Five reasons why Liz Truss was forced to resign as UK Prime Minister

Truss is now the shortest-serving PM in British history.

By Rohini Rajhansh On Oct 21, 2022

British Prime Minister Liz Truss announces her resignation, outside 10, Downing Street in London on October 20, 2022. | Photo Credit: Reuters

Less than a month after the newly minted Liz Truss government presented its now infamous “mini-Budget”, the Prime Minister has been forced to resign following a rebellion within her Conservative Party. Truss is now the shortest-serving PM in British history.

To be sure, Truss took office at a precarious time. The UK has been facing long-term economic stagnation on the one hand and double-digit inflation in the wake of the war in Ukraine, on the other.

Here are five reasons why Truss had no option but to go.

The mini-Budget

After the Tories were looking for a leader to replace Boris Johnson, Truss ran on an agenda of reviving growth through widespread tax cuts as well as providing energy price guarantees against rampaging inflation. Her main rival, former chancellor of the exchequer Rishi Sunak, repeatedly warned that her agenda of unfunded tax cuts and spending hikes were a recipe for disaster.

On September 23, Truss’s chancellor and long-time friend, Kwasi Kwarteng, presented a mini-Budget that essentially ramped up spending while also cutting tax revenues. This set in motion a chain of events that ultimately caused her downfall.

As Sunak had predicted, the budget meant that the government’s borrowings were set to spiral. At a time when the UK is facing historically high inflation, this was the worst thing that could have happened.

Market reaction

The mini-Budget spooked market participants because a sharp rise in borrowings at a time when the UK’s growth prospects have been iffy at best implied that the government may not be able to repay the debts it accumulated. In a panic reaction, investors started selling all possible UK assets. As such, the pound sterling fell to historic lows against the US dollar; worsening the imported inflation in the process because it made imports costlier.

Similarly, investors, unwilling to lend money to the UK government, started selling gilts (government bonds). As the price of gilts fell, their yields (or the effective interest rate that the markets charge for lending money) skyrocketed. Within no time, the Bank of England had to step in to stop a financial collapse.

Crisis in pension funds and mortgage rates

A direct result of the mini-Budget and the fall in gilt prices (and a rise in gilt yields) was the crisis it set off in the pension funds in the UK.

Several pension fund managers had hedged against interest rates going up sharply. But the sudden spurt in gilt yields meant that they were on the wrong side of the bet; worse, their assets, the gilts, were losing value. This created massive panic and genuine doubts over the viability of the pension funds.

A sharp rise in market interest rates also meant that those with home loans had to either refinance or risk losing their homes; prospective owners found that a new loan was considerably costlier within no time. And all this happened at a time when millions in the UK are struggling with the cost-of-living crisis, worried about how to stay warm in the coming winter in the wake of high energy prices.

The opposition Labour Party went to town with the message that every homeowner’s mortgage rate had gone up because of flawed Trussonomics.

U-turn upon U-turn

As it became clear that the markets would continue to punish UK assets unless Truss realised her mistake, the PM reluctantly started announcing U-turns. One by one, she started reversing her marquee ideas such as reducing the tax on the super-rich. The biggest blow came when she sacked her chancellor.

While this was seen positively by the markets, it led to the obvious political question: Why did Truss deserve to stay in office when she fired Kwarteng just for voicing Truss’ economic plans? There was no real answer to this question.

The new chancellor

The last nail, as it were, came in the form of the actions of the newly appointed chancellor Jeremy Hunt. In the lead-up to the leadership battle, Hunt had sided with Sunak. As soon as he took charge, he ripped apart everything that was left of Truss’s agenda. Soon it became clear that while she was in office, Hunt was in power. From that point on, it was only a matter of time before she went.

Liz Truss