‘The bond vigilantes are back’: Quick reactions to the resignation of U.K. Prime Minister Liz Truss

Rishi Sunak and Liz Truss at the Queen Elizabeth II Centre in London on Sept. 5, 2022. Stefan Rousseau/AP Photo.

U.K. Prime Minister Liz Truss delivered a minute-long speech on Thursday announcing her resignation as prime minister. With only 45 days between her swearing-in and resignation, Truss will go down as the shortest-serving prime minister in U.K. history.

The U.K. Tories will now scramble to find a new leader and prime minister after weeks of turmoil in the markets provoked by a “mini-budget” introduced by the Truss government that featured a large, debt-financed tax cut designed to spur economic growth.

We asked some experts as well as members of The Hub team to tell us what it all means.

Rudyard Griffiths, executive director at The Hub

“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” – James Carville

The resignation of Liz Truss as prime minister of the United Kingdom after forty-five chaotic days in office is an object lesson for the leader of every advanced economy today. In short, the bond vigilantes are back and they are taking heads not prisoners.

The debacle of Truss’ premiership is first and foremost a story of financial markets. The toxic combination of rising bond yield, plunging currency, and soaring inflation caused a crisis of confidence in the U.K.’s finances. Truss’ mini-budget has been blamed for detonating the U.K.’s public purse but the reality is the seeds of the current crisis were sown by previous Tory governments and a decade-plus of outsized fiscal largess.

To state the obvious, one can get away with massive deficit spending in deflationary times where helpful central banks are desperately trying to goose moribund economies by taking interest rates into the zero bound and, in moments of genuine crisis, removing outright any fiscal discipline by buying unlimited quantities of government bonds. But in our new, unexpected era of surging inflation, fiscal policy now faces a brutal market test courtesy of global bond and currency trading desks.

Any government that does not enjoy the exorbitant privilege of a global reserve currency and opts for large-scale fiscal or tax expenditures is now met with a rapid and punishing sell-off of both its currency and bonds, the latter pushing up its borrowing costs for governments and households. Once you ignite the vicious feedback loop of a plunging currency and rising bond yields, it’s all but inevitable you get the kind of crisis of confidence that eviscerated Liz Truss’ entire policy agenda in the matter of just a few short weeks.

Hopefully, Canada’s policymakers and central bank have been paying careful attention to what has just happened in the UK. Like Britain, we don’t have a global reserve currency. Like Britain, we are a heavily indebted nation with a combined government, corporate, and household debt to GDP, as measured on a per capita basis, greater than Greece (no stranger to debt crises) and behind only Japan (who does have a reserve currency of sorts). Minus mass migration, we too have experienced sclerotic to zero economic growth over the last decade.

Our collective productivity is moribund now and into the future as projected by the OECD. Canada unfortunately has all the attributes that make it a tantalizing target for the cruel administrations of the bond vigilantes should our national government succumb to a policy misstep. As such, we need to be thinking very carefully about how we respond to the range of challenges currently facing the country from climate change to health care to protecting the most vulnerable from the pernicious effects of inflation.

To the credit of the current government, they have exhibited to date a newfound attitude of caution. Continuing with fiscal prudence will only, however, get more difficult as the slowing of our economy sours into an outright recession. The cost of an ill-timed, politically expedient outburst of fiscal largess—if we correctly understand what happened in the UK..—will be swift, brutal, and inflict long-term damage on households as well as Canada’s global financial standing.

Sean Speer, editor-at-large at The Hub

My colleague Rudyard Griffiths says that Liz Truss’s sacking as British Conservative Party leader and prime minister is principally a story of the financial markets asserting their sovereignty over politics. He’s right. But another key story here is the leadership selection process that produced a leader who in hindsight lacked a clear constituency of support within her own party.

Readers will remember that the British Conservatives used a hybrid model for selecting Boris Johnson’s successor. The parliamentary caucus narrowed the candidates down to two over a series of internal votes and then the final two—Truss and former chancellor of the exchequer Rishi Sunak—were put to the party’s membership for a final vote. 

Yet the candidate that the party members were most enthusiastic about was Kemi Badenoch who, according to some polls, had the support of close to 60 percent of the membership. Her candidacy wasn’t put forward by the parliamentary caucus on the grounds that she represented something of a risk: she is young, bold, and prepared to take up the fight against so-called “wokeness.”

Conservative members were therefore forced to choose between Truss and Sunsak who advanced not because the parliamentary caucus was energized by either candidate but rather because they represented, in relative terms, lower-risk options. Setting aside that this operating assumption has proven fundamentally wrong, it also meant that as Truss became embattled, she had no core support. Neither the caucus nor the party members were committed in any meaningful way to her leadership. She was a leader without energy, a mandate, or grassroots support. Now she is without her job. 

It ought to prompt questions about the trade-offs inherent in these different leadership processes. There was a sense among some in Canadian political circles that the British Conservative model for leadership selection was superior because it enabled the sober second thought of super-delegates, as well as a truncated timeframe relative to the more egalitarian yet chaotic processes of the Canadian Conservative Party or Alberta’s United Conservative Party. 

Truss’s disastrous tenure and the underlying role of the leadership selection process in elevating her should cause a renewed look at the relative merits of different models. None is perfect. Each comes with benefits and costs. But as Canadian political parties think of their own processes, the legitimacy, enthusiasm, and grassroots support for the leader is something they should think about. 

Blair Gibbs, a Vancouver-based political consultant and former advisor to Boris Johnson

The British Conservative Party may be an old institution but today it is far from stable. It has become a fragile, divided coalition, and Liz Truss was always going to struggle to hold it together. Many Tory members, let alone their new Red Wall voters, are not in tune with their own MPs anymore—on more than just Brexit. And the parliamentary party is still unreconciled to the consequences of Brexit. It never even faced up to the implications of the Johnson victory in 2019 and all the new unfamiliar seats the party won—and what this would mean for key policy choices on the economy or public services.

Setting aside Truss’s capabilities and early missteps, there is also the fatigue factor. Tories have been government ministers for over 12 years in one administration or another. Add to this the Brexit factor, the small aging membership, and the breakdown of parliamentary discipline that started under Theresa May and you have a very unstable organization with roots that are not very deep anymore—and barely there at all in many of the seats it picked up at the last election. That challenge was underestimated by Truss and this tired, grumpy and diverse coalition of interests required of her many leadership skills she did not possess.

Undoubtedly Truss’s 50-day premiership has left many members with buyer’s remorse but this was not just a sorry tale of an individual. These governing tensions are structural for the Tories and no one has a clear plan to fix them. Whatever his failings as prime minister, Boris Johnson was a liberal Tory who campaigned for and delivered Brexit. And he had exceptional skills as a communicator. That allowed him a unique role in holding this fragile Tory coalition together, even if many of the underlying fissures were glossed over. Now it will fall apart.

The economic challenge was and is enormous. It will be a poisoned chalice for whoever succeeds Truss. If the MPs alone had decided the election for his successor, the economic malaise caused by high taxes, poor productivity, and the COVID destruction of the public finances would still have been there but the financial crisis triggered by Truss’s irresponsible borrowing plans would not have materialized. The media consensus is at least right about that.

When asked, the Conservative Party’s 2019 voters and many members want Boris back—a fact that the London-based media class cannot really comprehend. In any other decade, the MPs, members, and voters would have been aligned on Rishi Sunak’s strong appeal as a young, serious, ethnic minority candidate from a northern seat who backed Brexit. What’s not to like? Not to mention a very capable minister. However, at this time those attributes were not enough for party members who should have known Truss’s limitations but took a gamble on her anyway. It did not pay off.

It feels like the party’s MPs are staggering towards one of three real choices: restoring Johnson in the hope of reviving the party’s wounded body for one last battle with Labour in 2024; choosing Rishi in a coronation and hoping that he can stem the bleeding of votes to Labour and hold onto more 2019 seats; or roll over and face a Canadian-style electoral wipeout under anyone else.

Eric Kaufmann, professor of politics at Birkbeck College, University of London

Liz Truss’ mistake was to simultaneously promise generous fuel subsidies while pursuing tax cuts and hiking borrowing, all in the hope that the extra money would trickle down into growth numbers and markets wouldn’t panic. It was a gut-driven, high-stakes gamble driven by the hubris of a clique of libertarians who had been making their way through the party for two decades.

Basically, the Tory party is full of libertarian MPs who chafed under the economically centrist regime of Boris Johnson. Such people, if they backed Brexit, did so either for career reasons or because they thought leaving the EU would open up a global panorama for a free-trading “Singapore-on-Thames’”, unencumbered by EU regulation. With Johnson gone, they hoped to unleash “Britannia unchained” and “go for growth” by flipping a few fiscal levers. Truss is their candidate.

The members (as distinct from MPs) picked her because they thought she was less of a global elite figure than Sunak, closer to their concerns, and because she has occasionally said conservative things about wokeness. Truss did well among the Brexit voters who did not see Sunak as reflecting their more nationalist orientation. In reality, Truss governed as a libertarian, did nothing on populist issues, and even tried to increase immigration.

Just seven percent of 2019 Tory voters want increased immigration, and the vast majority don’t want to shrink the state—both policies pursued by Truss. A successor should lean into the realignment that has replaced economic issues with cultural cleavages. This means reducing immigration, addressing the rise of wokeism in institutions like schools or the NHS, levelling up the regions, and steering a centrist path on macroeconomics.

Basically, the Conservative MPs are far more economically right-wing and culturally left-wing than their voters, with members in between. Unless the Conservative Party can reform its MP selection process and sideline the libertarians, it won’t be able to reconnect with the only people who will vote for it—namely culturally conservative voters, most of whom voted for Brexit in 2016 and are extremely disillusioned with what’s on offer.

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