and energy adjacent markets that they need more resilience, more pluralism in terms of supply, supply of different sources of energy. They're responding to that Price stimulus. You talk about holidaymakers. They're responding to the messages of potential constraints of supply capacity in the airlines market of jet fuel by being more cautious in their demand picture. That is enabling some of those pinch points we were worried about in terms of supply to be somewhat mitigated. I also think give a bit of credit to if you like, not just corporate UK but the global corporates, particularly in the travel industry, airline chief execs who it turns out know a bit more about their industry than some of the substackers that we were all reading about a month ago who are telling us there would be huge acute supply pressures by the end of May if the Straits weren't reopened. Well, it turns out that the economic supply chains, the energy supply chains are a little bit more flexible, operators are a bit more flexible than we first thought. That is a good thing. Those messages politicians get in the way of at their peril in my view. And we need to be much more comfortable. Yes, I recognize there is political fallout always with inflation, but the message it sends to the supply side of the economy is really, really important. And I think we're paps can look at how markets have cast or risk markets have cast off some of the risks in the Gulf in terms of being quite a celebration of global supply chains.

[John Stevik]

Yeah, because it's interesting because obviously we have heard a lot about price controls recently, particularly with regard to supermarkets. I think you're right. This is object lesson in the value of price as a signaling mechanism. Basically saying to people, look, you need to find a different way to get hold of this or you need to use less of it. So yeah, yeah, basically interfere with races at your peril. Which is a nice way to bring us on to politics. I suppose so. So Andy Burnham, Andy Burnham is the mayor of Manchester and he's the kind of the person who seems at the moment most likely to eventually become the leader of the the Labour party and therefore the next Prime Minister. And gilt markets appear to have actually given them a bit of a break in the last week or so. Although how much of that is down to Andy Burnham and how much of it's actually down the economy not looking that great is another question. But Tony Blair has stepped in. It's almost as if the gilt markets have faded away as something to worry about. But now the specter of Labour's most successful Prime Minister has kind of risen to give Andy a of a nudge in the ribs. So what did you think of this? So there's a big letter that Came out from the Tony Blair Institute by the man himself. Basically making a big sort of wish list of what Britain should do.

[Simon French]

Yes.

[John Stevik]

And explaining why labor isn't doing it and it needs to start doing some of it. I mean, what was your take on this radical centrism?

[Simon French]

Radical centrism.

[John Stevik]

There's a little bit of a very political tautology there. Really? I think. No, it's not a tautology, it's an oxymoron. Sort of get my feelings of speech mixed up. Yeah.

[Simon French]

So what did I make of it? Look, I am no Tony Blair or New labor fanboy, but he spoke a lot of sense, I felt in the letter. There are some policy trade offs that are uncomfortable for what has been called the soft left of the Labour Party that he shines a light on or maybe holds a mirror up at on immigration, on net zero, on the world order, on the relationship with Europe. It's quite an essay, isn't it, of the big both structural challenges facing the middle powers. And he references Marcani in his speech or call to arms in Davos earlier in the year. But also some of the shorter term political challenges and perhaps some of the failings of the prospective Labour leadership candidates and the incumbents of not having the policy debates, which I think you and I share this frustration ahead of the 2024 general election and trying to make policy or have the debate with the public about some of the difficult decisions on technology, the cost of aging, on immigration, on welfare spending in Parliament, in government without a manifesto to backstop that with which to use to whip your own parties, not literally, but at least metaphorically, is a real difficult challenge and to me comes back to the root challenge Andy Burnham will have if he takes that path you lay out, which is he wins the make Phil Buy election, he wins the Labour leadership and he becomes prime minister. On one side he'll be boxed in by the bond market and the other side he'll be boxed in by his own political brethren. And therefore the room for maneuver is quite limited. And by the way, I think it is that limited room for maneuver that bond markets have responded quite favorably to. Because what has been revealed over the last couple years of couple of weeks is how many limits there are politically and financially on his ability to be particularly radical, be it a radical centrist or a radical leftist or a radical Mancunian or whatever descriptor we want to give it. And to some extent markets are saying, well, the status quo is not. It's not great, but it's not a

[John Stevik]

deterioration from here I thought it was quite interesting because. So we mentioned immigration and he says, first of all, he said that's something very punchy, which was. He said, we need to do whatever it takes to stop illegal immigration and specifically mentions the small boats. So that's the first thing he says, we need skilled immigration, but we need to stop the illegal stuff. He says that on energy, we should focus on getting cheap energy rather than clean energy, so stop going down the Net Zero route quite as vigorously and drill for more Nazi oil and gas that's in there as well. He talks about how the New World Order is actually not a New World Order, it's just the Americans finally being a bit more blunt about the fact that Europe and the UK haven't been pulling their weight in terms of. I mean, the UK is probably not actually as bad in terms of defense, but saying, look, we need you guys to contribute more because the world's getting a more dangerous place. And what strikes me is that he isn't saying anything that I think most people outside of the actual Labor Party and possibly those to the left of the Labour Party would consider to be controversial. I was seeing someone on Twitter this morning, said, how do you get these messages across in a populist world where they're going to be unpopular? And I was thinking, wait a minute, Nigel Farage could have said half of this stuff.

[Simon French]

Most of it, yeah. Yes.

[John Stevik]

Basically he's already said, yeah, we want to ditch Net zero, we want to get immigration. That and no, we don't think the Americans have lost their marbles. They've just got kind of frustrated with it. So it strikes me as very odd that Sony Player is essentially able to say all of these things and they just come across as being common sense. Whereas if the Conservatives or Reform had said it, there would be a sense of, oh my goodness, you can't say this, or are you climate deniers, are you racist for wanting to stop illegal immigration? That sort of response. I was just pointing. Do you think any of this actually going to help labor to talk about this stuff in a way that might change the policy? Say, let's take Energy Act a bit more sensibly on that front, maybe at least let some of the licenses continue in the North Sea.

[Simon French]

Depressingly, I feel it will not change the preferences revealed and targeted from the current cohort of Labour MPs, who I have thought really since very shortly after the general election, that they cut their teeth in think tanks and special advisors, most of them in a non private sector background during a period where Those luxury beliefs on net zero, on immigration, on the role of the United States, zero interest rates were all conditioning assumptions that could allow those luxury beliefs to come with relatively little cost. But they've all changed. All of that list has changed. What I struggle to see is how having set your stall out and for different MPs, they've sent their stall outs in different ways because it's actually quite a broad church. The Labour Party is part of the

[John Stevik]

problem for them, it absolutely is.

[Simon French]

Having set your stall out on what you really care about, reversing out of that and saying the facts have changed, financial facts have changed, the geopolitical context has changed, population flow has changed, the war in Iran has changed these calculations. It becomes very, very difficult for the individuals. It comes down to those people to reverse course. Keynes said, of course, famously, when the facts change, I change my view. Keynes is not someone whose view is at least not in terms of that quote, something that this cohort of Labour MPs show a huge affinity to.

[John Stevik]

He was an unusual guy, Keane, so I think we can definitely give him that.

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[Simon French]

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[John Stevik]

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[John Stevik]

See complete [e-mail] disclosures so coming back to gilts, because the thing that strikes me is that, okay, it's one thing the Gelts market might be thinking, okay, the status quo is all right, so if we kind of burn them in, he's going to toe the line. He's not going to completely go off in one. But that then means he's basically going to face exactly the same problem that Starmer's facing just now. He may be a more personable individual, he might be slightly better at talking to, he may be better at the comms thing as they keep talking about, but he's still going to face the problem whereby regardless, he may have taken the message of the gilt market on board, but I don't think all of the further left MPs will have. He's still going to be stuck with things like being unable to reform welfare. Yet another thing that Tony Blair said we need cut welfare costs. So that kind of leaves us rumbling along for the next conceivably three years. Do you think that happens or do you think we get a general election before then or it feels like squeezing

[Simon French]

the balloon, doesn't it? Because if you decide that your room to maneuver without a fresh mandate is very limited. And I think if you want to do anything on some of the proposals in terms of nationalization, in terms of property taxation, wealth taxation that had been proposed by Andy Burnham, it feels very difficult to do that without a fresh political mandate. But then you come in to lead your party and you announce early on that you're going to voluntarily trigger an event that will probably make on current polling 3/4 of your colleagues unemployed. Not a direct route, as far as I can establish, to popularity, internal popularity, unfortunately. That conclusion, therefore, is that the mandate bequeathed to Keir Starmer and the Labour Party in 2024 will be the one that they will run with all the way through to 2029. And therefore any radicalism from Andy Burnham will immediately face the challenge of legitimacy bringing it back to the bond market, which you opened. The question with is I think we also need to look at the other scenario where we've talked a lot about Andy Burnham but let's say he loses the Makerfield by election. Yeah, which is possible, which the moment doesn't look. I mean it currently looks like the right of center voters being split between reform and restore and that's allowing Andy Burnham a bit more gap to win that. But if he doesn't, I think the market would be worried about another candidate from they self style themselves as the soft left but probably more left than Andy Burnham, a character like either Angela Rayner or Ed Miliband who the bond market would respond more negatively to. So I think some of that compression of yield spread between the 10 year guilt and the 10 year treasury is a result of some more favorable polling for Andy Burnham. That actually means that some of those more left wing candidates from the Labour Party won't have to throw their hat into the ring, which I think they would inevitably have to do if Andy Burnham didn't have a seat in Parliament.

[John Stevik]

So I mean on that what would a crisis actually look like? Because assuming, let's say something happens, let's say Burnham loses and let's say that then Angela Rayner or Red Meliband decide that that's their opportunity and rather than say coming to power and saying okay, we'll stick with Rachel Reeves as Chancellor just to keep you folk happy, they stick someone to the left of them. I mean at what point would you say, I mean the words less trust moment are vastly overused and I always go back to how it was about ldi, but at what point you say actually this is where a kind of doom loop could start. We're talking 6% in the 10 year or what we thinking about?

[Simon French]

Well I thought the 5.5% on the 10 year is a pain threshold for both public finances and actually potentially for the bank of England to have to step in as they did actually after the ldi crisis of 2022. But and these may be, maybe we'll pull the tapes in six months time if this plays out different to what I anticipate, which is if this scenario were to play out, I think bond markets are the most rational of the financial assets that we look at and they would just somewhat impartially just apply a higher inflation premium for the UK economy to own sterling assets. And you can see that most obviously in gilts I think, but you would also see it in UK focused equities, domestic equities as well, is that the policies that those two have been associated with net zero in the case of Ed Miliband, the Renters Reform act and the Employee Rights act from Angela Rayner, Are all three of them seen as inflationary? Inflationary in energy markets, inflationary in jobs markets, inflationary in land and property markets in terms of rents. That is not a good position to set out your stall for a broader economic agenda. And are the markets, is the gilt market going to wait for those individuals to set out their broader economic stall or just say, well, there's the signal? The signal is that that will illustrate the kind of a higher inflation premium in the UK economy, and therefore we just price things accordingly, which is just an incremental increase on gilt yields. Nominal gilt yields.

[John Stevik]

Yeah. And it's presumably at that point that's when everyone starts panicking about their mortgage, and maybe that's what brings the next government into line.

[Simon French]

And to your point on this, two responses. There's the private sector in terms of a slowdown in demand because of tighter credit conditions. But then there's also the impact the next time the OBR forecast in those widely assumed to be November and the November budget, if you plug in those kind of yields, some of that 22, 23 billion pounds worth of headroom that the Chancellor left herself back in the spring will have largely evaporated and therefore we're back in that cycle, which I'd rather hope, I think we both hope had been left behind with that speculation day to day, week to week, that taxes are going to have to go up or spending is going to have to be cut, which credit to Rachel Reeves, and she doesn't get much. But having rebuilt in the last two fiscal events, the headroom, we have seen a diminution of that speculative cycle. If we get that back, that's not great news for the economic momentum of the UK economy.

[John Stevik]

Well, look, before we wrap up, is there one policy that Andy Bundham, assuming he is the next Prime Minister, could bring in that would make you feel a little bit more upbeat about prospects for the economy? UK economy, yes.

[Simon French]

And he has spoken about this, albeit he hasn't defined the exact parameters of it. And this is a land value tax or a proportional property tax. I look at the 64 billion pounds that the Exchequer raises off combination of stamp duty, land tax and council tax, and you think of them as two very poorly designed taxes. Stamp duty is a friction. You and I were desperate to talk about stamp duty on shares, but let's talk about stamp duty on residential property. It's a friction of 14 billion pounds a year. Friction and then a 50 billion pound a year very regressive tax, which is council tax, which has been unreformed in the UK since the early 1990s. And if you swept those away and replaced it with a proportional property tax, you incentivize right sizing of the property stock, you incentivize moving. And it's a broadly progressive move. I don't pretend it is easy, I don't pretend there aren't losers associated with it in terms of distributional losers, but as a pro growth initiative, because effectively you are engineering new supply, particularly by rightsizing, and you're generating VAT receipts from higher number of transactions, home improvements, etc. That feels to me a very, very pro growth policy. And the question really for Andy Burnham is whether without a fresh manifesto and mandate, whether he can push through something that politicians have ducked for 35 years.

[John Stevik]

I mean that's a fascinating one and I can see. Well, it touches on that thing that's so important to UK voters, isn't it the price of houses and the. That the house is a castle and the was. It's always the kind of, the kind of pension of living in somewhere in Mayfair who is cash poor and asset kind of vastly wealthy, who then gets hit. But I suppose if any shady government can push through that sort of issue, then this is quite possibly a labor one. So no, that's an interesting one.

[Simon French]

But I think if you look at thematically what is wrong with the UK economy, it has been the sclerosis of our supply side and property and land most obviously has been underdeveloped, underutilized. It has become a store of value rather than an asset to promote geographical mobility, labor mobility, aspiration. Part of that legacy is a result of how it has been taxed, really poorly taxed at some point. And I hope it's not in crisis. I hope it is proactively. You address that and address one part of the three legs of the stool, with energy and the capital markets being the other two, where the supply side has been neglected for decades. A growth story, and this is maybe we end with some of the El said in his letter is if growth is your primary mission, you don't add more frictions to generating growth. Which is basically the criticism of the last two years of the Labour government having come in promising growth was their primary mission. They've introduced a lot of policies that have made growth in the private sector even harder to achieve.

[John Stevik]

Excellent. Well, fingers crossed for a land value tax then. But if you're listening, Mr. Burnham, you have to replace the existing taxes, not add an extra one on top. Thanks for listening to this week's Merton Talks Money Debrief. If you like our show, rate, review and subscribe wherever you get your podcasts and be sure to follow me johnstepek on X& follow Simon at French Economics this episode was produced by Summer Saadi in mosesandam. Questions and comments on this show and all our shows are always welcome. Our show address is merdenmoneyloombird.net and a very special thanks as always to Simon French. Panmure Librum.

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