Inside the China spy crisis shaking Starmer’s government

0:14This is Political Coancy with Ed Balls and George Osborne.

0:28so welcome back and uh we are remote uh this week and um last night the traitors episode three i was urging you george to you know to watch the first two episodes last week because it was so good and because it's kind of program where you need to have seen it from the start have you got in touch i have not i'm afraid but i've got quite a long flight next week and um so i'm going to basically download it and binge watch it that's my plan and try and then avoid talking to people like you who then kind of tell me what's happened i'm going to give nothing away but i'm going to give you a little taster this is um from last night's episode and it is a brilliant moment where Claudia Winkleman, who's in charge, is trying to create a sense of suspense.

1:19And then Celia Imri, the absolutely brilliant actress, intervenes, let us say. Welcome to the worst team-building away day experience in history.

1:37What just happened? I just found it, Claudia.

1:43I'm so sorry. I'm so sorry. It's nerves, but I always own up. I know. I always own up too. Guys, settle. Right. I think I've given nothing away there about the plot. However, I mean, you know, it was so... I love the idea. It was nerves, but I always own up. And that they didn't edit it out. No. comedy gold i saw on um on x this morning and whoever had posted it said this deserves a bafta for itself you know claudia winkerman is a trustee of the british museum and um we have got a big gala ball uh fundraising ball for our international partnerships on saturday it's sort of like you know the met metropolitan museum in new york has that famous met gala now it's not it's not going to be the Met Gala because that's a world of its own.

2:41But we're having this big, big fundraising ball. And Claudia is, as our trustee, is the voice of God that's going to tell people, you know, it's time to have dinner and so on. So this is like a big swanky London celeb party for the great and the good. Yes. And the rich. And I have to say, I mean, I'm not going. In fact, I've not been invited. What happened? well if we were doing our old jobs i would have said you're neither great nor good but you are great and good uh and despite your unbelievably successful broadcasting career including this fabulously successful podcast i'm not sure you could afford one of the tables oh i see so there is a um there's an entry ticket is there there is an entry ticket but it's for raising money for good things for the partnerships the british museum has around the world and the theme is pink so uh we've got to think of um you know i've got to i've been thinking about the dress code as i've got to give a speech well it's good to know that with all of your many jobs you are um spending your hard and cash on you know a good cause george yes i think there might the chair of the museum might might be comped you are joking oh my god so you're saying that you've got a comp and I haven't.

3:59I do do the job unpaid. I'm going to brush this off and we're going to move on to the actual podcast. And we're going to start with two issues we discussed last week, China spies and peace in the Middle East, where there have been so much activity over the last week. We figured we couldn't start this podcast without looking back and say, you know, are things turning out the way that we expected. So we're going to talk about that first. Yeah, and then look, the budget is starting to loom. And Rachel Reeves has said that she's looking at tax and spending. We're not going to unpack the whole budget on this podcast, because we've got some weeks ahead to discuss it.

4:44But I thought we would take a particular look, didn't we, at spending and welfare reform. Is it possible that welfare reform after the setbacks the government has encountered earlier this year is back on the agenda. We will be having a look at that. And then as well as the budget, after the conference speeches from Keir Starmer and Kembe Badenock, we said their next big test is going to be the May elections. Some local elections in England, but very importantly, big parliament-wide elections in Scotland and in Wales and next Thursday there is a by-election in Caerphilly in Wales for the Parliament in Wales, the Senate, the tragic death of a member of the Senate in August and that is going to be the first indication as to whether Wales and Scotland but I think Wales in particular is going to totally upset the British political apple cart in the spring.

5:44So we're going to talk about Wales and Scotland third. And I don't think we're giving away too much, are we, when we say in that Welsh Senate election, neither the Labour Party nor the Conservative Party are at the moment in the running. So it's pretty interesting. The battle is not the battle that would have been had, you know, five, 10, 15 years ago. Well, look, in the Carefilly by-election, the last time that seat was fought Labour got I think 46 % and Reform got 2 % of the vote and the latest polls for next Thursday a week's time at the moment are Reform storming it well into the 40s with Plaid just behind and Labour languishing right back in the teens so if there is an earthquake happening in British politics and if it's going to be seen in full display next May well next week and carefully maybe the first real electoral sign of what's to come.

6:41So very interesting. But we're going to start with an update on a week ago. First of all, China spies, we said, what on earth is going on? How has this happened? And why isn't the government getting a grip? And we suggested that maybe the new chief political secretary to the prime minister, Darren Jones, ought to be getting a grip and a week on i mean is it still totally unclear what's going on or did the um publication of the the witness statement from the deputy national security advisor which keir starmer was forced to or chose to promise to publish in prime minister's questions yesterday has that provided some more clarity well i think if you take a step back there's still this sort of pretty extraordinary situation where, you know, two individuals were accused of spying for China.

7:39It has to be said they vehemently deny those allegations. In all the evidence that has been produced, and in a sense, this is sort of evidence for the prosecution, so we need to take it in balance, nevertheless says, you know, these are pretty serious charges. And there was the allegations are that real damage was done. And yet this trial has collapsed. So I still think there's that kind of, you know, in and around all the kind of political machinations, there's still this sort of central, rather bizarre story of the collapse of this trial. But I would say, you know, in the kind of day-to-day shifting kind of blame game over the last week or two, which has looked pretty messy for the government with different bits of the government, you know, briefing against each other and the Conservatives landing some pretty effective attacks on Keir Starmer, including forcing him to publish this evidence.

8:34I say forcing because there was no evidence beforehand that he was about to. All that said, I think overnight, now that this material has been produced, these are the statements from the Deputy National Security Advisor, Matthew Collins, I would say that sort of somewhat unexpectedly, I think the focus has now switched to the Director of Public Prosecutions, Stephen Parkinson. And there are quite a lot of questions about, well, hold on, this evidence seems pretty compelling. It's what you appeared to want. Why did you then abandon the case? Or if it was never going to be the case, if it was never going to be the situation, this kind of evidence would work.

9:13Why did you pick it up in the first place? And it reminds me a bit of sort of political rows where suddenly a sort of public official who's up until that point, largely anonymous, sort of suddenly comes into the spotlight. I'm thinking of like Michael Howard's row with Derek Lewis, for those long memories, mainly famous now for the Jeremy Paxman interview with Michael Howard. But Lewis was the director of the prison service. Or if you look at the Westland scandal back in the 1980s, which caused Michael Heseltine to resign and Leon Britton to, I think, be fired, ultimately. Again, it all involved the role of officials.

9:52And it's sort of extraordinarily ironic that potentially we're about to, the next twist of this is going to be a row between the former director of public prosecutions, our current prime minister, Keir Starmer, and the current director of public prosecutions, Stephen Parkinson. But I think that's now where it goes. Although the whole case has thrown a big spotlight on relations with China, China's espionage activities, and how we should engage economically with China. So there's a broader geopolitical or foreign policy implication, maybe geopolitical is too grand, but foreign policy political implication.

10:29But in terms of like the politics, I think now the heat is on Stephen Parkinson. I think that is right. There are a couple of second order issues which are still problematic for Keir Starmer and the government. Keir Starmer said that the witness statement was all about the position in 2023 when the Conservatives were in government but we now know that the second and third statements from Mr Collins which were sent this year quote the Labour Party manifesto from 2024 about the importance of cooperating with China where we can, competing where we need to, challenging where we must. So it's quite surprising to see him quoting the Labour manifesto in a witness statement about two years ago.

11:14I'm not sure it's illegitimate and it's providing kind of context for where we are now, but it slightly contradicts what the Prime Minister said when he was out in India. And then secondly, the Prime Minister... It's not clear, is it, that those later statements really apply to these offences, because these offences occurred, or alleged offences occurred, from the previous Conservative government. And I think, isn't it the safest thing to do if you're an official like Matthew Collins to just quote the Labour Manifesto? I mean, you can't then be accused of kind of... You can't be accused of distorting the view of the government.

11:49And Alicia Cairns, the Conservative MP, foreign affairs expert, was trying to give the impression on the Today programme today that somehow this was illegitimate for a civil servant to quote the manifesto. But the truth is, as you say, it's always the safest thing to do if you're a civil servant to quote the manifesto because there was a manifesto. And then the government got elected on the basis of that manifesto. Keir Starmer was also very clear in Parliament yesterday that there was no meetings or political contact with Mr Collins about the writing of his statement. And, you know, one has to hope that is correct, absolutely, because that is a potential problem for Keir Starmer if it turns out there was.

12:30Ed, more than a potential problem. I mean, that's the... That was an understatement. That would be a major, but it's hard to believe he would say that to Parliament, that no minister or politically appointed special advisor was involved. Because if it turns out that they were in any way, that is big trouble. That's true. Although really hard to believe that Mr Collins was really doing this all on his own in some little cell without any engagement with what was going on around him. The implication is that he read the room, kind of felt the vibe, read the manifesto and then decided off his own bat to write down these words.

13:13And that might be right. And it might be because this was a criminal case and he was a citizen given evidence that that was the way in which things were done. But I still have to say it kind of surprises me. But let's take that at face value. you. The thing we've been debating all week was, and it started a week ago with Mr Parkinson's letter to the Select Committee, that somehow the government was unclear or not tough enough in its view in these witness statements about China. And there was a red herring, were they an enemy? It turned out that the real key phrase was, would the government say that they were a threat?

13:47Not that there were threats, but that China was a threat. The truth is, these witness statements say this in terms i mean it's very strong the language it could be stronger but it's still very strong we now know from what um the dpp told um mps yesterday when he met them that it it was 95 of the way there fell five percent short he's going to be absolutely scrutinized in the next week or two by parliament about what was this five percent he's wanted because you know i don't see what that is so i think he is um under huge pressure now having given the impression that he was the wrong party and pointing the finger at the government in public which is a surprising thing for DPP to do he's got a lot of big questions to answer surprising is a Jim Hacker phrase there that's I know I'm obviously in that mode today slightly mad thing to do somewhat problematic public official however the other thing which we said last week is about government handling of these kind of crises.

14:44And there is a golden rule, isn't there? Two golden rules. One, if something breaks like this, you say nothing, if you're the prime minister or a senior civil servant, until you know absolutely all the facts. And then secondly, you then go out to the media and as far as you possibly can, you put it all out in the public domain and say, that's it, that's a lot, we'll answer any questions. And we were urging a week ago, look, the only people who could really do this for Keir Starmer were Morgan McSweeney, the Chief of Staff, or Darren Jones, his new Chief Political Secretary. And we said a week ago, this has got to be done.

15:24Couldn't be done by Jonathan Powell, because he's actually a Cabinet Office civil servant, and he was off in the Middle East anyway. He's not in Downing Street. Could be done by Keir Starmer. Couldn't really be done by somebody from another department, because they're sort of players in this, but they didn't have full control over the whole picture could have been done by Richard Hermer but actually he is as a law officer has a sort of you know an interest in this and they have not done this at all in the last week we still don't really know the answers to the questions about what happened when you've had day after day drip drip of things coming out is there somebody in Downing Street who really knows everything which went on and why aren't they putting out i mean dan jarvis clearly didn't know and then on tuesday um clearly the cabinet secretary didn't know because he was saying they couldn't publish these witness statements keir starmer let's hope he knows um but as a an example of handling a crisis this is not a good case study of the way to do it because they have allowed themselves to always look behind the curve and therefore they've created the impression that there was something to hide.

16:32And I still think, you know, it's not just the Conservative opposition who thinks they haven't got to the bottom of this. I mean, I feel as though I don't understand what on earth has actually gone on here. And I just don't know why this Downing Street doesn't grip these problems when they're happening in the way that they should. And they really haven't in the last week. I guess maybe it's, you know, still a learning curve, isn't it? I mean, is probably the polite way to put it. What I hope is it doesn't all spill into, you know, I think the attempt to have a constructive economic relationship with China, even if you identify its espionage threat, is important.

17:12Of course. And actually what the Labour government has been saying is very consistent with what Rishi Sunak and Boris Johnson previously said as prime ministers, even if other bits of their government were more sceptical. Anyway, I hope that's not lost in all this. We should turn this also to the Middle East, shouldn't we? I mean, there'll be some interest in Washington over the spy trial, and we're told that the administration is very concerned about sharing secrets with Britain and the like. I don't know if that's really true, to be honest. But they've been entirely focused on the Middle East.

17:45Even though the US government is shut down at the moment because of a row over the budget, the political attention in the US has been on Donald Trump's, let's call it his triumph of diplomacy in the Middle East. Triumph because he has got those remaining live hostages out. There's still a row about the bodies of those who were tragically killed as hostages. But I mean, I'm going to say something which I will probably quickly live to regret. But if this thing holds, don't you think he does deserve the Nobel Peace Prize? I mean, the Nobel Peace Prize has been given, was given to Barack Obama as president only months after he came into office and before he'd actually done anything.

18:33And it was given to other people who've been engaged in the Middle East in the past, like Henry Kissinger received the Nobel Peace Prize. Although I think an American comedian said at the time that there was no point carrying on comedy after Henry Kissinger got the Nobel Peace Prize. But, you know, if Donald Trump, and I think everyone acknowledges publicly and privately, that he was the kind of dominant force, particularly in kind of bringing the Israelis into line, that, I mean, what's the Peace Prize for if you don't get it for something like this? definitely definitely look it was too early to award the peace prize last week but as you said if this peace holds then next year should donald trump get the nobel peace prize of course he should it would be an astonishing achievement i massively hope he gets it i massively hope it holds and that is really hard because look um it is so difficult and messy and dangerous when you're trying to unfold these events.

19:37I mean, Hamas is clearly kind of fighting to hold its position against other kind of gangs and pressures within Gaza. There were those horrific photos, weren't there, of the Hamas people executing other Palestinians in the kind of town square, which we saw. Which Donald Trump sort of shrugged his shoulders at and said, They're all bad guys. They're all bad guys. We don't care. But of course, for Israel and for Netanyahu, the temptation to say, this is reneging and they're not serious and we're going to shut the borders again and we're going to return to conflict. I mean, politically, there is a short term incentive for them to do that.

20:24And Donald Trump has to force them to hold the line. And I have to say, the place where I just sort of slightly part company with you in your analysis is, of course, Donald Trump was the most important person in this by far. But it wasn't just Donald Trump and the Israelis and the IDF. And, you know, we have a silly debate about whether Britain was or wasn't influential or France wasn't or wasn't influential. And the truth is that Jonathan Powell was influential. And I personally think that the upping of the ante and the momentum created around the UN was useful. But the fact is, the Arab League, the Arab countries, Egypt, Qatar, Saudi, others, putting pressure on Hamas and saying the game is up, that was vital.

21:09And that was something which was being done by those countries with Donald Trump. And if that pressure is not sustained from those countries onto Hamas, if they don't force the agreement through, then in a year's time we'll be back in conflict and Donald Trump won't win his peace prize. So it is not just about one man. And, you know, I remember a year ago when we were discussing the American election, Donald Trump at the time was saying he was going to deliver peace in Ukraine and peace in the Middle East on day one. And I certainly wonder why it took so long to get around it. But that just makes me sound a little bit gnarky.

21:44I want him to get the Peace Prize in a year's time, but he's going to need allies and he is going to need massive focus. And, you know, is Donald Trump a massive focus kind of guy? Well, we'll find out. Of course, the debate we've been having on this podcast over the last couple of weeks about Britain's role did spill out into the public debate. and perhaps we should just have this here's a here's a little medley of clips which partly reflect the announcement but then end up with a conversation about the UK this is not only the end of a war this is the end of the age of terror and death and the beginning of the age of faith and hope and of God this is the historic dawn of a new Middle East I want to express my gratitude to a man of exceptional courage and patriotism whose partnership did so much to make this momentous day possible.

22:45You know who I'm talking about. There's only one. Prime Minister Benjamin Netanyahu. Mr. Trump says the war is over, but clearly the war is not over. The IDF is deployed to sections of Gaza still, and Hamas is still on the streets of Gaza. How can you say the war is over? Well, we agreed to give peace a chance. We also agreed, OK, let's get the first part done. And now let's give a chance to do the second part peacefully, which is my hope. We have played a key role behind the scenes in shaping this. It's right that we do so because it's in all of our interest, including our own national interest, that we move to a lasting peace in the region.

23:25Well, Mike Huckabee, who is America's ambassador to Israel, was clearly watching and reposted that clip with the following words. He said, I can assure you she's delusional. She can thank Donald Trump anytime just to set the record straight. United Kingdom. Where's United Kingdom? Where's our friend? Where? Come here. Is everything going good? Very good. That's very nice of you here. It was, that looks, that clip for Keir Starmer looks worse on the video than it does in the sound. I mean, you know. He's basically pulled up to the microphone, isn't he? And then basically it's pretty clear Donald Trump doesn't want him to speak.

24:05And he sort of shuffles back. And, you know, it's not totally clear why Keir Starmer is in row three. There were quite a lot of people in front of him. It wasn't clear totally. I mean, it was a rather last minute event and the seating plan wasn't great. To be honest, Keir Starmer is not going to mind any of that. And this will be a debate about whether or not Britain was or wasn't influential. I mean, you know, this is Trump's ambassador, Mr. Wyckoff. He says, in particular, I want to recognise the incredible input and tireless efforts of National Security Advisor Jonathan Powell. So where is the UK?

24:37Well, the answer is the UK National Security Advisor was absolutely at the centre of the negotiation. um this was not only slightly slightly old that um you know the americans singled out the national security advisors contribution rather than the prime minister's contribution felt a bit like back then this was a few days ago and jonathan powell was a little bit of hot water over the china spies although it feels like he's not been involved um again the one thing i'd say to you edge i don't want to continue our discussion too long but you say the kind of uk's role was the recognition of the UK's role, along with others, was the recognition of the Palestinian state at the UN.

25:18But I think where you can make a more plausible claim that the UK is involved and where Jonathan Powell's personal experience would come to play is some of the features of the 20-point Trump plan in Gaza that resemble the Northern Ireland peace process around decommissioning and the kind of off-ramp for Hamas, not the off-ramp for Hamas itself, but for Hamas fighters or leadership figures who can still have a role in the future of Gaza. And actually, that's the bit that Keir Starmer himself has been talking up when asked, like, what's been Britain's role? That is definitely right. Look, if you go back two weeks ago when we were doing our podcast in the week of the UN, I said there's a big momentum here this could be the moment and I seem to remember you being very dismissive of my idea this could be quite a big moment and it's actually been quite a big moment I don't have to overclaim I'm not going to say that British recognition made the difference but it was definitely part of it frankly though at a time when Middle East peace is in the balance and Donald Trump's Nobel Peace Prize in a year's time is in the balance you and I discussing who was or wasn't right two weeks ago, feels like that we aren't quite statesmanlike rising to the moment.

26:39So maybe we should draw a line. Okay, but the risk of being also a bit unstatesmanlike and looking at the domestic political implications of all of this, I mean, this is a massive relief if it holds, big massive if, for Labour, isn't it? Because the Gaza conflict has been such a sore on the left, the free Palestine movement the prescribing of Palestine action you know all of these things that it's caused such bitterness on the left and and raise real questions about you know support from certain left-wing groups for Labour if if if this all starts to move in a much more positive direction on the ground in the Middle East that's a huge relief for number 10 isn't it look there is no green serious politician or Jeremy Corbyn, New Party, Zawa Sultana politician who's going to say that anything other than incredibly pleased that we are on a path to peace in the Middle East, whatever they want to say about who's responsible for that.

27:45But there is no doubt that for Labour, if this peace holds, that definitely eases a very, very big political problem for Keir Starmer. You are right about that. Although, is that the biggest political problem Keir Starmer is facing? No, it's not, although it's been pretty significant, particularly on the left of British politics. Of course, you're right that the big, big challenge, and the one we're going to turn to next, is the looming budget, the hole in the public finances, and the continuing lackluster and rather inflationary performance of the British economy. And we're going to turn to that next.

28:34Welcome back. So in our old lives, we would be heading off this weekend, wouldn't we, for the annual meeting of the IMF and also the annual meeting of the World Bank, which takes place usually most years in Washington. They do rotate occasionally, but this time it's in Washington. Anyway, our chancellor is going, Rachel Reeves, with a team from the Treasury, and no doubt some other government ministers. And this is an occasion when people sit around the table at this great post-war institution, the IMF, and discuss the state of the world economy. The G20 often meets as well at the same time. And then there are lots of other meetings going on in and around Washington, hosted by private sector banks, NGOs, and so on.

29:18It's a sort of, you know it's a sort of big kind of party conference for the world's finance ministers and and people in um banking and the like um i guess you know if you're rachel reeves going there now you've got some good news and bad news haven't you on the economy which i guess is the context for the conversation we're about to have so the you know the good news is the imf has produced this forecast of how the world economies are doing and among the g7 britain is projected over the next couple of years to have the second highest, second fastest growing economy behind the US. But that's only 1.3%, which historically is pretty weak, but nevertheless, better than the pack.

29:58And we are also seeing a bit of a reduction in bond yields at the moment for GILT. So some of the cost of government borrowing is coming down at the moment, which helps with the budget numbers. But at the same time, the IMF also says Britain has the worst inflation in the G7, over 3 % this year, well over 2 % next year. And that is impacting the kind of cost of living, people's real living standards. And the numbers we just saw this morning from the Office of National Statistics on the performance of the economy over the summer is pretty weak. I mean, it's not terrible. It's not recession or anything like that.

30:35But it was, I think, just 0.3 % in the last three months. So sort of good and bad news, but it doesn't really fundamentally change the kind of overall view, which is things are pretty flat and this isn't the best backdrop for a budget. That's right. I always used to love going to the IMF annual meetings and the spring meetings. Spring meetings always in Washington, but the annual meetings, I think we had one year we went to Hong Kong, one year we went to Prague. I'm sure you went to kind of other countries where they were hosted around the world. most of the stuff which goes on is actually about global economic policy and the management of the international financial system the imf and the the world bank i used to be the chair of the deputies of all of the imfc members so i would chair a meeting in london with like 80 or 60 people from around the world who'd come to that meeting to prepare the agenda on the international side and it's always such an amazing thing to see all these countries who meet and cooperate together.

31:37And on the economic side, they do so without the kind of political pressures that you see in the UN and the Security Council and the General Assembly. However, there is always a side thing you do when you go to those meetings, which isn't about the international economy. It's about giving a story back to the UK about the state of the British economy. And that's what Rachel Rees was doing yesterday, we always used to give a prefiguring of our budget growth forecast at the IMF meetings. And so we would sort of... A prefiguring, not a leak. Not a leak, a prefiguring. The general direction in which we thought it was going.

32:18Certainly, absolutely not a leak, just a prefiguring. And you are catching me out on all of my language today, all of my civil service ease. And that's what she was doing. Look, the reality is, in the short term it helps her politically that um the uk is second in the g7 and um which is basically because the rest of europe is doing even worse than than britain and i think the big message from the imf so far is that um there isn't so far the kind of big hit to growth from the trump tariffs which people were fearing early in the year the imf do call out the worries about inflation persisting in the UK.

32:55But as far as the budget is concerned, it doesn't matter what the UK growth is relative to France or Germany or America. It matters what the growth in the UK is. And as you say, these numbers are weak and the economy has weakened into the autumn. And that means the vital thing, which I think Rachel Rees will now know, is what is the Office of Budget Responsibility forecasting for not just growth next year, the year after, but the public finances. That is the thing which um that she is um thinking hard about and what all the journalists were doing in in in washington this week were trying to read between the lines as to the hints she's giving about the decision she's going to make and although she she made some news i'm not sure she gave too much away yeah i mean i think there's still a big challenge which is what is the narrative for this budget isn't it i mean there's a big question like why are we having another big budget of raising taxes and potentially cutting spending when you told us a year ago that all was fine.

33:57And I don't think she's yet used the IMF visit, but it's only just, you know, starting to try and really shift the narrative. She gave an interview in The Guardian, didn't she, where she said that we could expect further taxes on wealthy people. And then she gave this kind of intriguing statement, didn't she, that she was looking in some of her broadcast interviews, that she was looking not just at tax, but also at spending. Well, certainly that's how it's been interpreted, although I wouldn't say she by any means spells it out. It was an interview with Sam Coates on Sky, and she was attempting to establish a narrative.

34:38The reason why things are hard is because of Donald Trump's tariffs or global instability or Brexit, the downgrading of growth. I think the problem is that it all feels very late to be establishing that narrative now. She really needed to, in a big way, land that narrative a year ago. And the problem was that she didn't do that. She didn't set out why British growth has been so weak for so long in order to motivate what she's doing about it. So a year on, it's much harder for her to persuade people that this is something which has been done to her over years by everybody else. Because as you say, it just begs these big questions about last year's budget.

35:25I also think there's an interesting point, which is this will be her second budget. The second budget should be utterly predictable. I know that sounds a strange thing to say, but you've done your big first budget as a new government. And your second budget, everyone goes, well, I know what she's going to do with the second budget. she's going to double down on the themes of the first budget. She's going to now build out on the reforms she's talked about. I don't know whether it's planning or housing or whatever it happens to be, or some of the tax changes she started to announce. But the fact that people still don't really know what the hell is going to be in this second budget is itself an indication that there's not a kind of continuity of narrative.

36:00We will talk about taxes, won't we, over the next few weeks. So let's just park those for a moment. And that's where a lot of the political heat will be. but what about spending? I think the kind of assumption has been okay so she can't break her fiscal rules and Keir Starmer said they were non-negotiable at the Labour conference because of the bond market despite some recent improvements there from the UK's perspective and she can't really touch spending because of the Labour parliamentary party. The U-turns on winter fuel payments and disability benefits has led to a sort of general assumption that she can't move on spending.

36:36And indeed, she's sort of set the spending envelope in the spending review. And so that's why all the focus has been on taxes. And it should be said today, the IFS say there's a£22 billion hole she needs to fill, or indeed more if she wants to build up more headroom on these fiscal rules so she's not in a similar situation in a year's time. All I'd say is I would watch for, in the context of your prefiguring, I think we would often have a conversation with Chris Giles, the economics editor of the FT, at some point before the budget on what the black hole might be. You might describe a kind of prefiguring conversation and then a very well informed Financial Times model would come up with something.

37:16So I keep our eyes on that if they're still using that method so that we do know what the black hole is going to be. Because there's so many moving parts, quite difficult even for the IFS to guess from the outside. But what about spending. Is it possible, and what about welfare, is it possible she is going to return to that despite the political setbacks of the last year? Well, as you said, we're going to talk about the scale of the black hole and what she does on tax in the coming weeks. And I think my reading of what's been happening this week, and in particular what Downing Street said after Prime Minister's questions about tax is, you know, Rachel Reeves does not want to break her manifesto commitments not to raise income tax, national insurance and VAT.

38:00But I don't know if that is fully settled yet. That may still be an ongoing conversation between number 10 and number 11. Because the problem is, if she's got to get into the tens of billions, and she's not going to break the manifesto commitments, it then leads to a whole series of kind of very difficult, controversial tax increases on particular sectors, the richer sectors of our society. But, you know, there's still a backwash from the rise in taxes on farming a year ago going on. So they will be worrying about that. I don't know if that is yet resolved. But on spending, she says in The Guardian, no return to austerity.

38:44If she were three months after the spending review where she set public spending totals for the next three years to reopen that spending review that would look like a crisis and I think that would also lead to kind of great unhappiness because there was already a lot of worry about are waiting times coming down, is the child care commitments from the government properly funded? Are police budgets going to be sufficient in order to deliver the neighbourhood policing which has been promised? Lots of local authorities under massive financial pressure with local elections coming up next year around things which are very public and salient and very reformy in terms of the ability of Nigel Farage to get cut through on them.

39:33So I would be surprised if she goes back to that. However, welfare, that is the question. They tried early in the year to get through a£4.8 billion a year welfare cuts programme and failed because as you say, that was knocked back by Labour MPs. And part of the problem in the spring when they were doing this is they led with the cuts and getting the money in. And these were cuts to benefits which went to all disabled people, personal independence payments. That's now off the table. Stephen Timms, the minister, has been given a remit for a review. It's not going to report until next autumn. The briefing is that this will be revenue neutral.

40:14This is not going to make big savings. It's about making the system work better. So a lot of the very painful, controversial cuts to payments for people with disabilities looks to me in the long grass for the parliament. But there are straws in the wind around the way in which the welfare system in particular bites on young people. And we've seen a big rise in the welfare bill, a big rise in the incapacity benefit bill. The number of young people under 25 who are getting those benefits has doubled in the last five years. So many more young people not in work and not looking for work, but instead receiving incapacity benefit for sickness.

41:00And 80 % of that is mental health related. First of all, we had at the conference Rachel Reeves, kind of surprisingly really, making a big announcement that she was going to abolish long term youth unemployment by having a guarantee for everybody out of work for 18 months or more, they would get a job or training and they'd have to accept it. That was for people aged under 22. I think isn't that resuscitating a policy from the Brown Premiership? It was. It was a new deal in 1997, the new deal for young people. At the time, though... But I think the paid job element actually came a bit later, didn't it?

41:42No, it was definitely in the original package. £75 a week subsidy, one of the four options. At the time, it was four options, but no fifth option, simply staying on benefit. But that was about unemployment, when youth unemployment was a big deal. Youth unemployment, much lower now. The issue is people who are outside the labour market, not actively seeking work, because they're classified as being sick. We then had Pat McFadden, the new Secretary of State for Work and Pensions, announcing the week after the Labour Party conference, or two weeks after, that he was going to put job centre advisors into GP surgeries to help people who had incapacity or sickness issues to find work.

42:27And lots of GPs saying, you know, is this going to be sort of stopping people going to GPs because they'll be worried they're going to lose their benefit? And Pat McSadden saying, no, we need to help people to get into work. And it's going to be all quite voluntary. But I think there's something happening here. I think what they are thinking about doing is putting the squeeze on young people on incapacity benefit who are, say, under 22, who aren't looking for work, who are in danger of getting stuck for decades of a life on benefit and not in work, and saying that this guarantee of a job and training isn't just for people who are unemployed and looking for work.

43:06it's actually going to apply to people who are currently classified as incapacity because they have had a GP note. And I put this to Pat McFadden on Good Morning Britain, and I thought his answers were really, really interesting. What people are wondering is how you're going to make the savings, which you need billions of pounds from this huge rise in people who are on incapacity sickness benefit rather than actively looking for work. They're wondering what you and the Chancellor are planning for the budget And what they think is going to happen is that people who were given that diagnosis of being unwell, of being sick, having mental illnesses, that they were therefore not required to look for work, you're going to say, change the benefit rules and say, certain medical categories, you'll have to look for work, you'll have to take a job.

43:56and if you don't, you would have a benefit sanction. Is that where this is going, that young people who are at the moment classified as sick will still have to look for work or lose their benefit? Well, I think we should be concerned about the number of young people who are being classified as sick. The number on long-term sickness benefits under the age of 25 has more than doubled in the last five years. 80 % of them are citing a mental health condition for that. But I do believe we should start with young people. That's why we announced a youth guarantee at our party conference last week to take a much more active approach to this group of people who we refer to as not an employment, education or training.

44:40That group has been growing in recent years. So, you know, we are the Labour Party. We believe in the value of work. And I want to get the right help and support to people who could work if they had access to such help and support. and that's what the programme today is all about. You're saying that the youth jobs guarantee will apply to people who are not just unemployed but also on sickness benefits and therefore if they don't take the job which is on offer, that guarantee, they could lose their benefit even if it is a disability or a sickness benefit. No, I'm not saying that. I think, though, that is what he's saying and that is where they're going in the budget.

45:19Pat McFadden, BBC says he's not ruled out tightening up eligibility for universal credit. or removing entitlement for health-related universal credit payments to those under the age of 22. Senior Labour source told The Independent, welfare is not life on welfare, it's a way to get people into work. Don't you think that what they are doing here is moving towards changing the rules in the budget to get people who are currently on sickness benefits who are young back into work? I have to say, I think it's the right thing to do. They've not announced it yet, but that feels to be one way in which they could attempt to score savings in the budget?

45:55Yeah, I mean, I think on there are sort of three things you were thinking about here. First of all, there's the very good policy objective here, which is to deal with this huge problem that has emerged over the recent years, not by any means of the Labour government's making, because, you know, a lot of the increase happened since COVID. And, you know, clearly, someone who goes on to these sickness benefits at the age of 20, 21 is, as you say, quite possibly going to spend 60, 70 years on these benefits. So that's a good thing in itself. Second, however, when it comes to kind of scoring savings, I think the big question is sort of stock and flow.

46:33To get the bigger numbers, you have to be reducing, from the point of view of trying to fill a black hole, you need to be kind of reducing either eligibility or the amount of money going to existing claimants. And that's what they were trying to do earlier this year, more broadly, with personal independence payments. That's where they got their five or so billion pound sum from. If you're just restricting the flow on, it might be a good thing for future claimants, and it might start to save money over time, but it's not going to solve her kind of black hole problem tomorrow. And finally, I think, you know, a big potential vulnerability of this Labour administration, if you think of the next election in four years time, is going to be a sense that the benefit system is too generous, that it is being abused, particularly on the kind of sickness benefits side.

47:24I thought it was interesting that Kemi Badenock, for example, raised the motability scheme, which is around new cars. New cars in Britain either go to companies who buy them for their workforces or for people on this who are disabled. People who aren't disabled can't afford new cars. And it creates a kind of general irritation. And that's a vulnerability which if I was Labour, I would definitely be looking towards. If I was the Labour high command, I don't think the Labour Parliamentary Party particularly understand that at the moment, and the pressure is in the opposite direction. So there's also a sort of political imperative for Labour to try and get a handle on this.

47:58I think there is no way they are going in this budget to go back to existing claimants on personal independence payments. That's all for this Tim's review for next year. That caused them massive problems. but I think when I listen to Pat McFadden speaking there he's not talking about new young people under 22 who are going on to sickness benefit for the first time he's talking about the existing stock the huge numbers the hundreds of thousands of young people who are currently on sickness benefit and he's saying he's going to change the rules for them I think that he and Rachel Reeves are going to say by the time of the budget they're going to expect certain categories maybe not everybody if you have a severe mental health issue it might be different but they've but for many people they will be saying you need to look for work and you need to look for training I would say my kind of the the the mistake in the spring was to make this about cuts and savings and they have to make this about work and as you say stopping young people getting stuck in a spiral of worklessness which turns out to be blighting for their whole lives they have to go out and make that positive argument for individuals as well as for our society.

49:14But the other thing I would say is, you know, the lesson from the spring is don't wait too long. You know, don't wait for the speculation to build between now and the budget, so that by the time you get there, it all looks like it's about filling Rachel Reeves's black hole. If they're going to change the rules here, and as you say, on the stock as well as the flow, on the existing claimants, they should go out and make the principled argument right now this is the right thing for opportunity for young people as well as for the economy and where you know a side benefit will be over time they'll make savings um if they lead with the savings or wait and allow that to become the political test then it goes wrong so you know i i've actually thought pat mcfann did good interviews there but if i was him and rachel reeves i wouldn't wait till budget day i'd get out and make this argument now so all All of this, of course, is in the context of the Labour Party's overall political performance.

50:09And the latest opinion polls are as difficult for Labour as they has ever been. And there's no evidence of a conference bounce. By the way, there's no evidence of a conference bounce for the Conservatives either. And two places where I think this is really showing up are in Wales and in Scotland. And we are going to turn our attention to the political climate in both nations after this.

50:42so welcome back and we are going to um turn our attention away from westminster although actually in a way which is hugely important for what's going to happen in westminster in the next few years it was prompted by a question from rob osborne who's the national correspondent for itv news in wales and um great surname great surname um i've known him for um spelt correctly as well i wonder if rob is his actual name or whether he's also called you know theseus or uh richard sebastian or something anyway um but but he um he's a very very well respected journalist in wales and also had some kind of great social media hits over the last few years but he sent us a question for EMQs.

51:26And we thought it was a sufficiently important question he was putting to us that rather than doing it in EMQs, we would actually do it in the main podcast. Not that our questions on EMQs aren't important, Ed. No, but I think... You might be giving the impression that somehow it's a kind of second class of citizen whose question doesn't make it to the main podcast. To be honest, George, that thought never came into my mind until you put it there. And also in the minds of the tens and hundreds of thousands of people who listen to this podcast, which may have been ill-judged, but there we are. Rob Osborne, ask us a question.

52:00Hello both. You recently had a question about Scotland and the elections there in May, but Wales is also going to the polls that day and I'd suggest the results here could be even more interesting. Labour, having been in power since 1999 and having won every election for a century could slip to third place. The Conservatives could fall from the main opposition to fourth. So who becomes the biggest party? Well it's a toss-up between Plaid Cymru and reform if you believe the polls. Quick spoiler alert here, just because you're the biggest party doesn't necessarily mean you'll be in power but that's for another day.

52:44Wales could very well be the story in May, but why does it so rarely get serious focus or scrutiny on the UK stage? Is it partly because, unlike Scotland with its constitutional questions, there aren't many prominent Welsh politicians or journalists bringing that perspective into the national conversation? I'd love to hear your thoughts. well it's a great question from rob and you know i would just sort of say you know neil kinnock anaren bevin lloyd george there have been some pretty big massively prominent welsh politicians over the last um a century as well as okay here's a quiz question for you who's the only prime minister to have been born in wales oh i don't know guess go on julia gillard of australia no well i would not have i would not have guessed that So David Lloyd George, who people often say, oh, he was born in Wales, was actually born in Manchester.

53:41But on Rob's kind of marriage… By the way, we're doing a quiz round, aren't we? A great kind of Westminster fundraiser for charity in about a month's time. So we've been exchanging some questions that we might be asking. I might have blown that one now. That's right. It's a quiz in memory of Chris Martin for Sarcoma UK. He was the principal and private secretary to a series of prime ministers, also was head of media when I was at the Treasury. So that is a good question. On Rob's question, first of all, narrowly, on this journalist point, if you go back over the last 10, 15 years, John Humphreys, I mean, I hesitate to say Hugh Edwards, Gito Harry.

54:22There have been a series of big Welsh journalists in Westminster, although, you know, and for different reasons, they are no more. But even now, Paul Brand, very successful award-winning journalist for ITV. He is a Welsh journalist who's kind of driving the news in the UK. But I think Rob is right that probably the constitutional interest in Scotland and independence. And the fact that you have the SNP as an avowedly leave the UK party has meant that there's been more political focused and maybe more resource focused from BBC, ITV newspapers than into Wales, where Plaid, although they are the nationalist party, they always push away the idea that Welsh independence is their short to medium term goal.

55:17It's a long-term aim, but they don't make that part of the here and now. And therefore, Welsh politics is less significant, usually, for the composition of the UK going forward. Do you think that explains it? I think it's partly about relative size, isn't it? I mean, Wales is smaller than Scotland. You know, three million people live in Wales. Five and a half million people live in Scotland. But of course, these are themselves smaller than some of the English regions, like the northwest of England, where I was an MP. I think it's also that the Welsh economy is more fragmented than the Scottish economy.

55:52I mean, the Scottish economy is obviously Edinburgh is completely different from the Highlands, but it's quite distinct from the English economy, whereas North Wales is very connected into the kind of Chester, Liverpool region, and Cheshire, where I was an MP, and South Wales is connected into kind of Bristol and so on. And journeys famously across Wales are harder than journeys from Wales into England. So there's some of the economic geography. And I think you're right, the independence question. I mean, this, of course, speaks to the history of Wales. Scotland clearly was an independent country until quite late.

56:32And there's always been this question of Scottish independence and, of course, a referendum on Scottish independence within the last 12 years. For Wales, I don't think anyone really thinks Wales has a long history of previously being independent or will become independent in the future. And so that kind of big constitutional question about the union, which, you know, has been with us for a long time, because it used to be about Ireland, now it's about Scotland, doesn't really apply in Wales. And that might be fair or unfair, although I think maybe you could say it allows people to focus on kind of improving everyday life in Wales rather than these constitutional questions.

57:14Although I think an interesting feature of this election, which you drew my attention to, was that this is the Welsh Senate election, what used to be called the Welsh Assembly election for the Assembly or Senate in Cardiff. They've actually changed the rules of this, and there are more Senate members. The voting system's changed, but maybe inadvertently this seems to have opened the door to reform. And the context of all of this is not just that Plaid, the Nationalist Party in Wales are doing better, but as we said with this carefully by-election, reform are doing very well in Wales. And therefore what happens in Wales could be prefiguring, to use our favourite word of this podcast this week, what's going to happen in the rest of the UK.

57:58That's right. So let us take Rob's fundamental challenge, which is talking more about Wales and its importance, seriously. As we said at the beginning of the podcast, there's a by-election in a week's time in Carfilly. That's happening after the very sad death of Heffin David, the Labour-Senate member, back in August. At the moment, the latest polls have reform slightly above 40%, plied two or three points behind, neck and neck. Labour in the teens, the Tories and the Lib Dems behind again, you know, an earthquake, because I think the last time that seat was fought, reform only got 2 % of the vote.

58:39I actually rang Rob yesterday and said, what is the big thing which we are missing of Westminster significance? And he said, well, it's not just that if these polls are right in Caerphilia, then next year in the by-election. This could be the end of Labour essentially being the biggest, most powerful political party in Wales, a position it has held consistently, not just since the beginning of the Assembly, but in the last hundred years in British politics. But also, you could end up with, and it is true that the slightly unusual changes they're making in the voting system, They're going to move to a full list system.

59:18So everybody's elected off a list and with 16 super constituencies. But, you know, it's proportional, not 100 % proportional, more proportional than it is at the moment. But in that system, reform could now, next May, be the largest party. Although, as Rob said, the way Welsh politics works is it's very unusual to have one party win a majority. So therefore, it's always about coalition making. And if reform is the largest party, but plied Labour, the Lib Dems decide to go back to what they're used to, which is working together, you could hand over to Nigel Farage the massive PR opportunity of being the largest party in an election, but being excluded from government by the establishment parties who block them out.

1:00:14On the other hand, could you imagine... That's quite a continental European situation, isn't it, that you've seen in the Netherlands and elsewhere, and indeed in Italy, though not in recent years, where the attempt to exclude the kind of, quote, far-right nationalist party often ends in tears for the mainstream parties. So it would be a gift for reform. He also told me, I hadn't realised this, that reform are very Welsh-orientated. A lot of the senior people around Nigel Farage and his team have Welsh heritage and pay a lot of attention to Welsh politics. And so therefore, they're obviously on this.

1:00:54What is going on in Wales? Look, it's always hard if you are a Labour government locally with a Labour government nationally. Same with the Tories. It's harder if the national government is unpopular. And clearly, Keir Starmer is unpopular. In Wales, you've had three first ministers changing hands in a short period of time. You've had turbulence with the previous leader Vaughan Gething being kind of turfed out, having to resign over a scandal around donations. You've had some unpopular policies around imposing 20 mile an hour road limits. But I think the other thing which is really interesting, I'd forgotten this, that Wales voted for Brexit in 2016.

1:01:40It's very different from Scotland. Big difference from Scotland, isn't it? And therefore the sort of political culture of Scotland, yeah. So while Scotland is seen as being more left-leaning, there's always been a reform style vote there, more left-leaning and voted for Remain. Wales voted to leave, always been a sort of more of a traditionalist, you could say small C conservative tradition within the Labour and the Conservative votes. And that is something which at the moment is playing into reform's hands. And so, you know, there is a sense that this is showing the kind of direction that you might be seeing in other English seats as well.

1:02:22I mean, isn't it also, I think a bit of a wake up call to people like ourselves and Westminster that if you just see Farage and reformers, English nationalists, which is, I think, how they're often portrayed. And I think, you know, a lot of Labour MPs would see them as that. That's a big mistake because their nationalism has an appeal in the kind of industrial parts of South Wales and the left behind mining communities of the valleys. And, you know, some of the more depressed parts of North Wales and equally in Scotland. You know, he does cross the border. But, you know, it used to be said that kind of Boris Johnson's form of English nationalism or kind of Brexity approach didn't translate north of the border in Scotland.

1:03:12But Farage does seem to have purchase in both of these areas. And maybe you should, we shouldn't really describe it as English nationalism, as a form of kind of British nationalism. Britain first, our communities have been abandoned. Neither of the mainstream parties have done anything for us. We've got to keep the foreigners out. I mean, I think it's just a very salutary lesson if they are doing well in Wales. And the polls suggest they're doing pretty well in Scotland, although the SAP are on the rise in Scotland. They're clearly more dominant there, having been set right back in recent years with the problems that the nationalists had over various scandals and the result of the last general election there.

1:03:55so you know it's just a warning isn't it of what's coming. It also lays down a big kind of challenge of political strategy for Keir Starmer and the Labour Party in Westminster and the kind of relations and the election campaigns they're going to be fighting in Wales and Scotland because there is clearly a disgruntlement and, as you say, a feeling of not having been listened to and things not getting better fast enough, and that's cost of living and the National Health Service and all those kind of things which Farage can feed into. And the strategy at the moment from Keir Starmer's speech is to attack reform and to expose them for who they really are.

1:04:42But you have to be careful that if you're only negative, does that fully land when people feel as though they're not being listened to and they're not being engaged with? And if you look in the polling, I mean, it is true to say that Wales has always been less independence-minded. But if you look at support amongst young people for independence and for plight in Wales, it is on the up. And there is a very important set of polling which John Curtis did in Scotland, just came out a couple of weeks ago, pointing out that in Scotland, it's not just the SNP on the rise because there's disgruntlement about Labour in Westminster.

1:05:24There is also, there has been a lasting increase in independent sentiment, particularly amongst young people in Scotland. And remembering back to some of the conversations we had, actually at the inside the room we did with Nicola Sturgeon and looking at that run up to the 2014 referendum and the lessons from that. I've never had a conversation with Gordon Brown about Scotland where he didn't go on at me about the importance not only of being negative but having a positive message that you have to have a message which says Scotland will do better in Britain and that Labour in Westminster or the government in Westminster wants that to happen.

1:06:05And the same thing may be applying in Wales as well. And if these elections are fought with reform emerging as potentially a big threat in Scotland, it would be reform, but also the SNP applied in Wales. And the political campaign is independence is bad, reform are dangerous. Therefore, you've got to vote for us. You've got to vote for the status quo. So that wasn't a winning argument in the run up to 2014. Gordon would say, I think we probably accept there's some truth in this, that the moving to the positive at the end was important as well. And that as you kind of approach these elections in Wales and Scotland next year, what is the benefit to Scotland and Wales of being in the UK right now with Keir Star and this Labour government?

1:06:58And is that message being sold strongly enough? And is there enough sense of partnership between what's happened in UK and in Scotland and Wales? And I'm not sure at the moment. It doesn't feel to me as though that is the message which is coming out of Downing Street. I don't think handing out flags with the Salter and the Red Dragon and the Cross St. George at the Labour Party conference, as they did, and getting the whole crowd to wave these various flags of the union is really enough of an answer. Anyway, very interesting. Rob, thank you for your question. Maybe we'll check in with you over the coming months to see how things are unfolding in Wales ahead of those Senate elections next year.

1:07:36And we'll obviously look at the result from Carefilly in a week or so's time. But anyway, good to be out across the different parts of the UK and have a look at how all of this is impacting the Labour government in the months ahead. So that is all for political currency. This week, we'll be back on Monday with ex-minister's questions. Thanks to Rob for me as well. Yeah, you can, of course, hear all of this earlier and ad-free if you become a member of our kitchen cabinet. I'm not sure what that is in Welsh. Anyway, our version of the Senate. And you can find the link to subscribe in our show notes.

1:08:11don't forget we're also on youtube search political currency you'll be able to watch all our best episodes and interviews including going back and um watching our inside the room with nicola sturgeon about the 2014 scottish referendum campaign which i think is is is very relevant today thinking about um these 2026 elections in scotland and wales yeah check that out if you haven't already it was one of our best series i think and we will see you next week see you next week

1:08:46Thanks for listening to Political Currency. This has been a Persephoneca production.