The Daily - The Rapid Downfall of Liz Truss

Episode Date: October 21, 2022

Prime Minister Liz Truss of Britain has resigned after only 44 days in office. Hers is the shortest premiership in the country’s history.What led to her downfall, and why has Britain entered a period of such profound political dysfunction?Guest: Mark Landler, the London bureau chief for The New York Times.Background reading: Prime Minister Liz Truss’s resignation, yet another episode of political instability, only added to Britons’ concerns and frustrations over galloping inflation and a looming economic crisis.Her fate was sealed three weeks ago when currency and bond traders reacted to her new fiscal program by torpedoing the pound and other British financial assets.Penny Mordaunt, Rishi Sunak and Ben Wallace, all current or former Conservative cabinet members, are seen as candidates to replace Ms. Truss. For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. 

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Okay, let's start today's show. From The New York Times, I'm Michael Barbaro. This is The Daily. After just 44 days in office, British Prime Minister Liz Truss has resigned, making hers the shortest premiership in the country's history. Today, my colleague, London Bureau Chief Mark Landler, on what led to her downfall and why Britain has entered a period of such profound political dysfunction. It's Friday, October 21st. Hey, Mark. Hey, Michael. How you doing?

I mean, good Lord, what a hot mess that country is. It's really amazing. So we want to talk about how it is that the Prime Minister of the UK touched off an economic crisis and self-immolated. of the UK, touched off an economic crisis and self-immolated. So tell us the story behind Liz Truss's downfall and what I think will be going down as the most disastrously short prime ministership in the history of Britain. Well, to really get to the beginning of this, you have to go back to the summer when Boris Johnson was forced out of office after a series of scandals. And there's a contest within the conservative party to decide who's going to replace him. The two candidates who ultimately emerge are,

of course, Liz Truss and a guy named Rishi Sunak. Truss was the foreign secretary under Boris Johnson. She served in the parliament for many years. And she's a real diehard conservative who is trying to fashion herself as the next Margaret Thatcher, a sort of a free market evangelist, very much in the Thatcher mode. Sunak, on the other hand, is this wealthy former hedge fund manager. And he's actually served as the equivalent of Treasury Secretary under Johnson, but resigned from Johnson's cabinet in the midst of all these scandals.

And what was the defining dynamic of the Truss-Sunak contest? Well, it really broke down, if you want to get to the most simple terms, to the question of taxes. Liz Trust basically said, I'm going to cut your taxes. I'm going to cut corporations' taxes. And in doing so, I'm going to unleash this new era of much faster economic growth.

Rishi Sunak said, wait a minute. I'm not opposed to reducing taxes, but we are in a period of double digit inflation. Interest rates are going up. We need to tame inflation before we can start talking about reducing taxes. And Mark, can you just explain for the economically challenged why cutting taxes in the minds of people like Sunak would be a problem in an inflationary period. Why he told her and the country that this was a bad idea. Well, basically, when you're in an inflationary situation, when prices are high and rising, and you cut people's taxes, essentially, you're putting more money into their pockets.

And you're, in a sense, fueling the inflation because people are going to spend more. And rather than curbing inflation, you're actually adding to it. And indeed, in addition to Sunak, you had lots of economists and investors and others who were also saying that Liz Truss's policies were, in the words of Sunak, a fairy tale. that Liz Truss's policies were, in the words of Sunak, a fairy tale. Nevertheless, Truss beats Sunak. And the reason she does has to do with the peculiarity of parliamentary law in Britain.

Because Truss is replacing a sitting prime minister, she doesn't need to win in a general election. She only needs to win in this intra-party contest, which in this case involves winning the votes of roughly 160,000 rank-and-file members of the party. And who are these people? Well, they tend to be older, whiter, richer, and more conservative than the country at large. These are people for whom a tax cut is uniquely attractive. So that message is really tailored to them, and they respond to it, and she wins the contest. Good afternoon.

I have just accepted Her Majesty the Queen's kind invitation to form a new government. Trust takes office. I have a bold plan to grow the economy through tax cuts and reform. On Tuesday, September 6th. I am determined to deliver. Thank you. And two days later, Queen Elizabeth dies. This is a momentous, you know, deeply emotional moment for the whole country.

And Liz Truss becomes overnight one of the mourners-in-chief for Britain. Right. So it's a moment of extremely high visibility for the new prime minister, So it's a moment of extremely high visibility for the new prime minister, but it also has the effect of taking her completely off what was going to be the rollout of her economic program. And the country really needs to wait almost for a full two weeks before the government can get back to the business of governing. So when parliament does finally reconvene...

I now call the chancellor of the Exchequer to make a statement. Chancellor! Liz Truss sends her Chancellor, a guy named Kwasi Kwarteng, the equivalent of the Treasury Secretary, to the House of Commons to roll out this package of tax cuts. Now, Mr. Speaker, we come to tax, central to solving the riddle of growth. And it's a stunner. I can announce today that we will cut the basic rate of income tax to 19 pence. It's even more radical and sweeping than she talked about during the summer. That means a tax cut for over 31 million people in just a few months' time. There are tax cuts for ordinary people.

Corporation tax rates will not rise to 25%. It will remain at 19%, and we will have the lowest rate of corporation tax in the G20. Tax breaks for corporations. I have another measure, Mr. Speaker. Take the additional rate of income tax. At 45%, it is currently higher. There is also a tax cut for the wealthiest earners.

But I'm not going to cut the additional rate of tax today, Mr. Speaker. I'm going to abolish it altogether. And the cumulative value of all of these tax cuts runs into the tens of billions of dollars. Our growth plan has delivered all those promises and more, Mr. Speaker. And what's particularly startling about it is these are unfunded tax cuts, which means the government's not offering corresponding cuts in spending to pay for this. They're just announcing it kind of in the classic style of supply-side economics that these tax cuts will somehow pay for themselves through increased economic growth. So this is a plan that is very much in keeping with Liz Truss's free market,

Reagan-style approach, but ends up going much further than anyone expected and therefore costs even more than anyone expected. That's right. And it really rattles international financial markets because, of course, it's not just the UK that's dealing with inflation. It's a problem around the world. Everyone is also trying to figure out how to deal with the impact of Russia's war in Ukraine. So this is the last thing that anyone wants or needs to hear, that the United Kingdom, a major global financial player, is about to plunge itself into a deep hole of debt. So the rejection of Liz Truss's economic program in the financial markets is instant and ferocious. And in the following week, all hell breaks loose. First, the city of London woke up to a currency crisis.

The pound dropped in value to just one US dollar and 0.34 cents early Monday morning, taking the currency to its lowest level since the early 70s. The pound plummets against the dollar. The decline against the common currency highlighted how the pound's recent fall reflects concern about Britain's economy. And it makes life more expensive for Brits. Right, because when the value of your currency is lower, then everything gets more expensive at a moment when inflation is already a huge problem. Yeah, and the next thing that happens is... And we're seeing epic bond market declines. UK rates climb as much as 50 basis points. That the price of British government bonds slumps and the yield on those bonds spikes

upwards. And that has two major effects. Worried about the credibility of the Chancellor's plans, traders have been selling government bonds, the instruments it uses to borrow money, forcing the government to pay much more in interest to borrow funds over the long term. One is that it makes it more expensive for the British government to borrow money, which makes the fiscal hole caused by the tax cuts even larger. Investors fear the big market moves are a particular threat to pension funds and could cause spillover damage across the financial sector. The other is that because UK pension funds are tied to government bonds, there's suddenly a risk that there's not going to be enough cash to keep them

afloat. Where the Bank of England has made an emergency intervention, which it says is needed to maintain financial stability. Finally, I've said before, I'm worried there's a ticking time bomb on mortgages. The interest rates for mortgage loans start to increase. And then last week, that went up to a peak of 6.1%. I'll show you in a second. This is really important in Britain, because unlike in the US, where a lot of people have 30 year fixed rate mortgages, many more people in the UK have either variable rate mortgages or five-year, two-year, at most 10-year mortgages. So when interest rates go up on mortgage loans, people begin to feel that right away. And all of this, just to be clear, is because of the announcement of this massive, unfunded tax cut program.

Yes, that's right. I mean, even though it appears to be almost impossible to imagine so much could spin out of one announcement, that announcement has the effect of really, in a moment, completely undermining investor confidence in the British economy. And so for millions of people in Britain who are negatively affected by all this, it quickly becomes clear who's to blame. It's Liz Truss and her tax cuts. And so suddenly, this brand new prime minister is in a great deal of political trouble.

We'll be right back. So Mark, what does this very embattled Prime Minister Liz Truss do once she realizes that her economic plan has plunged her entire country into financial chaos? Well, her initial instinct is to be really defensive. Look, I understand it's difficult times for people and we're facing a difficult winter. She puts the blame on a lot of other people. She says, you know, interest rates... Interest rates have always been set since 1997 by the Independent Bank of England.

We don't have anything to do with that. Politicians don't get involved in setting interest rates. She blames inflation on... We have a very, very difficult economic global situation because of the war that Vladimir Putin has perpetrated in Ukraine. Vladimir Putin. This isn't Putin. This isn't just about Putin. I mean, your chancellor on Friday opened up the stable door and spooked the horses so much you can almost see the economy being dragged behind them. And she sort of doesn't take any responsibility for having influenced any of these things with her own policies.

And she sort of says, you know, change is hard. People are going to resist it. But everyone is going to benefit in the long run because the economy is going to grow so much faster. So it's a very defiant, stay the course, you know, don't give an inch kind of response. And this goes on for a few days, but the markets continue to gyrate, interest rates continue to spike, and she realizes that she's going to have to backtrack on something. Big breaking news for you that will impact almost all of us. We're hearing that Liz Truss is preparing to scrap plans to remove the 45p top rate of income tax for the highest.

So what she and Kwasi Kwarteng do is they decide to do a U-turn on one of the big tax cuts. The fact is that the abolition of the 45p tax rate became a distraction. The one on the super wealthy. That is why we're no longer proceeding with it. I get it, and I have listened. And that sort of calms the waters for a little while, but everyone realizes that tax cut only accounted for a very small part

of the total cost of this program. So the markets are pretty much back to being unstable within a day or two. So what she does another week or so later is she calls Kwasi Kwarteng, arguably her closest associate in the government. You'll be chancellor and Liz Truss will be prime minister this time next month. Absolutely, 100%. I'm not going anywhere. She fires him. He gets thrown under the bus, and that's the first major high-profile casualty of this whole affair.

And she hopes that by basically giving the market quasi-quarting, she can kind of calm the waters. My priority is making sure we deliver the economic stability that our country needs. That's why I had to take the difficult decisions I've taken today. But guess what? It didn't work. She had to do something more. And she did that in the form of selecting Jeremy Hunt to be the new chancellor. Why do you want to work with this government?

Because I want to do the right thing for the British people. Jeremy Hunt is a longtime, well-known conservative politician. He opposed Liz Truss during the leadership campaign. Indeed, he ran his own very short-lived and unsuccessful campaign for the job. He was a supporter of Rishi Sunak and an arch-opponent of her economic program. Fascinating. And almost as soon as Hunt takes the job... Good morning. Liz Trust's first chancellor lasted 38 days. This morning, we'll hear from the new one. He goes on TV and he begins peeling away planks of her agenda. We are going to have to take some very difficult decisions, both on spending and on tax.

Saying you're not going to get a tax cut. And taxes are not going to go down as quickly as people thought and some taxes are going to go up. Corporation taxes are actually going to increase. So it's going to be very, very difficult, and I think we have to be honest with people about that. It's basically the reverse of what Liz Truss ran for office, promising to do. Right. And then you've got this vivid tableau where...

We've therefore decided to make further changes to the mini-budget immediately. Monday morning rolls around, and Jeremy Hunt goes to the House of Commons to confirm before lawmakers that this is now the government's policy. We've decided on the following changes to support confidence and stability. Firstly, the Prime Minister and I agreed yesterday

to reverse almost all the tax measures announced in the growth plan three weeks ago. And while he is delivering this message... It is a deeply held conservative value, a value that I share, that people should keep more of the money they earn. Liz Truss is sitting behind him on the front bench with a sort of a faraway smile on her face, you know, looking for all the world like a bystander in her own government.

But at a time when markets are asking serious questions about our commitment to sound public finances, we cannot afford a permanent discretionary increase in borrowing worth £6 billion a year. Right. I watched that scene, Mark, and suddenly the question became, who exactly is prime minister here? Is it Liz Truss or of a sudden didn't have much of a reason to be prime minister anymore. And as that realization dawns on people, it almost quickly becomes a political death watch. And the British media, in their typically dark, humorous way of looking at things, begin to look for metaphors to capture just how tenuous Truss' situation is. And the most memorable of these is in the tabloid, The Star, where they actually get a head of lettuce from a local supermarket chain, and they put it next to a picture of Liz Truss,

and they ask which of these has a longer shelf life. Right. But what is the shelf life, Mark, of a head of lettuce? Well, Michael, I'm going to confess I don't exactly know what the shelf life of a head of lettuce is, but I think we can safely assume it's measured in days and not weeks. Right. And that turns out to be a pretty good bit of foreshadowing, because over the next 48 hours, Liz Truss's prime

ministership begins to unravel really quickly. So on Wednesday, Truss goes to the House of Commons for an exercise called Prime Minister's Questions. We now come to the leader of the opposition, Keir Starmer. That's where members get to grill the prime minister on whatever topic they want. A book is being written about the prime minister's time in office. Apparently it's going to be out by Christmas.

Is that the release date or the title? And she comes under immediate attack. I've got the list here. 45p tax cut, gone. Corporation tax cut, gone. 20p tax cut, gone. So why is she still here? The leader of the Labour Party, Keir Starmer,

essentially asks her why she's still in office. Mr Speaker, I am a fighter and not a quitter. She insists that she's going to stay the course, but within hours, there's even more chaos engulfing her government. She's forced to fire her home secretary. That's now the second major cabinet minister she's fired in a week. Order! Order! And the craziest thing happens on Wednesday evening

when there's a vote in Parliament over whether the government should ban fracking. Conservative lawmakers are beginning to rebel against the government. They don't want to cast this vote. And there are these really surreal scenes in the Parliament where... I saw members being physically manhandled into another lobby. Lawmakers are being physically manhandled by senior cabinet ministers to come in

and cast this vote backing the prime minister. To be perfectly honest, this whole affair is inexcusable. So by the end of Wednesday night, you have this situation where it's clear that Liz Truss has not only lost control of her legislative agenda. It's an absolute disgrace. As a Tory MP of 17 years, it is a pitiful reflection on the Conservative parliamentary party at every level. She's lost control of her party, and she's lost control of the government. I think it's a shambles and a disgrace. I think it is utterly appalling. So by yesterday morning, the game was well and truly over. Conservative lawmakers were coming out one after the other saying it was time for her to step down. It was clear that if she didn't negotiate some sort of exit, she likely faced a vote of no confidence.

And shortly after 1 p.m., the prime minister's office put out a statement saying she would speak to the nation. And a podium was put up in front of the famous number 10 door, and at about 1.30... I came into office at a time of great economic and international instability. Liz Truss came out and said... Given the situation, I cannot deliver the mandate on which I was elected by the Conservative Party.

I've called King Charles and I've told him of my intention to step down. I will remain as Prime Minister until a successor has been chosen. Thank you. So in the end, she did not outlast the head of Lettuce. She did not outlast the head of lettuce. She did not outlast the head of lettuce. She also set a record for being the shortest serving British prime minister in history. 44 days from the day she moved in to the day she announced she was leaving. If I remember my math correctly, it's four Scaramucci's. If you want to go back and look at Anthony Scaramucci's famous record as White House communications director.

So, Mark, it feels worth zooming out here for a moment. Because when we think about what's happened to Liz Truss and, more importantly, what's happened to the British economy, it feels like there are two big lessons that emerge. It feels like there are two big lessons that emerge. The first, and I'm thinking back to the warnings that were delivered during her campaign about this tax cut, is that you can't defy the basic laws of economics and of inflation. You can't cut taxes and borrow a bunch of money at a time when prices are already at a record high and hope that somehow the market and consumers will embrace that. That's just not how it works. Yeah, that's right.

I mean, this was an economic program that was basically built on magical thinking. And magical thinking doesn't work in a world where the markets are as powerful as they are. So even if she had managed to win over the population and thumb her nose at the economic experts, she was never going to convince the markets that this was in any way credible. The only country that can really get away with unfunded tax cuts, with ballooning the deficit, is the United States. And the reason for that is the sheer size of the U.S. economy, the fact that the U.S. dollar is still the world's reserve currency, it gives the U.S. a freedom of maneuver that really no other economy has, and certainly not the British economy,

which for all its strengths is much smaller. And so to pursue a Ronald Reagan-style tax-cutting program in Britain doesn't really make any logical sense. And that's what Liz Truss learned over a couple of very bruising weeks. And it feels like the second lesson, Mark, is that when you're elected prime minister by a tiny portion of the electorate, as Liz Truss was, you're likely to get an agenda that favors that small sliver of voters and not feel especially accountable to everyone else because, after all, they didn't vote for you. So there's a lesson here about the very nature of British democracy. Yeah, that's a big topic of conversation in Britain right now. Because after all, this country is about to elect its fourth prime minister through this system.

And when you set up elections this way, it naturally leads to more extreme ideological positions. leads to more extreme ideological positions. Because, after all, as we said earlier, Liz Truss knew exactly what she was doing in appealing to these conservative party members. And when she got into office, she actually delivered what she had promised. This was, to that extent, a crisis foretold. a crisis foretold.

And the problem with having such a slender mandate is that when things go wrong, as they did in this case, you have no popular support to fall back on. When the markets turned on Liz Truss, the public turned on Liz Truss even more ferociously. And that's why she wilted faster than that head of lettuce. Well, Mark, thank you very much. Thank you, Michael.

Members of Britain's Conservative Party are expected to choose Liz Truss' successor by the end of next week. Among the likely candidates are Rishi Sunak, the lawmaker who had warned that Truss's tax cuts would backfire, and improbably, Boris Johnson, whose resignation as Prime Minister brought Liz Truss to power. We'll be right back. Here's what else you need to know today. A new poll has found that the majority of the American public is prepared to keep paying high energy costs in order to help Ukraine win its war against Russia. 60% of Americans overall told pollsters from the University of Maryland that they will tolerate

the higher costs, including 80% of Democrats and 48% of Republicans. The result suggests that Russia's hope that surging energy prices will undermine Western support for Ukraine, and ultimately help Russia defeat Ukraine, is so far not working in the United States. Today's episode was produced by Michael Simon-Johnson, Rochelle Bonja, and Will Reed, with help from Chris Wood and Sydney Harper. It was edited by Anita Botticello, contains original music by Marion Lozano, and was engineered by Chris Wood.

Our theme music is by Jim Brunberg and Ben Landvk of Wonderly. That's it for The Daily. I'm Michael Barbaro. See you on Monday.