Full text: Wirtschaft und Gesellschaft - 1996 Heft 3 (3)

22. Jahrgang (1996), Heft 3 Wirtschaft und Gesellschaft 
of its policy, the government had joined the ERM of the EMS, choosing ­
agairrst the advice of the Bundesbank - the over-valued rate of 2 .95 DM 
to the pound. To maintain this central parity, interest rates had to be 
raised to levels so high as to be wholly inappropriate for the cyclical po­
sition of the British economy, which had begun to slide into recession in 
the first half of 1990 and reached its cyclical trough early in 1992.  Eigh­
teen months after joining, it had become obvious that the fierce 
disinflatinary squeeze threatened to turn the recession into a slump. But 
the government, having elevated a specific parity into a symbol of its eco­
nomic and political competence, stubbornly refused to rectify the original 
error by devaluing inside the ERM; when the weakness of the pound ster­
ling became evident and speculative pressures for devaluation mounted 
inexorably in the Autumn of 1992, John Major repeatedly raised the poli­
tical stakes in defence of the actual rate, insisting that the parity of the 
pound in the ERM was the immovable cornerstarre of the government's 
economic strategy. On 16  September 1992, the pound was forced out of 
the ERM and the Prime Minister had "ensured that when the defeat came 
it was devastating" (87), leaving the government without a viable econo­
mic strategy and with its reputation for competence badly damaged. 
What had compounded the error of attempting to maintain an over­
valued exchange rate was that Britain was particularly vulnerable to the 
downside of an otherwise beneficial high exchange rate, as British com­
petitiveness appears to be (in cantrast to such traditional and successful 
hard currency countries as Germany, Switzerland and Austria) excessi­
vely based on price, rather than on quality and service, factors. It is also 
difficult to see how a hard currency policy could have been succesful and 
acted as a spur to productivity and structural change in a political cli­
mate in which the government persisted in its obsessive hostility to the 
trade union movement and in which the positive potential of meaningful 
co-operation and compromise between social partners was dogmatically 
ignored, even sabotaged. 
Mr. Major had broken his promise made before the 1992 elections to 
tarne inflation by maintaining the pound's parity inside the ERM. To pay 
for the consequences of the recession and for having lowered fiscal dis­
cipline before the election (the forecast for public borrowing was now for 
a "staggering" 5:: 50  billion) (88), he was then forced to break a further 
promise, that of reducing taxes. In the March 1993 Budget the " largest 
package of tax increases in living memory" , amounting to over 5:: 10  bil­
lion, was imposed and a further 5:: 5 billion were added in the Autumn of 
the same year (89) . "Creative accounting" managed to hide the full im­
port of the increases but they were later estimated to have been equiva­
lent to an addition of seven pence in the pound on the standard rate of 
income tax (90). Over the whole Thatcher period, the direct tax rate had 
been reduced by eight pence, amid great publicity and self-gratulation. 
What was left was a mere one pence reduction in the direct rate, while at 
the same time indirect taxation had been massively increased. (In the 
last but one Budget before the elections scheduled for 1997 ,  the direct 

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