Myth of Money: British Prime Minister Resigns as Economy Stumbles

Oct 23, 2022

Welcome to this week’s edition of Myth of Money, a weekly newsletter on the digital asset markets read by 12,000+ investors.

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Dear Investors,

This week, all eyes are on British politics.

Prime Minister Liz Truss of Britain announced her resignation on Thursday, bringing a swift end to a six-week stint in office that began with a radical experiment in trickle-down economics and descended into financial and political chaos, as most of those policies were reversed.
With her tax-cutting agenda in tatters, her Conservative Party’s lawmakers in revolt and her government in the hands of people who did not support either her or her policies, Ms. Truss, 47, concluded that she could no longer govern. (Source: New York Times.)

Truss departs as the shortest-serving occupant of Downing Street in 300 years of British history.

UK's new PM Liz Truss is inheriting a big mess - Global Times

Her resignation speech was as swift as her tenure:

I came into office at a time of great economic and international instability.
Families and businesses were worried about how to pay their bills.
Putin’s illegal war in Ukraine threatens the security of our whole continent.
And our country had been held back for too long by low economic growth.
I was elected by the Conservative party with a mandate to change this.
We delivered on energy bills and on cutting national insurance.
And we set out a vision for a low-tax, high-growth economy that would take advantage of the freedoms of Brexit.
I recognise, though, given the situation, I cannot deliver the mandate on which I was elected by the Conservative party.
I have therefore spoken to His Majesty the King to notify him that I am resigning as leader of the Conservative party.
This morning I met the chair of the 1922 Committee, Sir Graham Brady.
We have agreed there will be a leadership election to be completed in the next week.
This will ensure we remain on a path to deliver our fiscal plans and maintain our country’s economic stability and national security.
I will remain as prime minister until a successor has been chosen.
Thank you.

Despite being in office for merely 44 days, Truss will claim a yearly £115,000 allowance reserved for former Prime Ministers. Truss is also entitled to receive a pension allowance of up to 10% of the £115,000 allowance. Notably, Truss is only the sixth Prime Minister to receive this allowance, which was ratified in 1991 by John Major post-Margaret Thatcher’s resignation.

Events leading to the resignation

In an attempt by the Conservative Party leader to radically reorient the government’s economic agenda, Truss announced that she would be slashing taxes. Truss scrapped the pledge to reverse predecessor Boris Johnson's hike of corporation tax from 19% to 25%, a decision estimated to restore around £18 billion ($20.1 billion) to the U.K. Treasury's coffers by 2026.

In an already heightened inflationary climate, there was no subsequent plan to balance the economy. The announcement sent the markets into a tailspin, and Truss never recovered. By the end, Truss had grown so unpopular that her fellow party lawmakers were publicly contemplating plans to replace her.

The resignation comes only a week after Truss fired Finance Minister Kwasi Kwarteng after less than six weeks on the job, amid market chaos.

Kwarteng was the architect of Truss’s vision for economic growth and a longtime political ally. Truss fired him Friday and replaced him with Jeremy Hunt, Britain’s fourth finance minister. Kwarteng had unveiled a significant shift in the country’s economic strategy, promising to slash taxes for the highest earners and biggest corporations — with no plans to balance the budget.

The British pound’s valuation tanked, and the United Kingdom’s central bank was forced to hike interest rates. Inflation — already at record highs — raised the cost of living further, shredding the Conservative Party’s reputation for fiscal responsibility. Working-class voters were turned off by a renewed sense that the Conservative party represented only the interests of financial elites.

Musical Chairs of the British Government

Truss was not the only politician to depart this week. Home Secretary Suella Braverman also stepped down Wednesday. In her resignation letter, Braverman made it clear she was unhappy with the direction of Truss’s government. Truss’s top aide, Jason Stein, had been suspended after “anonymously” criticizing fellow Conservative lawmakers to reporters. Truss also appointed Edward Argar as Treasury chief secretary to replace Chris Philp in the Treasury’s second most important job which includes management of public spending.

Truss’ resignation sent the pound into a tailspin that left it briefly near parity with the dollar and forced the Bank of England to intervene in bond markets to stave off the collapse of pension funds and sent mortgage interest rates soaring.

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