Civil war in UK government: What you need to know

David Cameron
Jasper Juinen | Bloomberg | Getty Images
David Cameron

The U.K.'s ruling Conservative party is in crisis after a senior minister resigned Friday, further widening the rift in the party into a chasm and putting the careers of Prime Minister David Cameron and finance chief George Osborne in jeopardy.

CNBC takes a look at the big issues and what it means for the U.K.

Who’s resigned?

After six years as a cabinet minister, Work and Pensions Secretary Iain Duncan Smith announced his resignation on Friday. In a stinging two-page letter to Cameron, Duncan Smith blasted the government for cutting of state benefits for disabled people, a measure unveiled in Osborne's annual Budget speech last week. The former minister added that the cuts were indefensible given that high-earning taxpayers were being granted additional cash at the same time and that the government was at risk of creating a divided society.

So this is all about the UK Budget?

Many commentators don't believe it. Duncan Smith had been implementing swingeing welfare cuts for years - plus it looked as though Osborne's measures were so unpopular they were about to be quickly dropped.

OK, so what’s it REALLY about?

A number of commentators believe his resignation is really about the U.K. referendum vote on whether to stay in the European Union on June 23. They say Duncan Smith, one of a number of senior Conservatives supporting the 'Leave' campaign, is using the Budget to cause a damaging split in the party.

But how damaged is the Conservative party?

The knives are certainly out within party ranks. The Times newspaper is carrying a story that suggests Cameron blames his usual ally, Osborne, for creating the war of words after a poorly executed Budget speech. The Prime Minister's office has since dismissed the story as '"total nonsense" according to The Guardian. However some Conservative MPs have openly criticized Osborne while others have slammed Duncan Smith for attacking the party in order to push an anti-EU agenda.

Have financial markets reacted?

Market reaction to the U.K. referendum has been somewhat muted in recent months. The FTSE is a largely international index and takes few cues from domestic issues. The only previous twitch in asset prices came when the Mayor of London, Boris Johnson, announced his support for leaving Europe causing sterling to sell off against dollar. But today sterling took a dive, suggesting that currency traders interpret the Duncan Smith resignation and the subsequent fallout, as a positive for the 'Leave' campaign.

So will Britain leave Europe?

Most analysts believe the country will opt to remain as part of Europe but admit the vote will be close. The latest poll of polls by National Centre for Social Research shows that current Brexit vote intentions are split at almost 50/50. The vote is set for June 23 and Robin Bew of The Economist Intelligence Unit says as it approaches he expects the 'Stay' campaign to up the commentary on the financial risks of exiting the trading bloc.

And what does all this mean for who’ll be the next prime minister?

The current Prime Minister David Cameron has already let it be known that he will not fight a third term, meaning the U.K. will have a new leader before 2020. Potential successors include; London Mayor Boris Johnson; Chancellor George Osborne and Home Secretary Theresa May. The current divide in the party, Duncan Smith's resignation and a poor reception for the Budget has damped the chances of Osborne succeeding his old friend. London Mayor and euro-skeptic Boris Johnson is currently viewed as a hot favorite.