The landslide victory for Labour’s Keir Starmer in 2024, promising an end to nearly a decade of persistent instability in the United Kingdom triggered by the 2016 Brexit referendum, has proven illusory. A year and a half after winning 63% of British parliamentary seats with just 33% of the vote, Starmer is floundering in the polls, his own party is on the brink of rebellion, the economy remains stagnant, and the political crisis has only deepened. Bond yields, which had relaxed after recent budgets, have climbed back to levels seen in November.
The UK continues to pay the price for the populist wave unleashed by Brexit, a situation that has only worsened since the referendum. A nation accustomed to prime ministers serving for decades is heading towards a situation reminiscent of Italy, where governments fall every six months. “It’s not good for the country to change prime minister every 18 months or two years,” Labour’s Shadow Work and Pensions Secretary Pat McFadden told Sky News on Sunday. “It’s generating chaos and economic, political and reputational uncertainty around the world.” If Starmer lasts in office until July, he will only match the tenure of his predecessor, Rishi Sunak. Currently, the odds are stacked against him, following a scandal that has shaken the government and left him teetering on the brink.
The latest chapter in this ongoing crisis stems from the so-called ‘Epstein Papers,’ documents the U.S. Government is partially releasing following a congressional order for full declassification. While the Trump administration has resisted complete publication, millions of files have been made available online. And, alongside the already disgraced Prince Andrew, several references included Peter Mandelson, the United Kingdom’s ambassador to Washington, a veteran Labour figure and member of the House of Lords, known as the “Lord Mandelson” for his political maneuvering.
The scandal has rocked the country. Starmer dismissed Mandelson in October and demanded his resignation from the House of Lords last week. His departure has taken with it his chief of staff, Morgan McSweeney, who suggested replacing the previous ambassador to the U.S., career diplomat Karen Pierce, with a politician capable of utilizing their “dark arts” to negotiate with Donald Trump. To compound matters, Downing Street’s head of communications, Tim Allen, resigned this morning.
But the crisis doesn’t end with Mandelson. Labour grandees are pointing the finger at Starmer, citing both the scandal and his perceived weak leadership. The leader of the Scottish Labour Party, Anas Sarwar, has called for his resignation. Two weeks ago, the Mayor of Manchester, Andy Burnham, sought to trigger a special election to challenge Starmer for the party leadership, a move blocked by the party’s leadership. Other potential challengers include Health Secretary Wes Streeting, former Housing Secretary and Deputy Prime Minister Angela Rayner, and Energy Secretary and former party leader Ed Miliband.
Fear of the Aftermath
All this chaos evokes the worst memories of Liz Truss’s brief and turbulent premiership. Starmer’s Chancellor of the Exchequer, Rachel Reeves, has consistently emphasized fiscal seriousness and stability to avoid the shocks that plagued the recent Conservative governments. Despite numerous U-turns and communication missteps, the budgets themselves have satisfied the markets. The fear, however, is that a successor will abandon fiscal control and launch into uncontrolled public spending. Political tensions have pushed 10-year bond yields to 4.60%, a high since November, and have caused the pound to fall 0.7% against the euro.
At the root of the problem is a stagnant economy that has persisted for years. Brexit has taken a heavy economic toll, and successive governments have raised taxes to their highest levels since World War II. But this hasn’t solved the crisis in public services: healthcare, education, roads, social services, and elderly care have suffered a decade of severe cuts. Many local councils are facing bankruptcy. And the country’s high-speed rail project has become a running joke after decades of delays, shrinking scope, and astronomical costs. Public debt is under control, at 105%, a level acceptable compared to other European countries like France or Italy, but leaving little room for maneuver. The situation recalls the saying: “If you cover your feet, you uncover your head, and if you cover your head, you uncover your feet.” Markets fear that the next prime minister will change course and prioritize increased investment in public services at the expense of fiscal discipline.
Bloomberg macro strategist Ven Ram warned today that “a political risk premium has been re-added to UK assets, frustrating another potential rally in long-dated bonds. The concern in the markets is that any successor will be fiscally more lax.” However, the memory of the ‘Truss Moment,’ with the disastrous ‘mini-budget’ that sent bonds soaring and forced the Bank of England to intervene to avert a larger crisis, remains fresh in everyone’s minds. Eric Lonergan, discretionary macro director at Calibrate Partner, says that “there is widespread political consensus that is terrified of the bond market. Even after Starmer, I foresee restrictive and prudent fiscal policy, but also volatility in between.”
Starmer’s biggest weakness, however, lies to his left, a flank he has largely left open in an attempt to appeal to Reform UK voters, the anti-immigration party of populist Nigel Farage. This move has left him in no man’s land: voters on the populist right have not given any credence to the government’s immigration restrictions or defense of Brexit; but his left-leaning voters have abandoned the party en masse to progressive parties like the Liberal Democrats and the Greens, who support closer ties with the EU and a more open immigration policy. Party MPs have rebelled several times against Starmer, forcing him to maintain disability benefits or expand support for families with children. McSweeney’s policy of alienating his own voters has had results, although perhaps not the ones he intended: Starmer’s approval ratings are at -50 (15% approve, 65% disapprove) and the Labour Party is polling below 20% of the vote. His numbers are even worse than Truss’s, now the benchmark for political failure in the UK.
Green Shoots on the Horizon… But Still Distant
The biggest hope for Starmer lies in signs of “green shoots” in the economy. Berenberg, in a note to investors, pointed out today that “if inflation falls back to 2% year-on-year, as we expect, we suspect the Bank of England will cut interest rates to 3%. This would maintain the upward trend in bank credit growth and stabilize employment.” According to their calculations, GDP would grow from 0.9% in 2026 to “1.6% in 2027 and 1.7% in 2028.” An economic recovery just in time for the next general election, allowing the government to launch a pre-election spending package and capitalize on the ‘feel-good factor’ among families.
However, his biggest threat is the local and regional elections on May 7th. Polls point to a collapse in Labour support in its historic stronghold of Wales, where it could lose control of the Welsh Assembly for the first time since its creation and be relegated to third or even fourth place, swapping positions with the left-wing nationalist Plaid Cymru, who are taking all its votes. In Scotland, where Labour was the largest party in the 2024 general election after a decade in the wilderness, polls suggest they will sink again at the expense of the Scottish National Party (SNP), the Greens, and the Liberal Democrats. This is in addition to numerous councils in England, where they risk losing hundreds of councilors.
A Labour disaster in the May elections would open the door to a larger rebellion within the party, given the need to do something to stem the tide of lost support. But several MPs question why they should wait for such a catastrophe to change the prime minister instead of doing so sooner, hoping that a clear signal of a political shift will allow them to salvage some of their support in the elections.
