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opinion

John Major had laid the blame firmly at the feet of the chancellor of the exchequer and had fired Norman Lamont.Paul Hackett/Reuters

Martin Buckle is a British-based chartered management accountant

The pound is sinking through the floor.

The British economy is in a mess, featuring the dreaded double deficit (fiscal and current account deficits).

The European Union is looking on in bemused horror.

The Conservative government has a majority in Parliament but, having recently replaced leaders, it’s looking leaderless.

The year is 1992.

Despite strong opposition from some political and economic quarters, the Conservatives have decided for ideological reasons to align more closely with the EU (oh, the irony): Britain has hemmed itself into the European exchange rate mechanism, or ERM, ahead of the formation of the euro currency.

As the pound tanks, the government (this is before the days of an independent Bank of England) has responded by boosting interest rates. Homeowners and other debtors are watching their financial well-being destroyed in real time: On Sept. 16, 1992, the government announces it will increase the interest rate from an already eye-watering 10 per cent to 12 per cent, then later the same day bangs it up to 15 per cent. To no avail. The currency traders don’t bite, the pound continues to fall, and Britain withdraws from the ERM like a balloon held under water.

After John Major had laid the blame firmly at the feet of the chancellor of the exchequer and shown him the door, the departed Norman Lamont went on to complain of the government: “We give the impression of being in office but not in power.” That phrase has become one of the most renowned in recent parliamentary speeches.

The disastrous experiment with the ERM led the government to a volte-face: Monetary policy became focused on inflation targeting, interest rates came down, unemployment dropped and the economy started to rise. But the damage to the Conservatives’ reputation for financial management had been firmly embedded in the minds of the electorate. Infighting over Britain’s place in Europe added to the sense of chaos: In 1997, Tony Blair swept aside the ailing Tories, winning 418 seats for Labour compared with just 165 for the Conservatives. Worse still, the Conservatives were blanked in Scotland and Wales, solidifying divisions within the union.

Not only was the 1997 defeat the Conservatives’ worst since before the First World War, it led to their longest period in opposition, returning to government in 2010 only in coalition with the Liberal Democrats.

This week, the pound sank to a historic low against the U.S. dollar: Is history about to repeat itself?

Despite the similarities, many economic and political indicators in 1992 do not match the realities of 2022.

According to Britain’s Office for National Statistics, the government’s net borrowing as a percentage of GDP for the period April, 1992, to March, 1993, was 6.5 per cent, almost exactly where it was for the year ending March, 2022. The government gross consolidated debt, however, has ballooned from £257-billion ($377-billion) to £2.365-trillion. And that’s before last week’s giveaway “mini-budget” spooked the markets and led to what the Financial Times called “turmoil in the gilt markets” as the “U.K. government borrowing costs suffer historic rise after hit to gilts.” Does Britain have a realistic chance of borrowing its way to wealth?

After the government’s struggles 30 years ago, the British inflation rate declined to more manageable levels, setting the economy on course for a rapid recovery: Having peaked at just over 8 per cent in 1990, the rate had already fallen below 5 per cent in 1992; today the rate is 9.9 per cent and predicted by the Bank of England to exceed 10 per cent and stay above 10 per cent for some months. Despite the bank’s target of 2-per-cent inflation, its own predictions exceed that level for two years: Will the electorate sustain inflation for that long without getting jolly cross?

In 1992, British exporters still had free access to trade with Europe: After Brexit, economic growth is supposed to come from trading with the whole world (excluding Russia and its allies, and China, which Prime Minister Liz Truss distrusts).

Despite warm words from the Biden administration about the strength of the “special relationship,” there is no sign of the free-trade negotiations between the United States and Britain being completed any time soon. In fact, the risks to Britain from entering a free-trade agreement during a recession are huge: British businesses, pounded by high interest rates, a labour shortage and inflation, may have been extinguished before they get the chance to trade, and therefore find themselves permanently displaced in a market dominated by their larger cousins.

The next British general election is due no later than January, 2025: Will the Truss Tories make it over the line?