Ok here is something vague I want to fill out
"What does Religious Tollerance mean in this case?"
The freedom to chose your deity isn't anything unique to this setting, though there are nations that don't allow it, nor does Religious tolerance mean that they allow cults and followers of evil deities. For the most part Religious tolerance means that heresy isn't a recognized crime and that religion inspired violence is not overlooked.
Or rather Religious tolerance means that any Religion doesn't have legal rights to prosecute individuals themselves, Clerics are no longer legal authorities by right (though by all means a Cleric can become a legal authority).
Or in simple terms: Churches have no legal authority and their woes have to go through the legal system.
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"Are the people of Firecotton Irreligious?"
On the contrary, though certainly many of them believe in their separation of Church and state, they are by a large a religious community and consider the Church to be a vital institution as part of their everyday life. A philosopher once said that Kingdom must be run as if it was the church of Firecotton, and that is the best way to understand it.
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"What is the current Government of Firecotton?"
Technically Anarchy, as the central government is gone. Though they still are holding onto hope it can be restored. Give it time though and eventually they will start to fend for themselves even against their own neighbors.
"What was it before?"
Elected Monarchy by the aristocracy.
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"Why is losing the Capital such a huge loss?"
The capital was the most central location in Firecotton chosen deliberately to be a stop over between one location in the kingdom to another. In order to circumvent moving through it one would need to essentially walk around the circumference of the entire kingdom. This was important for trade as well as military as it allowed the army to respond to any threat quickly.
Along with this the Capital held the nation's treasury, several of their landmarks, and was considered their center of culture. Religious pilgrimages to its large cathedrals were common and the academies were situated within the city. Essentially losing the Capital is losing ones' heart, mind, and wallet.