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SUBJECT
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Contents
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Copy No. I o f 4 Copies
MOST CONFIDENTIAL RECORD TO CC(83) 3 r d C o n c l u s i o n s , Minute 5 Thursday 3 February 1983 ECONOMIC
STRATEGY
The Cabinet c o n s i d e r e d a memorandum by t h e C h a n c e l l o r o f t h e Exchequer (C(83) 5) on economic s t r a t e g y . THE CHANCELLOR OF THE EXCHEQUER s a i d t h a t t h e background t o t h e Budget, t o be p r e s e n t e d on 15 March, was one o f e x p e c t a t i o n s o f modest g r o w t h i n t h e w o r l d economy. Recovery had been d e l a y e d i n 1982, p a r t l y because o f t h e d i f f i c u l t i e s e x p e r i e n c e d by t h e U n i t e d S t a t e s and West German economies and p a r t l y because o f r e t r e n c h m e n t by major d e b t o r c o u n t r i e s such as N i g e r i a and Mexico.
I n f l a t i o n and i n t e r e s t r a t e s were, however, d e c l i n i n g ; and r e a l demand was l i k e l y t o expand i n 1983.
There were two main u n c e r ­
t a i n t i e s . F i r s t , t h e s c a l e and speed o f r e c o v e r y would depend on developments i n t h e U n i t e d S t a t e s economy: i t would be necessary f o r t h e A d m i n i s t r a t i o n t o t a c k l e c o n v i n c i n g l y t h e problem o f t h e mounting f e d e r a l budget d e f i c i t i n o r d e r t o improve c o n f i d e n c e and a l l o w scope f o r r e d u c t i o n s i n i n t e r e s t r a t e s . Secondly, t h e f u t u r e movement o f o i l p r i c e s was u n c e r t a i n . A moderate d e c l i n e i n t h e p r i c e o f o i l would be b r o a d l y h e l p f u l to w o r l d economic a c t i v i t y and i n f l a t i o n , and had l i t t l e e f f e c t on t h e U n i t e d Kingdom's balance o f payments and p u b l i c revenue. A sharp d e c l i n e c o u l d however have adverse e f f e c t s . The 1982 Budget had envisaged a P u b l i c Sector B o r r o w i n g Requirement (PSBR) i n 1982-83 o f about £9.5 b i l l i o n ; t h e o u t t u r n was l i k e l y t o i b e l e s s . For 1983-84, t h e Medium Term F i n a n c i a l S t r a t e g y suggested a PSBR o f about £8 b i l l i o n .
A h i g h e r f i g u r e would have l i t t l e e f f e c t on a c t i v i t y and employment i n t h e s h o r t t e r m , b u t c o u l d s e r i o u s l y i m p a i r c o n f i d e n c e , e s p e c i a l l y i n the present s t a t e o f u n c e r t a i n t y i n the markets. H i s p r e l i m i n a r y v i e w was t h a t i t would be a m i s t a k e t o p u b l i s h a f o r e c a s t PSBR f o r 1983-84 o f h i g h e r t h a n £8 b i l l i o n .
A f i g u r e o f £8 b i l l i o n would a l l o w some scope f o r t a x r e d u c t i o n s besides t h e r e v a l o r i s a t i o n o f a l l o w a n c e s and bands assumed i n t h e economic f o r e c a s t s . On i n d i r e c t t a x e s , he would be r e l u c t a n t t o f o r g o a s u b s t a n t i a l measure o f r e v a l o r i s a t i o n .
Full r e v a l o r i s a t i o n would y i e l d some £600 m i l l i o n a year b u t add o n l y about 0.5 p e r cent t o t h e R e t a i l P r i c e I n d e x . There m i g h t , however, be a case for l i m i t i n g the increase i n p e t r o l t a x i n order t o p r o t e c t r u r a l areas. To t h e e x t e n t t h a t d i r e c t taxes were reduced, i t would be necessary t o d e c i d e between t h e c l a i m s o f i n d u s t r y and t h e p e r s o n a l s e c t o r . The C o n f e d e r a t i o n o f B r i t i s h I n d u s t r y (CBI) were p r e s s i n g s t r o n g l y f o r r e l i e f t h r o u g h t h e a b o l i t i o n o f t h e N a t i o n a l I n s u r a n c e Surcharge ( N I S ) . I t was u n d o u b t e d l y d e s i r a b l e t o encourage improvements i n c o m p e t i t i v e n e s s and t h e r e b u i l d i n g o f companies' p r o f i t m a r g i n s . Companies were, however, a l r e a d y b e n e f i t i n g f r o m t h e p r e v i o u s r e d u c t i o n s i n NIS, and f r o m f a l l s i n i n t e r e s t r a t e s and t h e exchange r a t e . There was a s t r o n g e r case f o r i n c r e a s i n g income t a x t h r e s h o l d s beyond t h e amount needed f o r r e v a l o r i s a t i o n . T h i s would be welcome t o many o f t h e Government's s u p p o r t e r s , and would be a p p r o p r i a t e i n v i e w o f t h e Government's i n a b i l i t y t o reduce t h e burden o f SECRET •
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d i r e c t t a x a t i o n t o the e x t e n t t h a t i t had hoped t o be a b l e t o do when i t
took o f f i c e . A s i g n i f i c a n t i n c r e a s e i n t h e t h r e s h o l d s c o u l d w e l l b r i n g b e n e f i t s i n wage b a r g a i n i n g , and would h e l p a l l e v i a t e t h e p o v e r t y and unemployment t r a p s . F i n a l l y , he hoped t h a t t h e Budget c o u l d i n c l u d e , as i n 1982, packages o f s m a l l e r measures t a r g e t e d t o h e l p p a r t i c u l a r areas o f t h e i n d u s t r y o r d e s e r v i n g groups. He would be i n t o u c h s e p a r a t e l y w i t h t h e M i n i s t e r s concerned. The
f o l l o w i n g main p o i n t s were made i n d i s c u s s i o n ­
a.
The C h a n c e l l o r o f the Exchequer was t o be c o n g r a t u l a t e d on t h e s t e a d i n e s s w i t h which he had m a i n t a i n e d t h e course o f t h e Government's f i n a n c i a l and economic s t r a t e g y . This was t h e main reason why t h e Government now had u s e f u l freedom o f f i s c a l manoeuvre. I t would be p o l i t i c a l l y and e c o n o m i c a l l y d i s a s t r o u s i f t h e Government appeared t o be d e p a r t i n g now f r o m the course w h i c h had been s e t . b.
I t c o u l d be argued t h a t , w i t h o u t d e p a r t i n g f r o m the Government's u n d e r l y i n g p o l i c i e s , i t would be p o s s i b l e t o a l l o w the PSBR i n 1983-84 t o be r a t h e r h i g h e r than t h e C h a n c e l l o r o f t h e Exchequer had suggested. A PSBR o f £8 b i l l i o n would be low i n comparison w i t h t h e average o f i n d u s t r i a l i s e d c o u n t r i e s ; and the p r e v i o u s f o r e c a s t s w h i c h had i n c l u d e d i t had assumed a r a t h e r h i g h e r l e v e l o f economic a c t i v i t y t h a n now seemed l i k e l y .
I t was improbable t h a t t h e markets would r e a c t a d v e r s e l y i f the PSBR were k e p t below £9 b i l l i o n . On t h e o t h e r hand, t h e r e were g r e a t u n c e r t a i n t i e s , as C(83) 5 b r o u g h t o u t , i n t h e economic f o r e c a s t s and i n the c u r r e n t economic s i t u a t i o n . These and o t h e r c o n s i d e r a t i o n s argued f o r e r r i n g on the s i d e o f c a u t i o n i n t h e Budget. I t would be b e t t e r t o be c a u t i o u s i n t h e s p r i n g and r e l a x i f
a p p r o p r i a t e l a t e r , than t o r e l a x too f a r i n t h e s p r i n g and be o b l i g e d t o r e t r e n c h l a t e r . A f u r t h e r c o n s i d e r a t i o n was t h a t r e a l i n t e r e s t r a t e s were a t an e x c e p t i o n a l l y h i g h l e v e l .
Reductions i n them would encourage i n d u s t r i a l i n v e s t m e n t and new h o u s e b u i l d i n g , which were t h e keys t o sound economic growth.
The l e v e l o f mortgage i n t e r e s t r a t e s was a l s o o f c e n t r a l importance t o many f a m i l i e s . A l l these arguments t o l d i n f a v o u r o f a c a u t i o u s p o l i c y i n r e s p e c t o f t h e PSBR. c.
A few members o f the Cabinet took t h e v i e w t h a t any r e d u c t i o n i n t a x a t i o n should m a i n l y b e n e f i t i n d u s t r y . The U n i t e d Kingdom's i n d u s ­
t r i a l base was s t i l l weak. S t r e n g t h e n i n g i t , and i m p r o v i n g c o m p e t i t i v e n e s s , was t h e o n l y s a t i s f a c t o r y l o n g - t e r m s o l u t i o n t o t h e problem o f unemployment, w h i c h was bound t o assume i n c r e a s i n g p o l i t i c a l and s o c i a l i m p o r t a n c e .
One p o s s i b i l i t y would be t o make a f u r t h e r r e d u c t i o n i n the r a t e o f NIS, as an e a r n e s t o f t h e Government's i n t e n t i o n u l t i m a t e l y t o a b o l i s h i t . But t h e r e were grounds f o r b e l i e v i n g t h a t t h e CBI's arguments i n f a v o u r o f t h i s course r e f l e c t e d t h e i r d i f f i c u l t i e s i n r e a c h i n g agreement among t h e i r members r a t h e r than the t r u e needs and wishes o f i n d i v i d u a l companies. Moreover t h e f a l l i n t h e exchange r a t e was now h e l p i n g t o make i n d u s t r y more c o m p e t i t i v e . I t m i g h t be b e t t e r t o d e v i s e schemes o f i n c r e a s i n g c a p i t a l i n v e s t m e n t , p a r t i c u l a r l y i n t h e West Midlands and o t h e r p a r t s of t h e c o u n t r y w h i c h had been p a r t i c u l a r l y h a r d h i t by unemployment. I
SECRET
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An a l t e r n a t i v e way o f h e l p i n g b u s i n e s s e s , w h i c h c o u l d have some p r e s e n t a t i o n a l advantage a t r e l a t i v e l y s m a l l c o s t , would be t o reduce c o r p o r a t i o n t a x .
d.
Most members o f t h e C a b i n e t , however, took t h e v i e w t h a t p r i o r i t y s h o u l d be g i v e n t o r e d u c t i o n s i n p e r s o n a l t a x a t i o n , and t o i n c r e a s i n g income t a x t h r e s h o l d s , r a t h e r t h a n t o r e d u c i n g t a x r a t e s . Many workers on r e l a t i v e l y l o w e a r n i n g s p a i d s u r p r i s i n g l y l a r g e amounts o f income t a x . Unless e a r l y a c t i o n was taken t o p u t t h i s r i g h t t h e problem c o u l d become i n t r a c t a b l e f o r a l o n g t i m e . R a i s i n g t a x t h r e s h o l d s would h e l p t o a l l e v i a t e t h e problems o f t h e p o v e r t y t r a p and t h e l a c k o f i n c e n t i v e t o take a j o b r a t h e r than r e l y on s o c i a l s e c u r i t y benefits.
I f p o s s i b l e , i t would s i m i l a r l y be d e s i r a b l e t o make a s u b s t a n t i a l increaase i n the r a t e o f c h i l d b e n e f i t . e.
On t h i s o c c a s i o n i t would be d e s i r a b l e t o make a s t r i k i n g improve­
ment i n one major area o f t h e t a x system r a t h e r t h a n d i s s i p a t e t h e e f f e c t by s p r e a d i n g t h e r e d u c t i o n s over s e v e r a l areas.
I t would a l s o be i m p o r t a n t , however, t o supplement t h e major measures w i t h an i m a g i n a t i v e package o f minor measures such as had f e a t u r e d i n t h e 1982 Budget. These need n o t c o s t much, b u t c o u l d have a s t i m u l a t i n g e f f e c t out o f a l l p r o p o r t i o n t o t h e i r c o s t . A t t r a c t i v e p o s s i b i l i t i e s were developments o f t h e E n t e r p r i s e Allowance Scheme and t h e Small E n g i n e e r i n g Firms Investment Scheme. The l a t t e r c o u l d be p a r t i c u l a r l y h e l p f u l t o f i r m s i n areas such as t h e West M i d l a n d s , w h i c h had s u f f e r e d an e x t r e m e l y sharp d e c l i n e i n comparison t o t h e i r p r e v i o u s history.
I t might a l s o be d e s i r a b l e t o devote resources t o a l l e v i a t i n g unemployment, w h i c h was c e r t a i n t o c o n t i n u e t o i n c r e a s e f o r some time t o come, t h r o u g h such measures as t h e Temporary S h o r t -
Time Working Compensation Scheme, t h e Job Release Scheme, and improved y o u t h t r a i n i n g . There should a l s o be a more i m a g i n a t i v e and h e l p f u l a t t i t u d e t o f i s c a l measures, such as s t o c k - o p t i o n schemes, designed t o encourage e n t r e p r e n e u r s h i p . f.
I t was open t o doubt whether i t would be p o s s i b l e t o mount a scheme t o i n c r e a s e p u b l i c i n v e s t m e n t , as had been suggested i n
d i s c u s s i o n , which would be e c o n o m i c a l l y j u s t i f i e d and have s u f f i c i e n t l y e a r l y e f f e c t s t o be u s e f u l . I t was however r e g r e t t a b l e t h a t t h e undershoot i n t h e PSBR f o r 1982-83 was p a r t l y t h e r e s u l t o f an unintended s h o r t f a l l i n c a p i t a l expenditure i n the p u b l i c s e c t o r . Every e f f o r t should be made t o p r e v e n t t h i s f r o m happening a g a i n i n 1983-84. g.
The r e d u c t i o n i n t h e o i l p r i c e might have s e r i o u s e f f e c t s on t h e p r o f i t a b i l i t y o f m a r g i n a l f i e l d s on t h e U n i t e d Kingdom C o n t i n e n t a l S h e l f . I t might be necessary t o a d j u s t t h e r e l e v a n t f i n a n c i a l regime i n o r d e r t o ensure t h a t m a r g i n a l f i e l d s c o n t i n u e d t o be e x p l o i t e d and developed. h.
There was some concern about t h e p r i c e o f p e t r o l , p a r t i c u l a r l y i n r u r a l a r e a s , and t h i s should be borne i n mind i n c o n s i d e r i n g t h e r e v a l o r i s a t i o n o f the r e l e v a n t d u t i e s . L i m i t i n g the increase i n t h e d u t y on DERV c o u l d i n p a r t i c u l a r have b e n e f i c i a l consequences f o r
i n d u s t r i a l and a g r i c u l t u r a l c o s t s . On t h e o t h e r hand r u r a l areas had b e n e f i t e d f r o m t h e g r e a t e r p r o s p e r i t y o f a g r i c u l t u r e , as compared w i t h industry. 3 SECRET
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i.
Much a t t e n t i o n had been g i v e n i n t h e media t o c o m p l a i n t s about t h e r a t i n g of empty i n d u s t r i a l and commercial premises.
There were, f o r example, r e p o r t s o f r o o f s b e i n g removed f r o m new b u i l d i n g s i n o r d e r t o a v o i d the payment o f l o c a l r a t e s . There might be scope f o r f i s c a l r e l i e f s i n t h i s a r e a . However, t h e f a c t u a l b a s i s f o r t h e r e p o r t s was d o u b t f u l . The m a t t e r was under e x a m i n a t i o n by the S e c r e t a r y o f S t a t e f o r the Environment and t h e o t h e r M i n i s t e r s concerned. THE PRIME MINISTER, summing up t h e d i s c u s s i o n , s a i d t h a t t h e r e was g e n e r a l agreement on the assessment of the s i t u a t i o n , on the o u t l o o k f o r the f u t u r e and on t h e course t o be f o l l o w e d . The Cabinet
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I n v i t e d t h e C h a n c e l l o r of the Exchequer t o take account of the d i s c u s s i o n i n p r e p a r i n g h i s f o r t h c o m i n g Budget. Cabinet
Office
7 February
1983
4 SECRET
*
Index
i
y
/
SUBJECT,
(
No .
V
cc
Contents
( y Date
SECRET AND PERSONAL ( U n t i l 16 March 1983, then made CONFIDENTIAL)
ft
Copy No | o f 5 Copies
MOST CONFIDENTIAL RECORD
TO
CC(83) 7 t h C o n c l u s i o n s , Minute 5
Thursday 3 March 1983
OTHER
BUSINESS
Public
Expenditure:
Uprating of
Pensions and
Benefits
Previous
Reference:
CC(82) 6 t h
Conclusions,
Minute 2
. '
THE PRIME MINISTER s a i d t h a t the Cabinet'had p r e v i o u s l y endorsed
t h e p r i n c i p l e o f r e c o v e r i n g the excess p r o v i s i o n f o r i n f l a t i o n i n t h e
November 1982 u p r a t i n g o f s o c i a l s e c u r i t y b e n e f i t s , up t o a maximum
o f 2{ p e r c e n t . The need t o r e c o v e r an excess had once a g a i n
demonstrated the u n s a t i s f a c t o r i n e s s o f t h e method o f u p r a t i n g based on
forecasts of i n f l a t i o n .
That method had been i n t r o d u c e d by the p r e v i o u s
Labour A d m i n i s t r a t i o n i n o r d e r t o produce a o n c e - f o r - a l l s a v i n g i n
p u b l i c e x p e n d i t u r e a t a time o f t e m p o r a r i l y d e c l i n i n g i n f l a t i o n .
I n the
e v e n t , o u t t u r n had r a r e l y c o i n c i d e d w i t h f o r e c a s t s . When t h e o u t t u r n
exceeded t h e f o r e c a s t , the Government was expected t o make good t h e
s h o r t f a l l ; when o u t t u r n f e l l s h o r t o f f o r e c a s t , i t was p o l i t i c a l l y
d i f f i c u l t f o r t h e Government t o r e c o v e r excess p r o v i s i o n . She and t h e
M i n i s t e r s most c l o s e l y concerned had t h e r e f o r e agreed, s u b j e c t t o t h e
a p p r o v a l o f t h e C a b i n e t , t h a t f u t u r e u p r a t i n g s should be based on the
a c t u a l i n c r e a s e i n t h e R e t a i l P r i c e s Index (RPI) i n the twelve-month
p e r i o d ending i n t h e May b e f o r e each November u p r a t i n g . T h i s i n c r e a s e
was announced i n June. I t was the l a t e s t f i g u r e which i t was f e a s i b l e
to use b o t h because o f a d m i n i s t r a t i v e c o n s t r a i n t s and because o f t h e
need t o a l l o w t i m e f o r P a r l i a m e n t a r y debate on t h e s t a t u t o r y i n s t r u m e n t s
g i v i n g e f f e c t t o t h e u p r a t i n g . The necessary l e g i s l a t i o n would be
announced i n t h e C h a n c e l l o r o f t h e Exchequer's Budget Statement and
i n t r o d u c e d i m m e d i a t e l y t h e r e a f t e r . The p r e s e n t year was a f a v o u r a b l e
t i m e f o r making t h e change f r o m f o r e c a s t s t o a c t u a l f i g u r e s as t h e b a s i s
of u p r a t i n g s . A l t h o u g h i t was l i k e l y t h a t t h e i n c r e a s e i n t h e RPI
between May 1982 and May 1983 would be l e s s than the f o r e c a s t i n c r e a s e
between November 1982 and November 1983, i t was no l o n g e r proposed t h a t
any p a r t o f t h e excess p r o v i s i o n f o r i n f l a t i o n i n t h e November 1982
u p r a t i n g should be r e c o v e r e d .
The use o f a c t u a l f i g u r e s , u n a d j u s t e d
f o r the p a s t excess p r o v i s i o n , was l i k e l y t o be more f a v o u r a b l e t o
b e n e f i c i a r i e s than t h e use o f a f o r e c a s t w i t h f u l l o r n e a r - f u l l a d j u s t ­
ment. I t was proposed t h a t i n c r e a s e s i n p u b l i c s e r v i c e p e n s i o n s , which
were l i n k e d by s t a t u t e t o i n c r e a s e s i n S t a t e r e t i r e m e n t p e n s i o n s , should
be d e a l t w i t h i n the same way.
T h i s made i t unnecessary t o pursue t h e
p o s s i b i l i t y , r a i s e d i n t h e Cabinet's p r e v i o u s d i s c u s s i o n , o f b r e a k i n g
the s t a t u t o r y l i n k between i n c r e a s e s i n p u b l i c s e r v i c e pensions and
i n c r e a s e s i n S t a t e p e n s i o n s : t h e problem o f excess p r o v i s i o n f o r
i n f l a t i o n , and consequent u n i n t e n d e d i n c r e a s e s i n t h e r e a l v a l u e o f
p e n s i o n s , which had been t h e cause o f t h e Cabinet's p r e v i o u s concern,
c o u l d no l o n g e r a r i s e i f pensions i n c r e a s e were based on a c t u a l i n c r e a s e s
i n t h e RPI r a t h e r than f o r e c a s t s .
A l t h o u g h t h e p r o p o s a l s were e n t i r e l y l o g i c a l , they would need c a r e f u l
p r e s e n t a t i o n b o t h i n t h e Budget Statement and s u b s e q u e n t l y . The
Government would be c r i t i c i s e d f o r changing f r o m f o r e c a s t s t o a c t u a l
f i g u r e s as t h e b a s i s o f u p r a t i n g s a t a t i m e when t h i s change, i n i s o l a t i o n ,
seemed l i k e l y t o be l e s s f a v o u r a b l e t o b e n e f i c i a r i e s ; b u t such c r i t i c i s m
c o u l d be r e b u t t e d i f , as was proposed, no a d j u s t m e n t was made i n November
1983 f o r the excess p r o v i s i o n f o r i n f l a t i o n i n November 1982.
I t was
SECRET AND PERSONAL SECRET AND PERSONAL h e l p f u l that several organisations representing pensioners, i n c l u d i n g the i n f l u e n t i a l N a t i o n a l F e d e r a t i o n o f Old Age Pensioners A s s o c i a t i o n s , had pressed f o r t h e change. I n d i s c u s s i o n , t h e r e was g e n e r a l agreement w i t h t h e p r o p o s a l s o u t l i n e d by t h e Prime M i n i s t e r . The f o l l o w i n g main p o i n t s were a l s o made ­
a.
Using a c t u a l i n c r e a s e s i n t h e RPI r a t h e r t h a n f o r e c a s t s as t h e b a s i s o f u p r a t i n g s o c i a l s e c u r i t y b e n e f i t s would reduce t h e a t t e n t i o n g i v e n t o t h e f o r e c a s t s o f i n f l a t i o n which had t o be p u b l i s h e d a t t h e time o f t h e Budget by v i r t u e o f t h e p r o v i s i o n s o f t h e I n d u s t r y A c t 1975. I t was p a r t i c u l a r l y u n d e s i r a b l e i n t h e c o n t e x t o f pay b a r g a i n i n g t o draw e x c e s s i v e a t t e n t i o n t o such f o r e c a s t s . b.
A l t h o u g h t h e r e were p e r s u a s i v e a d m i n i s t r a t i v e and o t h e r reasons f o r u s i n g t h e May RPI f i g u r e s as t h e b a s i s o f u p r a t i n g s , i t would be d e s i r a b l e f o r t h e proposed l e g i s l a t i o n n o t t o p r e v e n t t h e use o f l a t e r f i g u r e s i f t h a t should a t some stage prove f e a s i b l e . The p r o p o s a l s were f u l l y c o n s i s t e n t w i t h t h e Government's c.
pledge t o m a i n t a i n t h e r e a l v a l u e o f S t a t e r e t i r e m e n t pensions d u r i n g t h e l i f e t i m e o f t h e p r e s e n t P a r l i a m e n t ; . i t was, however, l i k e l y t h a t t h e Government would be pressed d u r i n g t h e Budget debate t o make c l e a r i t s p o l i c y towards m a i n t a i n i n g t h e r e a l v a l u e o f pensions and o t h e r b e n e f i t s a f t e r e x p i r y o f t h e present pledges. The
Cabinet ­
1.
Approved t h e p r o p o s a l s d e s c r i b e d by t h e Prime M i n i s t e r r e l a t i n g t o the f u t u r e uprating of social security benefits and p u b l i c s e r v i c e p e n s i o n s , and i n p a r t i c u l a r agreed: i.
t h a t t h e excess p r o v i s i o n f o r i n f l a t i o n i n t h e November 1982 u p r a t i n g o f S t a t e r e t i r e m e n t pensions and o t h e r s o c i a l s e c u r i t y b e n e f i t s should n o t be recovered; ii.
t h a t l e g i s l a t i o n should be i n t r o d u c e d t o p r o v i d e t h a t t h e November 1983 u p r a t i n g and subsequent u p r a t i n g s should be based on t h e a c t u a l i n c r e a s e i n t h e R e t a i l P r i c e s Index i n t h e t w e l v e ­
month p e r i o d ending i n t h e p r e v i o u s May; iii.
t h a t p u b l i c s e r v i c e pensions should be t r e a t e d i n t h e same way as S t a t e r e t i r e m e n t p e n s i o n s . 2.
I n v i t e d t h e Secretary o f State f o r S o c i a l Services t o c o n s i d e r whether t h e l e g i s l a t i o n t o g i v e e f f e c t t o t h e p r o p o s a l s should p e r m i t t h e use o f i n c r e a s e s i n t h e R e t a i l P r i c e s Index over a twelve-month p e r i o d ending i n a month l a t e r t h a n May as t h e b a s i s o f f u t u r e u p r a t i n g s o f s o c i a l s e c u r i t y b e n e f i t s and p u b l i c s e r v i c e p e n s i o n s , i f t h a t should i n due course prove t o be a d m i n i s t r a t i v e l y and politically feasible. 2 SECRET AND PERSONAL
I
SECRET AND PERSONAL M 1
3.
Took n o t e t h a t t h e Prime M i n i s t e r would d i s c u s s f u r t h e r w i t h t h e C h a n c e l l o r o f t h e Exchequer and t h e S e c r e t a r y o f S t a t e f o r S o c i a l S e r v i c e s how t h e Government's d e c i s i o n s c o u l d b e s t be p r e s e n t e d i n t h e C h a n c e l l o r o f t h e Exchequer's f o r t h c o m i n g Budget Statement and s u b s e q u e n t l y . Cabinet
Office 7 March 1983 3 SECRET AND PERSONAL Index
',
SUBJECT j
, foknc^
No .
rfo^kb^
Contents
_
I
Date
Copy No I o f 3 Copies MOST CONFIDENTIAL RECOPJ) TO CC(83) 8 t h C o n c l u s i o n s , M i n u t e 2 Thursday 10 March 1983 FOREIGN
AFFAIRS
Hong Kong
THE PRIME MINISTER s a i d t h a t d u r i n g h e r v i s i t t o Peking i n September 1982 Chairman Deng X i a o p i n g and t h e t h e n Prime M i n i s t e r o f t h e Chinese People's R e p u b l i c had agreed a communique, i s s u e d j o i n t l y w i t h h e r , which committed t h e two s i d e s t o h o l d t a l k s t h r o u g h d i p l o m a t i c channels about ways o f m a i n t a i n i n g t h e f u t u r e s t a b i l i t y and p r o s p e r i t y o f Hong Kong. D e s p i t e r e p e a t e d approaches f r o m t h e B r i t i s h s i d e , these t a l k s had n o t y e t t a k e n p l a c e . I n s t e a d , t h e Chinese were seeking t o make c e s s i o n o f s o v e r e i g n t y over Hong Kong by t h e B r i t i s h Government a p r e c o n d i t i o n f o r s t a r t i n g t h e t a l k s ; and t h e r e was evidence t o suggest t h a t t h e Chinese Government was i n t e n d i n g t o use t h e o c c a s i o n o f a meeting o f t h e Chinese People's Congress i n June 1983 t o announce t h a t i t s i n t e n t i o n s f o r Hong Kong were t o assume f u l l s o v e r e i g n t y over t h e whole c o l o n y , which would t h e r e a f t e r be a d m i n i s t e r e d as a s p e c i a l autonomous r e g i o n o f China. T h i s would be d i s a s t r o u s f o r c o n f i d e n c e i n Hong Kong. Unless s a t i s f a c t o r y arrangements c o u l d be n e g o t i a t e d w i t h China f o r m a i n t a i n i n g B r i t i s h a d m i n i s t r a t i o n a l o n g w i t h t h e p r e s e n t l e g a l and economic system i n Hong Kong, t h e economy o f t h e c o l o n y would c o l l a p s e . S o v e r e i g n t y over 92 p e r c e n t o f i t s t e r r i t o r y would i n any case r e v e r t t o China i n 1997 w i t h t h e e x p i r y o f t h e l e a s e o f t h e New T e r r i t o r i e s - w i t h o u t which Hong Kong would cease t o be v i a b l e .
I t was t h e r e f o r e v i t a l t o g e t t a l k s w i t h China s t a r t e d soon. A c c o r d i n g l y , a f t e r c o n s u l t a t i o n w i t h t h e Governor o f Hong Kong, S i r Edward Youde, and HM Ambassador a t P e k i n g , S i r Percy Cradock, she proposed, s u b j e c t t o t h e agreement o f t h e C a b i n e t , t o w r i t e t o Chairman Deng X i a o p i n g . Her l e t t e r , t h e proposed t e x t o f which t h e Prime M i n i s t e r read t o t h e C a b i n e t , would be d e l i v e r e d by HM Ambassador on h i s r e t u r n t o Peking w i t h i n t h e n e x t few days. I t would express d i s a p p o i n t m e n t t h a t t a l k s had n o t s t a r t e d on t h e b a s i s o f t h e j o i n t communique o f l a s t September, and would propose t h a t they s h o u l d s t a r t a t once. The l e t t e r would go on t o say, t h a t p r o v i d e d t h a t f o r m a l agreement c o u l d be reached on arrangements f o r m a i n t a i n i n g t h e s t a b i l i t y and p r o s p e r i t y o f t h e c o l o n y which were s a t i s f a c t o r y t o t h e people o f Hong Kong and t o t h e B r i t i s h Government as w e l l as t o t h e Government o f China, she would be p r e p a r e d , s u b j e c t t o t h e agreement o f t h e C a b i n e t , t o recommend t o P a r l i a m e n t t h a t s o v e r e i g n t y over t h e whole o f Hong Kong s h o u l d be t r a n s f e r r e d t o China. T h i s would i n v o l v e g o i n g one step f u r t h e r t h a n t h e f o r m u l a she had used w i t h t h e Chinese Government i n September 1982, when she had s a i d t h a t , i n t h e c i r c u m s t a n c e s d e s c r i b e d , she would be p r e p a r e d t o " c o n s i d e r " making such a recommendation t o P a r l i a m e n t . The Cabinet -
Agreed t h a t t h e Prime M i n i s t e r s h o u l d w r i t e t o Chairman Deng X i a o p i n g i n t h e terms proposed. H
TOP
SECSET
m
Index SUBJECT No .
Contents
Date
• • H
Copy No 1 o f 2 Copies
MOST CONFIDENTIAL RECORD
TO
CC(83) 1 1 t h C o n c l u s i o n s
Thursday
FOREIGN
AFFAIRS
Hong Kong
Previous
Reference:
CC(83) 8 t h
Conclusions,
Minute 2
24 March 1983
THE PRIME MINISTER s a i d t h a t her l e t t e r t o t h e Chinese Prime M i n i s t e r ,
t h e t e n o r o f which t h e Cabinet had approved a t t h e i r m e e t i n g on
10 March, had been d e l i v e r e d . The Chinese Prime M i n i s t e r had i n d i c a t e d
t h a t he was n o t y e t ready t o r e c e i v e t h e B r i t i s h Ambassador i n Peking
to discuss the l e t t e r .
I n t h e meantime t h e Chinese Government had
c a n c e l l e d a c o n t r a c t p l a c e d i n B r i t a i n f o r the r e f i t o f t h e i r Luda
d e s t r o y e r s , a p p a r e n t l y o u t o f a f e e l i n g t h a t i t was i n p r i n c i p l e wrong
f o r Chinese d e s t r o y e r s t o be r e f i t t e d i n f o r e i g n s h i p y a r d s . A B r i t i s h
f i r m had, however, won a c o n t r a c t f o r making board f r o m r i c e s t r a w .
The Chinese M i n i s t e r o f Commerce would be a r r i v i n g l a t e r i n t h e day on
a v i s i t t o t h i s c o u n t r y , i n t h e course o f w h i c h she would meet t h e
Prime M i n i s t e r and t h e S e c r e t a r i e s o f S t a t e f o r I n d u s t r y and Trade.
The Cabinet Took n o t e .
TOP SECRET
I
Index
SUBJECT f h & z i & f &
No.
Contents
H
• -Uo»a tCwa
U
(J
Date
CONFIDENTIAL
I *
I
Copy No X
o f 3 Copies MOST CONFIDENTIAL RECORD TO CC(83) 18th Conclusions Thursday
FOREIGN
AFFAIRS '
Hong Kong
Previous
Reference:
CC(83) 8 t h
Conclusions,
Minute 2
12 May 1983 THE PRIME MINISTER r e p o r t e d t h a t a r e p l y had now been r e c e i v e d f r o m t h e People's R e p u b l i c o f China. The g e n e r a l tone o f t h e Chinese l e t t e r was f r i e n d l y .
They proposed an e a r l y meeting i n Peking t o agree on t h e agenda f o r p r e p a r i n g d i s c u s s i o n s . These t a l k s m i g h t s t a r t i n May or June. I n t h e d i s c u s s i o n s t h e U n i t e d Kingdom and Chinese l e t t e r s would b o t h be on t h e t a b l e . Our p o s i t i o n on a t r a n s f e r o f s o v e r e i g n t y was f u l l y p r o t e c t e d b y t h e c o n d i t i o n s which we had l a i d down, i n c l u d i n g t h e agreement o f t h e B r i t i s h P a r l i a m e n t and t h e people o f Hong Kong. The Chinese now seemed t o r e c o g n i s e how complex t h i s q u e s t i o n was. I n d i s c u s s i o n i t was p o i n t e d o u t t h a t i n f o r m a l c o n t a c t s w i t h t h e L i b e r a l and S o c i a l Democratic P a r t i e s (Mr Healey had n o t responded t o t h e o f f e r ) had i n d i c a t e d t h a t they expected t h e Government's p o s i t i o n t o be f u l l y a c c e p t a b l e t o t h e House o f Commons. The Cabinet -
Took n o t e . CONFIDENTIAL Index SUBJECT i
(
CO.
iq m. ( ^ ^ o W g ^ a
T C ^ W
I
No.
Contents
0 lb i ^ e .
I
1^3
^
|
^
Date
TOP SECRET
Copy No I o f 3 Copies
MOST CONFIDENTIAL RECORD
TO
CC(83) 19th Conclusions
Thursday 16 June 1983
FOREIGN
AFFAIRS
Hong Kong
Previous
Reference:
CC(83) 1 8 t h
Conclusions,
Minute 2
THE PRIME MINISTER s a i d t h a t n e g o t i a t i o n s w i t h t h e Government o f the
People's R e p u b l i c o f China were c o n t i n u i n g on t h e b a s i s o f the l e t t e r
which she had s e n t , w i t h the Cabinet's agreement, t o the Chinese Prime
M i n i s t e r , Mr Zhao Z i y a n g , and the Chinese r e p l y . The Chinese had a l l o w e d
a d i s t o r t e d v e r s i o n o f t h e c o n t e n t s o f her l e t t e r t o become p u b l i c , b u t no
g r e a t harm had been done. I t was c l e a r t h a t they were now anxious t o
proceed e x p e d i t i o u s l y w i t h the f o r m a l t a l k s about the f u t u r e o f Hong Kong;
n e g o t i a t i o n s were i n p r o g r e s s about the agenda, and the Chinese had come
some way t o meet t h e B r i t i s h p o s i t i o n by o f f e r i n g t o r e l e g a t e the q u e s t i o n
o f a t r a n s f e r o f sovereignty to t h i r d place i n t h e i r l i s t .
Her M a j e s t y ' s
Ambassador a t Peking had now been i n s t r u c t e d t o communicate the B r i t i s h
Government's v i e w i n the f o l l o w i n g terms:
" I n o r d e r t o meet the w i s h o f the Chinese s i d e f o r a broad agenda
c o v e r i n g the whole course o f the f o r m a l t a l k s , t h e B r i t i s h s i d e agree
t h a t , d u r i n g t h e course o f the t a l k s , m a t t e r s r e l e v a n t t o the f u t u r e
of Hong Kong should be d i s c u s s e d , i n p a r t i c u l a r a l l the s u b j e c t s
mentioned i n Mrs T h a t c h e r ' s l e t t e r and Premier Zhao Ziyang's l e t t e r .
These w i l l i n c l u d e arrangements f o r Hong Kong a f t e r 1997, a r r a n g e ­
ments f o r Hong Kong between now and 1997, and m a t t e r s r e l a t i n g t o a
t r a n s f e r o f s o v e r e i g n t y i n t h a t o r d e r . I t i s agreed t h a t t h i s agenda
should remain s t r i c t l y c o n f i d e n t i a l . "
The Hong Kong E x e c u t i v e C o u n c i l had been c o n s u l t e d and had agreed t h a t i t
would be r i g h t f o r the B r i t i s h Government t o e n t e r i n t o t a l k s on the f o r e ­
g o i n g b a s i s . The concept t h a t t h e f i n a l outcome would have t o be
a c c e p t a b l e t o t h e B r i t i s h P a r l i a m e n t , t o China and t o the people o f Hong
Kong had n o t been made e x p l i c i t , s i n c e i t was judged t h a t t h i s would be
r e j e c t e d by the Chinese, b u t was i m p l i c i t i n the r e f e r e n c e t o her l e t t e r
t o the Chinese Prime M i n i s t e r . The eagerness w h i c h the Chinese Government
was now showing t o b e g i n t h e f o r m a l t a l k s was an i m p o r t a n t development,
and suggested the b e g i n n i n g o f some u n d e r s t a n d i n g on the Chinese s i d e o f
the need t o a v o i d a c o l l a p s e o f c o n f i d e n c e i n Hong Kong; b u t the n e g o t i a ­
t i o n s would be l o n g , c o m p l i c a t e d and d i f f i c u l t and i t would be i m p o r t a n t
t o discourage any e x p e c t a t i o n o f an e a r l y r e s u l t .
TOP SECRET Index
I
SUBJECT
No .
Contents
Date
CONFIDENTIAL Copy No \ o f 7 Copies MOST CONFIDENTIAL RECORD TO CC(83) 21st
Conclusions
Thursday 30 June 1983 PARLIAMENTARY
PAY AND
ALLOWANCES
Previous
Reference:
CC(83) 17th
Conclusions,
Minute 2
THE PRIME MINISTER s a i d t h a t the Top S a l a r i e s Review Body (TSRB), i n t h e i r Report No 20 on P a r l i a m e n t a r y Pay and A l l o w a n c e s , had proposed t h a t t h e s a l a r y o f Members o f P a r l i a m e n t should be i n c r e a s e d by 31 per c e n t , f r o m £14,510 t o £19,000. The Report c o n t a i n e d p r o p o s a l s on p e n s i o n s , i n c l u d i n g an i n c r e a s e i n t h e a c c r u a l r a t e f r o m /60th t o /50th and an i n c r e a s e i n the c o n t r i b u t i o n r a t e f r o m 6 per cent t o 8 per c e n t . I t a l s o proposed i n c r e a s e s i n allowances f o r Members o f P a r l i a m e n t and Peers, and l a r g e i n c r e a s e s i n t h e s a l a r i e s of M i n i s t e r s . She had a l r e a d y made c l e a r t h e Government's g e n e r a l a t t i t u d e t o the recommendations f o r M i n i s t e r s ; i t was now necessary t o c o n s i d e r those r e l a t i n g t o Members o f P a r l i a m e n t . The p r o p o s a l s on allowances and pensions were v e r y generous and, t o g e t h e r w i t h p r e v i o u s pay i n c r e a s e s , c o u l d j u s t i f y a much s m a l l e r s a l a r y i n c r e a s e t h a n t h e TSRB recommended. The 31 per cent proposed by t h e TSRB was q u i t e unacceptable and would have a d i s a s t r o u s e f f e c t on o t h e r pay s e t t l e m e n t s . There were two o p t i o n s : t o r e j e c t the Report a l t o g e t h e r and suggest a f i g u r e s i m i l a r t o r e c e n t p u b l i c s e c t o r s e t t l e m e n t s ; o r t o propose as a compromise an i n c r e a s e o f , say, 15 per c e n t , i n w h i c h case t h e pensions c o n t r i b u t i o n r a t e might be s e t a t 9 per c e n t . I n d i s c u s s i o n t h e f o l l o w i n g main p o i n t s were made ­
a.
A p r o p o s a l by t h e Government t h a t t h e s a l a r i e s o f Members o f P a r l i a m e n t should be i n c r e a s e d b y 15 per cent would c o n t r a s t u n f a v o u r a b l y w i t h t h e 3.7 per cent i n c r e a s e i n t h e o l d age p e n s i o n and w i t h o t h e r pay s e t t l e m e n t s i n t h e p u b l i c s e c t o r , w h i c h had been i n t h e r e g i o n of 5 per cent and were expected t o be even lower i n t h e f o r t h c o m i n g pay round.
From t h a t p o i n t o f v i e w i t m i g h t be b e t t e r f o r t h e Government t o propose a low i n c r e a s e , accept the r i s k o f a d e f e a t i n t h e House o f Commons, and be prepared t o d i s t a n c e i t s e l f f r o m t h e House's d e c i s i o n . I t was by no means c e r t a i n t h a t such a p r o p o s a l would i n f a c t be d e f e a t e d . b.
I f a low o f f e r were made, emphasis c o u l d be p l a c e d on the o t h e r p r o p o s a l s i n t h e TSRB R e p o r t , e s p e c i a l l y those on p e n s i o n s , w h i c h were v e r y f a v o u r a b l e . I t was a l s o r e l e v a n t t h a t i n t h e p r e v i o u s P a r l i a m e n t Members' pay had r i s e n f r o m £6,900 t o £14,510. c.
I f t h e Government proposed a low f i g u r e and was d e f e a t e d , t h e a u t h o r i t y o f t h e Leader o f the House and t h e Chief Whip c o u l d be damaged. Some o f t h e Government's s u p p o r t e r s had no a d d i t i o n a l sources o f income, and Members o f P a r l i a m e n t , u n l i k e o t h e r p u b l i c s e r v a n t s , had no s e c u r i t y o f t e n u r e . There was s u b s t a n t i a l support f o r the TSRB recommendations. From t h a t p o i n t o f v i e w i t might be p r e f e r a b l e f o r t h e Government t o propose t h e lowest f i g u r e t h a t was l i k e l y t o be accepted by P a r l i a m e n t . CONFIDENTIAL I
•
CONFIDENTIAL
d.
Whatever p r o p o s a l t h e Government made, i t was n o t c l e a r how f a r i t c o u l d d i s t a n c e i t s e l f f r o m t h e f i n a l d e c i s i o n of t h e House of Commons. The s i z e of t h e Government's m a j o r i t y c o u l d l e a d the p u b l i c t o a s s o c i a t e t h e Government w i t h whatever d e c i s i o n the House made. e.
The Government's a t t i t u d e t o the TSRB's recommendations on M i n i s t e r i a l s a l a r i e s would be d i s c u s s e d i n t h e f o l l o w i n g week. There would be d i f f i c u l t i e s , p a r t i c u l a r l y f o r P a r l i a m e n t a r y S e c r e t a r i e s , i f
t h e House approved a h i g h i n c r e a s e f o r Members and i f M i n i s t e r i a l s a l a r i e s were n o t i n c r e a s e d . A Member l o s t s u b s t a n t i a l t a x allowances on becoming a M i n i s t e r . f.
I t was r e c o g n i s e d t h a t t h e q u e s t i o n o f M i n i s t e r i a l s a l a r i e s i n the House o f Lords r a i s e d separate i s s u e s . THE PRIME MINISTER, summing up t h e d i s c u s s i o n , s a i d t h a t i t would be necessary f o r the Chief Whip t o take f u r t h e r soundings o f o p i n i o n among t h e Government's s u p p o r t e r s b e f o r e a d e c i s i o n c o u l d be t a k e n . An a t t e m p t should be made t o i n f l u e n c e them towards acceptance o f a f i g u r e around 4 per c e n t , by p o i n t i n g o u t t h e l e v e l o f awards t o pensioners and t o o t h e r s i n t h e p u b l i c s e c t o r , and of a pension c o n t r i b u t i o n of 9 per cent ( t h e e q u i v a l e n t of t h e 8 per cent e f f e c t i v e l y i n f o r c e i n the C i v i l S e r v i c e ) . The v a l u e o f t h e recommendations on pensions and allowances should a l s o be s t r e s s e d . I t was c l e a r t h a t a h i g h i n c r e a s e i n t h e s a l a r i e s o f Members of P a r l i a m e n t c o u l d have an adverse e f f e c t on t h e Government's economic strategy. The Cabinet
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1.
I n v i t e d t h e Chief Whip t o take f u r t h e r soundings of o p i n i o n among t h e Government's s u p p o r t e r s , as i n d i c a t e d by t h e Prime M i n i s t e r i n her summing up of the d i s c u s s i o n . 2.
Agreed t o resume t h e i r c o n s i d e r a t i o n o f Reports No 19 and 20 by t h e Top S a l a r i e s Review Body a t t h e i r m e e t i n g on 7 J u l y 1983. 2 I
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1
MOST CONFIDENTIAL RECORD
Index
SUBJECT
^
CCC83) 2 8 t h
Conclusions,
T h u r s d a y 22 September 1983
FOREIGN AFFAIRS: Hong Kong
No.
Contents
Date
1
SECRET Copy No I o f 3 Copies
MOST CONFIDENTIAL RECORD TO CC(83) 28th
Conclusions
Thursday 22 September 1983 FOREIGN
AFFAIRS
Hong Kong
Previous
I
Reference:
CC(83) 19th
Conclusions,
Minute 2
THE PRIME MINISTER s a i d t h a t t h e n e x t round o f t a l k s w i t h t h e Chinese Government about t h e f u t u r e o f Hong Kong, which were b e g i n n i n g t h a t week, would be c r u c i a l and d i f f i c u l t .
The U n i t e d Kingdom was f o r t u n a t e t o have a s k i l f u l and e x p e r i e n c e d n e g o t i a t o r i n S i r Percy Cradock. The Chinese were i n s i s t i n g n o t o n l y on Chinese s o v e r e i g n t y b u t a l s o on Chinese a d m i n i s t r a t i o n o f the whole Colony f r o m 1997 and had so f a r r e f u s e d t o t a k e any account o f t h e B r i t i s h c o n t e n t i o n t h a t the l i n k w i t h t h e U n i t e d Kingdom was e s s e n t i a l t o c o n f i d e n c e and hence t o
Hong Kong's c o n t i n u e d p r o s p e r i t y . D e s p i t e t h e c o n f i d e n t i a l c h a r a c t e r o f the t a l k s , the Chinese were making t h e i r own p o s i t i o n and i n t e n t i o n s p u b l i c , and t h i s had p r e c i p i t a t e d s e r i o u s f a l l s i n t h e v a l u e o f t h e Hong Kong d o l l a r and on t h e Hong Kong Stock Exchange. There was l i k e l y t o be growing P a r l i a m e n t a r y concern about how f a r t h e Government was t a k i n g account o f t h e wishes o f the p o p u l a t i o n o f Hong Kong, f o u r m i l l i o n o f whom were refugees f r o m China f o r whom B r i t a i n had a p a r t i c u l a r moral r e s p o n s i b i l i t y . The Government was i n f a c t i n c l o s e touch w i t h t h e E x e c u t i v e C o u n c i l , t h e L e g i s l a t i v e C o u n c i l and w i t h t h e e l e c t e d D i s t r i c t C o u n c i l s i n Hong Kong, as w e l l as w i t h o t h e r r e p r e s e n t a t i v e o r g a n i s a t i o n s i n t h e Colony. A referendum would be a b l e t o be e x p l o i t e d by t h e Chinese i n a way which would make a f r e e e x p r e s s i o n o f o p i n i o n i m p o s s i b l e . The overwhelming m a j o r i t y o f t h e p o p u l a t i o n wanted t h e s t a t u s quo m a i n t a i n e d , b u t u n f o r t u n a t e l y s e n i o r members o f t h e Hong Kong Chinese community were f r i g h t e n e d t o make t h i s c l e a r t o the Chinese Government when they v i s i t e d Peking.
The Chinese a u t h o r i t i e s p r e f e r r e d t o b e l i e v e t h a t Hong Kong would c o n t i n u e as b e f o r e f o l l o w i n g a complete Chinese t a k e o v e r .
I t was u n c l e a r how f a r , i f a t a l l , they understood t h e importance o f t h e c o n f i d e n c e f a c t o r (and hence of a c o n t i n u e d a d m i n i s t r a t i v e l i n k w i t h B r i t a i n ) f o r Hong Kong's f u t u r e p r o s p e r i t y : b u t Chinese n a t i o n a l p r i d e , combined w i t h Communist non­
comprehension o f how a c a p i t a l i s t system worked, made i t d i f f i c u l t f o r them t o accept t h a t B r i t a i n should have any r i g h t s i n Hong Kong a f t e r 1997, whatever t h e economic consequences. U n f o r t u n a t e l y B r i t i s h p u b l i c o p i n i o n tended t o over e s t i m a t e B r i t i s h power and the e x t e n t o f B r i t i s h l e v e r a g e w i t h t h e Chinese. The t a s k o f t h e B r i t i s h n e g o t i a t o r s i n t h e coming round would be t o keep t h e Chinese i n p l a y on t h e q u e s t i o n o f c o n f i d e n c e and c o n t i n u e t o put across t h e B r i t i s h case w i t h o u t prompting them t o break o f f t h e t a l k s . The Cabinet -
Took n o t e . SECRET MOST CONFIDENTIAL RECORD Index
SUBJECT
CC(83) 3 3 r d
Thursday
Conclusions,
10 November 1983 ECONOMIC SITUATION AND PROSPECTS No.
Contents
Date
Copy No I o f 4 Copies
MOST CONFIDENTIAL RECORD TO CC(83) 33rd
Conclusions
Thursday 10 November 1983 ECONOMIC
SITUATION
AND
PROSPECTS
THE CHANCELLOR OF THE EXCHEQUER s a i d t h a t he would be making h i s Autumn Statement on Thursday 17 November. T h i s would i n c l u d e the o u t l i n e p u b l i c e x p e n d i t u r e programmes f o r 1984-85, r e f l e c t i n g t h e d e c i s i o n s t a k e n by t h e Cabinet i n t h e i r e a r l i e r d i s c u s s i o n . I t would a l s o d e a l w i t h N a t i o n a l I n s u r a n c e c o n t r i b u t i o n s (NICs) and the economic f o r e c a s t s r e q u i r e d by t h e p r o v i s i o n s o f the I n d u s t r y A c t . He had agreed w i t h the S e c r e t a r y o f S t a t e f o r S o c i a l S e r v i c e s t h a t t h e r e would be no change i n t h e r a t e o f e i t h e r employers' o r employees' NICs i n
1984-85. The lower e a r n i n g s l i m i t , below which NICs were n o t charged, would be i n c r e a s e d i n l i n e w i t h the S t a t e R e t i r e m e n t Pension t o £34 a week; t h e upper e a r n i n g s l i m i t , income above which was n o t s u b j e c t to NICs, would be i n c r e a s e d i n l i n e w i t h e a r n i n g s t o £250 a week. The Exchequer supplement would be reduced f r o m 13 per cent t o 11 p e r c e n t . As a r e s u l t o f these changes, t h e s u r p l u s i n t h e N a t i o n a l I n s u r a n c e Fund would be reduced; b u t i t would s t i l l be w e l l above the l e v e l which the Government A c t u a r y had a d v i s e d was necessary.
The b u d g e t a r y p r o s p e c t which would be r e v e a l e d i n the I n d u s t r y Act f o r e c a s t s was n o t c o m f o r t a b l e . The p u b l i c s e c t o r b o r r o w i n g r e q u i r e m e n t i n 1983-84 was above t h e f o r e c a s t made a t t h e time o f the Budget. T h i s would i n c r e a s e the burden on debt i n t e r e s t i n 1984-85. I t a l s o seemed t h a t t h e r e would be l i t t l e s h o r t f a l l i n t h a t year i n c a s h - l i m i t e d e x p e n d i t u r e programmes. F o r e c a s t s o f revenue f r o m N o r t h Sea o i l were h i g h e r than b e f o r e ; and t h e r e was l i t t l e change i n t h e f o r e c a s t y i e l d o f o t h e r I n l a n d Revenue t a x e s ; b u t because o f lower i n f l a t i o n the f o r e c a s t y i e l d of Customs and E x c i s e d u t i e s was l o w e r . The n e t e f f e c t was t h a t a s m a l l n e g a t i v e f i s c a l a d j u s t m e n t ( t h a t i s , an i n c r e a s e i n the r e a l burden o f t a x a t i o n ) would p r o b a b l y be r e q u i r e d i n s t e a d o f t h e s m a l l p o s i t i v e a d j u s t m e n t f o r e c a s t a t the 1983 Budget. Such f o r e c a s t s were, however, n e c e s s a r i l y u n c e r t a i n , s i n c e they depended on t h e d i f f e r e n c e between v e r y l a r g e f l o w s o f revenue and e x p e n d i t u r e . A t the p r e s e n t stage t h e f i s c a l a d j u s t m e n t was an assessment o f t h e p r o s p e c t based on e x i s t i n g p o l i c i e s and assumptions and on t h e b e s t a v a i l a b l e f i g u r e s ; i t was n o t a budget judgment. I n f l a t i o n was f o r e c a s t t o be under 5 per cent by t h e end o f 1984. The economy was expected t o grow by up t o 3 per cent i n b o t h 1983-84 and 1984-85. Much o f t h i s growth i n 1983-84 was due t o h i g h e r consumption.
But i n 1984-85 a h i g h e r p r o p o r t i o n would come f r o m growth i n investment and e x p o r t s , as our main e x p o r t m a r k e t s , such as West Germany, r e c o v e r e d : growth i n e x p o r t s was a l s o b e i n g f o r e c a s t by the C o n f e d e r a t i o n o f B r i t i s h I n d u s t r y . The balance o f payments was expected t o be n e u t r a l . The Cabinet -
Took n o t e . SECRET