U.K. Prime Minister Liz Truss Resigns After Tax Plan Caused Market Turmoil

LONDON — Britain’s Prime Minister Liz Truss said she will step down after a risky plan to cut taxes and boost spending caused turmoil in financial markets, forcing her to withdraw and the crumbling of her political authority.

The 47-year-old will become the shortest-serving prime minister in British history and the third Conservative leader to be ousted from office in as many years. Ms. Truss said a leadership election would be held within the next week to find her successor.

“I recognize that, given the situation, I am unable to fulfill the mandate for which I was elected by the Conservative Party,” she told Downing Street on Thursday.

The resignation comes months after rebel lawmakers ousted Boris Johnson from the post of prime minister following a series of scandals.

Ms Truss’ successor will have to navigate a political crisis and economic turmoil, with the UK grappling with stagflation – the combination of slow growth and high inflation. The new leader is almost certain to face a long winter of discontent, with forecasts of falling real wages, unions promising a spate of strikes and many voters calling for new elections.

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There will now be an accelerated process to find a new Conservative Party leader who will automatically become Prime Minister. The current leader is former CFO Rishi Sunak, followed by Cabinet Secretary Penny Mordaunt, according to the betting company. However, given that the party is divided by ideological divisions in the economy, it is not clear which candidate will unite the party ahead of an election expected in 2024.

The Conservative Party has yet to explain in detail how this accelerated leadership contest will work, but government officials expect Tory lawmakers to vote among themselves to choose the next prime minister. “This will ensure we remain on track to implement our budget plans and safeguard our country’s economic stability and national security,” Ms. Truss said.

The pound rose 0.4% to $1.126 and the benchmark 10-year UK government bond yield was broadly unchanged at 3.887%. “We will need higher rates, we are in a deeper recession than we were a month ago, it is very difficult to see how these fundamentals will change with a new PM,” said Simon Harvey, head of FX research at Monex Europe.

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British voters and businesses will hope that Conservative lawmakers can choose a successor who will ensure stability and continuity. Political instability is a source of economic uncertainty, and 35% of companies surveyed through Oct. 16 said it was weighing on their operations, the Bureau for National Statistics said on Thursday.

“Political instability is not good for investment decisions,” said Eiko Sievert, an economist at Scope Ratings, a rating agency. “Recent developments are negative for the economic outlook and a fall in production is likely next year.”

The resignation ends a chaotic six weeks in British politics. Conservatives lost confidence in financial markets after Ms Truss announced a plan to borrow billions of pounds to fund the country’s biggest tax cuts since the 1970s to boost economic growth. The plan, coupled with a costly household energy subsidy, proved too much for investors.

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Ms Truss’s popularity plummeted, and voters worried about the economic chaos that would result from her plan. Government borrowing costs soared, the pound hit a record low against the dollar and the Bank of England intervened to stabilize the government bond market. Mortgage rates rose quickly in anticipation that the central bank would have to raise rates further to curb inflation.

Ms Truss, a veteran cabinet minister and former foreign secretary, tried to backtrack on her economic proposals by sacking finance chief Kwasi Kwarteng and reversing a handful of tax cuts. Under continued pressure from investors, Jeremy Hunt, Mr Kwarteng’s successor, said on Monday that he would scrap almost all of the tax cuts Ms Truss has campaigned for.

Liz Truss speaks at the House of Commons in London on Wednesday.


Photo:

Jessica Taylor/Agence France-Presse/Getty Images

This stabilized markets, but political chaos only grew in the days that followed amid partisan infighting. In the end, Tory party officials decided they had no choice but to force Ms Truss to resign. At the time of her resignation, she had the lowest public approval ratings of any prime minister since the early 1990s and was becoming deeply unpopular even among conservatives. A YouGov poll this week found 55% of Conservative voters wanted her out.

Many conservative lawmakers felt they had no chance of winning an election in 2024 with Ms. Truss at the helm. According to Redfield & Wilton, the party is 36 points behind the opposition Labor Party, a poll deficit unseen since the 1990s. The UK’s reputation for economic excellence has also taken a hit as the growth plan has been derided by institutions including the International Monetary Fund and a parade of political leaders including President Biden.

Things came to a head on Wednesday when the already badly wounded government told Conservative lawmakers that failure to vote against an opposition bill to block fracking in Britain would result in expulsion from the party – a risky move for a government in Difficulties of a credibility crisis.

In extraordinary scenes, several lawmakers refused. An opposition MP said he saw government officials crowding their own party members into the parliament building. The government finally relented, saying lawmakers could vote as they please but face unspecified consequences. The threats were the last straw for some lawmakers.

“This whole affair is inexcusable. It is a pathetic reflection of the Conservative Parliamentary Party at all levels and reflects very badly on the government at the time,” said Charles Walker, a Tory MP for the past 17 years. “I hope all the people who put Liz Truss in 10th place [Downing Street]I hope it was worth it… Because the damage they have done to our party is extraordinary.”

Ms Truss’ tenure is expected to be the shortest in British history, dwarfing that of George Canning, a Tory leader who died in 1827 after 118 days in office as Prime Minister. His successor, Frederick John Robinson, resigned after 144 days in office. the shortest tenure for a prime minister who did not die in office, until Ms. Truss.

The rapid rise and fall of Mr. Truss is a stark lesson for global leaders about the risks of trying to use stimulus packages to boost their economies at a time of rising inflation and rising interest rates.

Ms Truss’ advisers said balancing the books was hampering the government’s ability to stimulate the economy by using debt to fund tax cuts and Western nations, already mired in a cycle of low growth and ever-rising taxes, to fund the UK public services. Ms Truss’ team expected markets to absorb the debt the UK government was offering in return for the prospect of 2.5% annual growth.

But Ms Truss, a former chartered accountant for Shell PLC and other companies, and her allies refused to have the tax cut and energy subsidy plan evaluated by the independent Bureau of Fiscal Responsibility, which usually releases an analysis along with new government budgets to consider their impact on public finances .

The strategy backfired. Analysts estimated Ms Truss’ plan would have cost the government around £70 billion ($79 billion) in lost revenue. There were broader concerns that the government was working at odds with the Bank of England in stimulating the economy while the central bank introduced measures to cool inflation.

Ms Truss, a longtime cabinet minister, was a surprise choice as prime minister. After Mr. Johnson left as head of state, many lawmakers tipped Mr. Sunak to take over. Ms Truss came second in a runoff among Tory lawmakers. She and Mr Sunak went to a final round of voting among Conservative Party members.

During this campaign, Mr. Sunak repeatedly warned that Ms. Truss’ plan would cause economic chaos. But Ms Truss impressed the party’s 160,000 members by presenting herself as a modern-day Margaret Thatcher while railing against what she called “Treasury Department orthodoxy”. Despite a delivery that some found stilted, members liked what they heard and voted her to Downing Street.

Entering Downing Street, she promised a supply-side revolution to boost growth. Ms Truss’ tenure was made even more surreal by the fact that it spanned the death of Britain’s longest-serving monarch, Queen Elizabeth II. That meant Ms Truss observed a 10-day period of mourning during her short tenure and was unable to announce government policy.

Ultimately, their about-face in economic policy did little to mollify their critics or reassure investors entirely. “An arsonist is still an arsonist, even if he runs back into a building with a bucket of water,” said Rachel Reeves, the opposition Labor Party’s shadow chancellor.

write to Max Colchester at [email protected]

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