What Partygate can do for Johnson like Black Wednesday did for the Major | Larry Elliott

MeterEmorys came like a tide George Soros Vladimir Putin and Xi Jinping were berated last week in Davos, even though 30 years ago the leading speculator looked at the pound rather than the autocratic leader.

Sterling came under increasing pressure as 1992 passed, and it was not until September 16 that it was separated from the European Exchange Rate Mechanism (ERM).John Major’s government has never been known from swift black wednesday, The humiliation and loss of public trust was so complete.

The question now is whether party gate Will do for Boris Johnson what Black Wednesday did for the Major. Has the Conservative Party’s reputation been so badly damaged by scandal that defeat is inevitable no matter what happens between now and Election Day?

In some ways, Johnson’s outlook is bleaker than Major. Black Wednesday forced the then-government to abandon a policy hitherto considered non-negotiable — joining the ERM. The policy, which only allowed sterling to trade within a narrow range against the Deutsche mark, required interest rates to be kept higher than they would otherwise have been, prolonging the recession of the early 1990s.

Leaving ERM is good for the economy. Interest rates fell sharply and the pound fell. Fears that inflation would soar proved unfounded because the recession has left so much weakness in the economy. Higher taxes in the post-Black Wednesday budget are unpopular, but ensure lower interest rates help producers rather than encourage consumer spending.

Once the route was determined, no changes were made. By the time of the 1997 election, unemployment had fallen, growth was strong, and the huge balance of payments deficit built up during the boom of the late 1980s had been eliminated.Even so, the Conservatives succumbed to Labour landslide.

Rishi Sunak made a U-turn last week windfall tax Not as bad as leaving ERM in September 1992, but disruptive enough. The chancellor has for months opposed the idea of ​​a tax on the profits of North Sea oil and gas companies, arguing that it would deter investment. Likewise, Sunak said he would wait until the fall budget to decide whether to provide more help for households struggling with rising energy bills.

This strategy has now been abandoned. Echoing the deafening echoes of the crisis-laden 1970s, there are now three small budgets since early February as the government grapples with the cost of living crisis.

In a way, what Sunak is doing is completely reasonable. Only the Treasury has the means to prevent millions of households from falling into fuel poverty, and £15bn in extra purchasing power could save the economy from recession later this year.

However, there are some significant downside risks as well.One is that injecting additional demand into the economy increases inflationary pressures, prompting Bank of England Be more aggressive in raising interest rates.

The Bank believes that the current inflationary pressures are caused by a series of supply-side shocks, including the loss of workers due to Brexit and the pandemic, bottlenecks caused by the recovery of demand after the lockdown, China’s zero-COVID-19 policy and – most recently – Ukraine war. What matters for interest rate policy in the near term is what Threadneedle Street’s Monetary Policy Committee (MPC) thinks will happen to inflation. Sunak’s actions last week will add to MPC’s concerns.

In theory, changing the policy mix is ​​a good thing. There are good reasons why monetary policy (what the Bank of England does) is too loose and fiscal policy (what the Treasury does) is too tight. But the picture is not as clear-cut as it was after Black Wednesday, when the loose money/tight fiscal policy mix worked.With every year Inflation has reached 9%, the bank’s reputation on the line. Sunak’s loosening of fiscal policy threatens to overkill the central bank’s monetary policy.

Even if the policy mix miraculously turns out to be perfect, there will be no post-Black Wednesday recovery. Even after Sunak’s latest measures, living standards will fall this year, but not by as much.Paul Dales of Capital economics Says that before the small budget, real household disposable income would fall by 2% in 2022, but it would still fall by 1% even after deducting energy bills.

Black Wednesday has damaged the Conservative Party’s reputation for economic power. Major received no credit for the ensuing recovery, which only happened because the British government abandoned what it insists was a non-negotiable austerity policy.

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Johnson’s situation was equally dire. A new, largely effective framework for controlling inflation was quickly pieced together after Black Wednesday. Today, government economic policy is rudderless, with flip-flops and short-term headlines replacing long-term strategies.

Sunak said he was a fiscal conservative, but he didn’t act like a man. Thank you Prime Minister and Prime Minister,”“Big government” is now back in vogue, The result was a pandemic first, and now a Russian invasion of Ukraine.

Ministers speak the language of the right, but – usually after multiple kicks and screams – end up behaving like an incompetent left-wing party. Even if the economy booms between now and the next election, voters may not forgive Johnson’s party. They certainly won’t forgive him if the economy is in trouble, which is more likely to happen.