Merlin Weekly Macro: Is Reform ready to govern?

What a week for the Wannabes!

Mark Carney was a wannabe who for many reasons should not have had an iota of a chance of being Canada’s new prime minister in 2025: threatened with Canada’s subjugation as the 51st State, the former Governor of the Bank of England’s fairy godmother sprinkled a liberal dose of anti-Trump-laced fairy dust and his dream of taking the national helm came true. As he told President Trump this week, “like the White House and Buckingham Palace some things are never for sale; Canada is not for sale”. It earned him a smile and a pat on the knee and a retort of “never say never”. That stand-off has further to run, one feels.

Friedrich Merz was a wannabe for German Chancellor: he was expecting a relatively straight forward coast into the job after signing his post-election coalition agreement with the ousted and deeply unpopular Social Democrats; yet somehow he managed to fluff it at the first hurdle when 18 crucial MPs, who were supposed to support him, took temporary umbrage; he made it at the second time of asking but Merz’s is a wannabe stable and secure government that is off to a decidedly shaky start.

Heavens above! Donald Trump wanted to be Pope! He was only joking. He could wannabe the Pope all he liked but Hell would freeze over before that one happened. As it is, he has the next best thing: the first American Pope, Leo XIV from Chicago.

Trump’s good chum Nigel Farage, on the other hand, wants to be the next British Prime Minister: it might be a bit premature but his wannabe chances are certainly greater than The Donald’s thwarted dream of seeing white smoke and to don the Papal vestments and a zucchetto.

Farage’s ambitions came a step closer at last week’s local elections. For the principal national parties in what for decades has been largely a two-horse race, the warning signs are all too clear.

Tory water, water everywhere…

Nor any drop to drink. They’re all at sea. The termination of the Conservative Party is not absolute but it is flirting dangerously with making it so. After 14 years in office and returned to the wilderness, it remains an ideology and policy-free zone. Delivered by Boris of a big majority in the 2019 general election and a sweep of councils in the 2021 local elections, its rapid decline to near irrelevance in half a decade has been a political phenomenon. A party ill at ease with itself for a generation, its propensity for vicious internecine warfare and serial self-perpetuating regicide culminated in near-immolation in 2024; today, what remains of the Conservative corpse has been eviscerated by Farage and Reform. Kemi Badenoch is not the answer to Tory prayers: lacking either command or charisma she is on borrowed time as leader; the only smudge of blue sky on an otherwise bleak horizon for her leadership is that while the pre-2024 parliamentary Tory Party was an ungovernable rabble, today there are so few MPs with any genuine potential or experience that those who might oust her are stuck for credible alternatives who can be seen as prospective winners.

Labour: Red Wall revolt

Labour is in power and in trouble. Ten months into its first term in office since being ousted in 2010, its ‘loveless majority’ of 174 (‘loveless’ because only 20% of the electorate actually voted Labour last July) has already shrunk by 18 seats to 156; only one of those has been lost in a by-election (Runcorn, spectacularly, where a 14,700 majority was overturned by Reform); one resigned, another is under arrest and the remainder are suspended for defying the whip. At this stage in the electoral cycle, Labour should be riding high. Instead, it too has suffered significant setbacks, mostly self-inflicted.

Its failure to understand its core electorate and the dynamics and appeal of Reform in what historically were naturally safe Labour areas (the ‘Red Wall’ seats), combined with major unforced policy errors such as the withdrawal of the winter fuel allowance, have left it wide open to accusations of being politically (s)tone deaf. An EU trade deal reintroducing free movement of young workers and significant concessions on UK fishing sovereignty would have only inflamed the situation with this Leave-rich audience.

As for that pre-election support garnered by Labour among business, private sector leaders’ scales have fallen from their eyes. They have quickly come to understand that the government’s positions on growth and wealth creation are incompatible with its policies of exerting greater direct control, destroying the continuity of long-term private capital, enhancing workers’ rights and raising taxes on employment. Not to mention Ed Miliband’s myopic zeal for carbon net-zero inflicting energy at penurious and competition-destroying costs on UK businesses. The US and Indian trade deals were too late to make a difference.

While Labour’s troubles are different from those of the Tories, it too should be looking over its shoulder (it may explain why Keir Starmer so often appears wary in public, having the look of the permanently hunted): in these local elections in the specific geographic areas polled (they were not country-wide), both parties lost two thirds of their councillors and from a standing start, Reform now has 60% more local representatives than Labour and the Conservatives combined (677, against 98 and 319 respectively, with the LibDems on 370). Labour will be hoping, but most certainly cannot take for granted, that the main urban councils not being contested on this cycle are more resilient and loyal when their turn comes (while the Conservatives are vulnerable to voters switching to Reform and the LibDems, Labour’s threat is from both of those alternatives and the Greens). But at the national level, the current polls show that Labour has lost ten percentage points of support since the 2024 election and at 24% is only three points ahead of the Conservatives but two points behind Reform; in July last year, Reform was 20 points behind Labour.

Keir Starmer’s reaction to the local elections was predictable but perverse: his assertion that “we get it” sits in contradiction with his follow-up exhortation that “we must go further and faster”; if the ears and eyes were open, the brain were on ‘receive’ and the mouth not switched to ‘transmit’, Starmer would surely realise that doing more of the same, only even faster, and expecting a different result, is to test the proof of Einstein’s Parable of Quantum Insanity. He promised to deliver ‘change’; the change he is delivering appears to be not what a growing proportion of the electorate were led to expect. Voters taken for fools tend to be unforgiving.

Reform: ready to govern?

Which brings the spotlight onto the political phenomenon that is Nigel Farage. Love him or loathe him, it is not unfair to say that he has been probably the most influential politician in the UK since Margaret Thatcher in redefining the political landscape. The rise of UKIP and the seductive appeal to the Tory Eurosceptics (the ‘swivel-eyed loons’, as Cameron derided them); as an MEP his being the cheeky-chappie champion of the common man while taking delight in throwing stones inside Brussels’ greenhouse; his persistent needling and the eventual open challenge to David Cameron for a referendum on EU membership which led to Brexit; his carefully honed image of the Barbour & Beer Bloke who will willingly stand you a pint and a chat in the Bull & Bush but which disguises a deep reactionary no-holds-barred conviction; it is easy to forget that until a year ago when he won his first Westminster seat at Clacton, all of this had been without a British Parliamentary platform (finally achieved on the eighth attempt).

As Reform gains its first levers of executive power (it now controls 10 councils), it has much to prove if its national ambitions are to be successful. A significant future investment risk would be if Reform were to be elected to office in Westminster in four years’ time promising it is able to run long before it has learned to walk. The effect on sterling and government borrowing costs could be significant if Reform in office turned out to be the political equivalent of the Wizard of Oz: a triumph of noise and bright lights over substance and when the big red curtain is pulled back, there is precious little behind it. However far-fetched a Reform victory might have seemed, the new western 21st century landscape of polarisation and populism means it is now not impossible, especially in a first-past-the-post electoral system where victory in a seat is binary regardless of the margin (playing the highly unreliable game of Westminster predictions, were there to be a UK general election tomorrow and extrapolating the local election results from last week, the website Electoral Calculus estimates Reform would have 245 seats, Labour 177, the Tories 94 and the LibDems 60; Reform would need a Tory coalition to carry a working majority but Farage would be in No 10).

Without doubt Farage has charisma and star appeal. He is a force of nature. There is obvious key-man risk: there is no evidence that in the absence of Farage, Reform as a coherent party would not simply implode or evaporate. To be a credible party of government needs much more than a figurehead, a megaphone and faithful followers: first, it needs a mature machinery and a pool of experienced talent drawn from a range of disciplines and policy areas who can bring together detailed analysis and planning and high intellectual rigour; second, in Reform’s case, it must be able to convert narrow populist protestations into broad, coherent national policies of substance and sustainability which can withstand deep scrutiny.

The party’s 2024 manifesto (its ‘Contract’ with the electorate) gave little confidence: it had breadth but no depth. Each policy target was granted one side of paper of which between a third and a half was taken up with a banner headline and a photograph footer with precious little in between. It contained sweeping, unsubstantiated numbers plucked from thin air giving the impression of GCSE economics backed up with figures scribbled on the back of an envelope (“Proposals will create 1-1.5% extra growth pa; extra 1% pa GDP = £25bn; Tax @ 40% spend = £10bn”). There is an argument for the KISS (Keep it Simple, Stupid) approach to messaging, so long as there is strong substantiated evidence of detailed DPhil-level rigour behind it.

Because once in office, the immediate judge and jury will no longer be the electorate but the bond markets. The numbers in the 2024 ‘Contract’ are now out of date and much has changed already; what we are interested in is the robustness of Reform’s fiscal thinking. Its 2024 proforma net annual £19bn reduction in the deficit relied to a large extent on £10bn of additional tax receipts from a far-from guaranteed doubling in GDP growth from the 15-year average rate, plus achieving £50bn a year savings on waste (by removing qangos and commissions as well as departmental savings) and £35bn a year by abolishing the interest paid to commercial banks on deposits with the Bank of England (supported by former Monetary Policy Committee members Paul Tucker and Charlie Bean, but opposed by the Governor and the Treasury, it is a moot point as to whether removing £35bn a year in liquidity from the financial system has unintended consequences and damages what economists call the ‘transmission mechanism’, or whether it is a genuine cost saving). On the other side, annualised tax cuts totalling £80bn (£70bn ‘personal pledges’, £18bn ‘business pledges’) run the risk of being unfunded were any of the planned cost savings either not to materialise or be delayed (who can forget the rumpus over Liz Truss’s £2bn unfunded tax cut when she wanted to reduce the top rate by 5p?).

Unless the economic outlook improves dramatically (and at the risk of labouring the point, governments do not control growth), in 2029 the next administration will inherit (or in Labour’s case, persist with) an unenviable financial position based on the OBR’s projections. While presented by Reform as a net saving of £19bn, all it in fact means is that the deficit endures and compounds just at a modestly slower rate; the risk to the debt/GDP ratio, already close to 100%, is on the upside. As a means of a structural re-set of the country’s finances, Reform offers little in the way of radical thinking. There are nuggets of good ideas in here (a very different approach to energy, for example), but the overall impression is of a half-formed plan with much work to be done to be wholly convincing.

You call that reform?

Given its name, the disappointment with Reform’s published agenda is that very little real reform is in evidence, at least from a fiscal standpoint. Over five years, an extra £53bn pa of additional public sector funds would be allocated to the big spending departments including £17bn to the NHS (and £14bn to defence). The ‘Contract’ blurb for the NHS, for example, contains nothing more radical than Labour is currently planning; instead of operational sticking plasters, where is the major surgery to make the NHS structurally fit for the next two generations? Why not a new funding model? For the entire machinery of government, where is the ambition to do things very differently providing services to the public, rather than mostly more of the same, or variations on a theme, and simply slashing specific financial items such as Bank of England interest?

It begs the question: how serious is Reform about significantly resetting the balance between the state and the electorate and reducing the debt to a manageable level that maximises our national competitive prospects and minimises the risk of reaching the OBR’s tipping point in 25 years’ time when the country will be on a self-induced path to insolvency. It eluded the Tories for 14 years and is running rings around Labour today. Crack that one, Mr Farage, and you’ll have the bond markets eating from the palm of your hand. But so far, it’s not obvious you have the answer either.

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