Sandgroper-WA
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It's a popular British 'lite' insult. with a twinge of humor. I've always felt that it related more to the 'chaos and incompetence' integral to the behavior of Muppet characters...
Also used along those lines in Australia. I'm sure we've all had to deal with muppets from time to time. The other one you may hear on the rare occasion is "gumby" - less chaos and more incompetence.