John Major became Prime Minister in late 1990, following Thatcher’s resignation. He took over the premiership at a time when the Conservatives were deeply unpopular, with polling showing Labour’s Neil Kinnock with a 23% lead over the Tories. This was down to a combination of factors; the economy was in recession from the early 1990s, and Thatcher had introduced a deeply unpopular Poll tax. Despite this, Major won his re-election bid in 1992, securing 14 million votes which remains a record to this day. Major’s privatisations of coal and British Rail proved successful, alongside his tax reductions that provided the succeeding Blair administration with a strong economy. With this said, his legacy has come to be defined by his government’s poor handling of Britain joining the ERM, and the subsequent recession that followed. This culminated in the landslide election defeat of 1997.
Privatisation & Taxation
Major continued the legacy of Thatcher by privatising certain state industries. This began with the privatisation of the coal industry, which had been notorious for being a net burden for the government. This is because many coal pits weren’t profitable, thereby requiring state subsidies to keep them operational. The gradual privatisation of the remaining state-owned coal pits that took place between 1994 and 1997 resolved this, ensuring that taxpayers weren’t subsidising failing industries.
British rail was also privatised by the Major government. This had been considered by Thatcher, but ultimately she passed on the idea. Between 1994 and 1997, the railways were gradually privatised, split up into different franchises that were to be run by the private sector. Whilst controversial, the privatisation of railways has resulted in booming passenger numbers, with the number of rail passengers increasing year-on-year following privatisation. Between 1948 and 1995, when British rail was nationalised, passenger numbers had been steadily declining, largely due to the poor quality services that the state-run railway services provided. Following privatisation, the number of delayed trains quickly fell, culminating in rising passenger numbers.
Reductions in income tax continued under Major, continuing the legacy of Thatcher. The basic rate was gradually reduced, having stood at 29% in 1986, falling to 23% by the time Major left office. As a result, working families kept more of their hard-earned income, whilst ensuring that work always paid more than benefits. Cutting taxes from the bottom-up also boosted the economic recovery from the recession of the early 1990s, as lower-income individuals have a higher marginal propensity to consume. Keeping taxes low paved the way for the strong economy of the late 1990s and early 2000s.
Failure with the ERM
The failure of the Major administration to keep the pound within ERM plagued the government and was ultimately a leading factor in their 1997 election defeat. The ERM was established in 1979; the UK initially declined to join. This changed in October 1990, when then-chancellor John Major entered the UK into the ERM. The initial exchange rate in 1990 was 2.95 DM to the pound. If this exchange rate fell below 2.78 DM, then the government would have to intervene. However, the pound was rapidly depreciating due to a combination of factors, including high inflation and much lower productivity than other countries within the ERM such as France and Germany. This prompted the UK government to intervene to keep the pound within the ERM, notably by selling billions of pounds of foreign currency reserves to keep exchange rates stable. As German interest rates were far higher than that of the Bank of England, investors were incentivised to buy Deutsche Marks, resulting in the pound further depreciating.
As a result, the government sought to raise interest rates to encourage investors to purchase pounds; however, speculators didn’t believe the government and continued shorting the pound. Later that same day, the chancellor announced that the UK would leave the ERM; this day came to be known as Black Wednesday. This caused the pound to depreciate rapidly, resulting in speculators such as George Soros becoming billionaires overnight. As the UK economy was heavily reliant on imported goods, the depreciation of the pound prompted a recession, as imports suddenly became much more expensive. Black Wednesday greatly tainted the government’s economic credibility, as billions of taxpayer money was wasted on trying to keep the UK within the exchange mechanism. In hindsight, Major’s failure to join the ERM has saved the UK economy from the troubles of the Eurozone that plagued the continent following the Great Recession of 2008. With this said, the economic ineptitude displayed by the Major administration played a large part in the Conservatives’ election defeat of 1997.
Ultimately, John Major’s economic policies are underrated, with his legacy tarnished by Black Wednesday and the failure with the ERM. His policies on privatisation and taxation, continuing with the legacy of the previous Thatcher government, led to the booming economy of the late 1990s and the early 2000s. The failure to join the Euro has benefitted the British economy in the long run, with Black Wednesday having been far less expensive than the Eurozone bailouts that followed the Great Recession.