IS D O C U M E N T IS T H E P R O P E R T Y OF H E R B R I T A N N I C M A J E S T Y * S
C ( 6 8 ) 19
GOVERNMENT)
C O P Y NO.
65
^
11th January, 196Q
CABINET
PUB LIC E X P E N D I T U R E :
POST - D E V A L U A T I O N MEASURES
DEFENCE CUTS;
THE F. I l l
M e m o r a n d u m by the S e c r e t a r y of State f o r D e f e n c e
"When we d i s c u s s e d the F , 111 last week, the Cabinet
( C C ( 6 8 ) 1st C o n c l u s i o n s , Minute 3) invited m e t o p r o p o s e a l t e r n a t i v e
e c o n o m i e s with a v i e w t o s e c u r i n g d e f e n c e savings c o m p a r a b l e with
those which I could m a k e if the whole F . I I 1 o r d e r w e r e c a n c e l l e d .
The G r o s s Saving f r o m C a n c e l l a t i o n
2.
On the assumption that our w i t h d r a w a l f r o m E a s t of Suez
is c o m p l e t e d by A p r i l , 1971 I can r e d u c e the defence budget f r o m
£ 1 , 890 m i l l i o n in 1968-69 t o £ 1 , 650 m i l l i o n in 1972-73 (at 1964 p r i c e s )
while keeping the 5 0 F . I l l s and 170 Phantoms now on o r d e r .
This
saving v/ould be reduced by £10 m i l l i o n if withdrawal is not c o m p l e t e d
until A p r i l , 1972.
The i m p a c t on a l l t h r e e S e r \ i c e s w i l l be s e v e r e
and r a p i d , though it w i l l take s o m e t i m e t o w o r k out the consequences
in d e t a i l .
B y the e a r l y 1970s t h e r e w i l l be m a s s i v e cuts in the
numbers of fighting units.
The s i z e of the f o r c e s w i l l be cut by
80,000 - r e p r e s e n t i n g an i m m e n s e t r a n s f e r of m a n p o w e r t o the c i v i l
s e c t o r - equivalent, with t h e i r f a m i l i e s , t o a town the s i z e of
Newcastle or L e i c e s t e r .
A p a r t f r o m a r a d i c a l reduction in the
whole support o r g a n i s a t i o n we shall have cuts in many " t e e t h " a r e a s ,
including the a i r c r a f t c a r r i e r s and the r a t e of new naval building;
cuts in the number and o r g a n i s a t i o n of r e g i m e n t s and b a t t a l i o n s ;
cuts in the t r a n s p o r t and m a r i t i m e f o r c e s of the R A F and the
e l i m i n a t i o n of the proposed V G c o m b a t a i r c r a f t .
A g a i n s t this
b a c k g r o u n d , if we a r e t o maintain e f f e c t i v e volunteer f o r c e s at a l l ,
the r e m a i n d e r must know they w i l l have good conditions of s e r v i c e
and such new equipment as is e s s e n t i a l f o r t h e i r t a s k s ,
3.
If our reduced f o r c e s a r e to b e g i v e n no p r o t e c t i o n w h a t e v e r
against the consequences of l o s i n g a s t r i k e / r e c o n n a i s s a a e s eapabildty
on which they have depended since the invention of the f l y i n g m a c h i n e ,
and our N A T O a l l i e s a r e p r e p a r e d t o see us r e m o v e a l l t h e i r b e s t
r e c o n n a i s s a n c e a i r c r a f t and an e s s e n t i a l part of their l o n g e r - r a n g e
s t r i k e f o r c e without making any c o m p e n s a t o r y i n c r e a s e in our
contribution in other f f o l d s , c a n c e l l a t i o n of the F , 111 o r d e r would
save an a v e r a g e of £39 m i l l i o n a y e a r or £390 m i l l i o n in a l l up t i l l
1977-78, though owing t o the incidence of c r e d i t r e p a y m e n t s the
saving in 1972-73 would be £57 m i l l i o n .
4.
On the other hand, owing t o c a n c e l l a t i o n c h a r g e s our
expenditure next y e a r on the F , 1.11 would i n c r e a s e f r o m
£16 m i l l i o n t o £ 3 8 m i l l i o n , £33 m i l l i o n of which would be in d o l l a r s .
W e would a l s o l o s e the substantial benefits under the offset a g r e e m e n t
which I d e s c r i b e d in C ( 6 8 ) 10, and which ensure that if wo k e e p the
50 F . I l l s , we shall e a r n at l e a s t $5 0 m i l l i o n m o r e than we pay o v e r
the next t h r e e y e a r s .
A n n e x A t o this paper deals m o r e fully with
a r g u m e n t s against the offset a g r e e m e n t which w e r e used by some of
m y c o l l e a g u e s at our m e e t i n g of 4th January.
T h e M i l i t a r y capability l o s t by C a n c e l l a t i o n
5.
T h e unanimous v i e w of a l l four Chiefs of Staff on the
i m p o r t a n c e of the F . I l l t o a l l t h r e e S e r v i c e s is s u m m a r i s e d in the
f o l l o w i n g s t a t e m e n t : ""The heart of the c a s e f o r the quality of l o n g ­
r a n g e s t r i k e and r e c o n n a i s s a n c e capability r e p r e s e n t e d by the F. I l l
is that, b r o a d l y speaking, a l l other operations of war short of ultimate
strategic, n u c l e a r attack take place e i t h e r under c o v e r of this capability
or with the knowledge that we have it at our d i s p o s a l if n e c e s s a r y .
If this capability is abandoned then our s e a , land and a i r f o r c e s a r e
not only d e p r i v e d of the a b i l i t y t o find out by r e c o n n a i s s a n c e what
an enemy or potential e n e m y is d o i n g , or is planning t o d o , but a r e
a l s o thrown b a c k on an e s s e n t i a l l y d e f e n s i v e s t r a t e g y with a l l that
this means in s u r r e n d e r of the i n i t i a t i v e .
T h e l o s s of the F. I l l
w o u l d , t h e r e f o r e , c a r r y the g r a v e s t m i l i t a r y i m p l i c a t i o n s f o r the
United K i n g d o m s a b i l i t y to p a r t i c i p a t e in m i l i t a r y o p e r a t i o n s in
E u r o p e and o v e r s e a s and r e m o v e an e l e m e n t of r e a l sig&if icance in
the p r o c e s s of c o n t r o l of e s c a l a t i o n " .
s
6.
I d e s c r i b e d in C(6&) 10 the c r i t i c a l i m p o r t a n c e of the F . 111's
s t r i k e capability in reducing N A T O ' s r e l i a n c e on nuclear weapons.
I would l i k e h e r e to r e - e m p h a s i s e the i m p o r t a n c e of r e c o n n a i s s a n c e ,
not only in saving the l i v e s of our fighting m e n , but a l s o in checking
the e s c a l a t i o n of a c r i s i s .
Once we r e c e i v e d i n t e l l i g e n c e that
something was afoot we should want to have the m o s t a c c u r a t e
i n f o r m a t i o n p o s s i b l e b e f o r e d e c i d i n g how t o r e a c t .
Aerial
r e c o n n a i s s a n c e is the p r i m e s o u r c e of such inf orma-tion.
T h e F, l i l
has two s p e c i a l attributes as a r e c o n n a i s s a n c e a i r c r a f t , one of which
is p o s s e s s e d by no other a i r c r a f t pianned f o r s e r v i c e in E u r o p e ;
without c r o s s i n g national boundaries it w i l l be able to look " s i d e w a y s "
with c a m e r a and r a d a r f r o about 100 m i l e s f r o m within f r i e n d l y a i r
space or f r o m international w a t e r s .
If, h o w e v e r , at a l a t e r stage
in the c r i s i s fighting has s t a r t e d , the F . H i can pass o v e r national
b o u n d a r i e s , and its chances of being able t o do s o and r e t u r n , whatever
the weather c o n d i t i o n s , a r e much g r e a t e r than that of any other
a i r c r a f t b e c a u s e of its s u p e r s o n i c s p e e d , r a n g e and sophisticated
e l e c t r o n i c fit.
7.
T h e Phantom o f f e r s no a l t e r n a t i v e .
It is e s s e n t i a l l y an
a i r c r a f t f o r operating in the b a t t l e f i e l d a r e a .
It lacks the unique
and valuable " s i d e w a y s " - l o o k i n g photographic f a c i l i t y .
In the
r e c o n n a i s s a n c e r o l e it has not the p e r f o r m a n c e at the r e l e v a n t
h e i g h t s , it is l i m i t e d in bad weather and its r a n g e is only a qt&axter
that of the F , 111.
T o g i v e the B u c c a n e e r an analagous but much
i n f e r i o r r e c o n n a i s s a n c e capability would take s o m e s e v e n y e a r s at
a p r o g r a m m e c o s t no l e s s than that of the F . 111A which would
o t h e r w i s e have r e p l a c e d the C a n b e r r a s o m e f i v e y e a r s e a r l i e r .
When we o r i g i n a l l y r e d u c e d our F . I l l o r d e r f r o m 110 t o 50, we
assumed that they would supplement some 15 0 A F V G , coming into
s e r v i c e p r i m a r i l y in E u r o p e f r o m 1975 o n w a r d s .
The A F V G p r o j e c t
c o l l a p s e d last y e a r , and it is now c l e a r that t h e r e is no chance of
c o l l a b o r a t i n g in a U K V G a i r c r a f t in the s a m e t i m e s c a l e .
T h i s has
g i v e n a new i m p o r t a n c e t o the 5 0 F . 111, p a r t i c u l a r l y in E u r o p e .
8.
F o r B r i t a i n t o depend wholly on the United States and F r a n c e
p r o v i d i n g a i r c r a f t f o r v i t a l information in a c r i s i s would g r a v e l y
d a m a g e our p o l i t i c a l influence on e v e n t s , quite apart f r o m its
m i l i t a r y consequences.
9.
The r e c o n n a i s s a n c e and strike capability could be e q q a l l y
important outside E u r o p e both in the f i n a l s t a g e s of our w i t h d r a w a l
and in any operations w e m i g h t undertake t h e r e a f t e r .
Indeed it is
c l e a r that if our g e n e r a l capability in E u r o p e does not include the.
F . I l l , our d e c l a r e d r e a d i n e s s to help outside E u r o p e if we b e l i e v e
it our duty or i n t e r e s t t o d o s o w i l l be w o r t h v e r y l i t t l e t o those
whose a c q u i e s c e n c e in our withdrawal we a r e now seeking.
Our copt ribution to N A T O
10.
A.s I understand i t , one purpose of our w i t h d r a w a l into E u r o p e
is t o m a x i m i s e our influence with our continental n e i g h b o u r s , an
ob j e c t i v e of paramount importance whatever our r e l a t i o n s h i p with
the C o m m o n M a r k e t . I do not b e l i e v e it would be p o l i t i c a l l y p o s s i b l e
or d e s i r a b l e t o rob N A T O of the 36 f r o n t - l i n e F . I l l (which i s what a
buy of 50 w i l l p e r m i t ) w e have a l r e a d y promised,, in r e p l a c e m e n t f o r
the 100 C a n b e r r a s a s s i g n e d t o N A T O and the further 50 C a n b e r r a s
a v a i l a b l e to N A T O in a c r i s i s , without maiding s o m e i n c r e a s e in our
a i r contribution to compensate f o r t h e i r l o s s .
11.
The t a b l e s at A n n e x B show how our own p r o j e c t e d defence
p r o g r a m m e in 1972-73 w i l l c o m p a r e with that of F r a n c e and G e r m a n y
both in t e r m s of money and of f o r c e s p r o v i d e d f o r W e s t E u r o p e a n
defence.
12.
The f o r c e f i g u r e s show that without the F . I l l contribution our
e f f o r t in the c o m m o n d e f e r c e would c o m p a r e m o r e c l o s e l y with that of
Holland than with F r a n c e or G e r m a n y .
The e x p e n d i t u r e f i g u r e s
(which a r e on the N A T O definition f o r purposes of c o m p a r a b i l i t y and
i n c l u d e , e. g. m i l i t a r y a i d ) show that on the b a s i s of p r e s e n t plans
our total expenditure in 1972-73 would be s o m e £ 4 - 5 0 0 m i l l i o n l o w e r
than that of F r a n c e or G e r m a n y (even b e f o r e taking account of the
latter s heavy -expenditure - s e m e £275 m i l l i o n - on the support of
Berlin).
On the basis of expenditure per head of population, the
f i g u r e s would b e j
r
United K i n g d o m
£36
France
£50
Germany
£ 40
The d i s p a r i t y would s t i l l be significant if the F . I l l u e r e included in
our p r o g r a m m e .
-3­
13.
A b i g i n c r e a s e in our land contribution is u n d e s i r a b l e on many­
grounds - including the additonal f o r e i g n exchange expenditure and the
doubt whether we could a c h i e v e it without c o n s c r i p t i o n .
T h e r e is no
case f o r i n c r e a s i n g our naval contribution.
Any i n c r e a s e t o compensate
f o r l o s s of the f , 111 would have t o be made in a i r c r a f t ,
14.
A t psoo&Sit the total number of combat a i r c r a f t we d e c l a r e to
N A T O is 223.
In 1972 without the 36 F . I l l s it would amount to only
100 a i r c r a f t (including 32 V b o m b e r s whose operational value is
steadily w a n i n g ) .
In m y v i e w , t h e r e i s no p o s s i b i l i t y of persuading
our a l l i e s that a reduction on this s c a l e , when we have d i s e n g a g e d f r o m
E a s t of Suez and at a t i m e when N A T O strategy is b e i n g r e v i s e d - at
our u r g i n g - t o lay g r e a t e r s t r e s s on the f l e x i b i l i t y of conventional
a i r p o w e r , j u s t i f i e s the c l a i m that we a r e b e a r i n g anything like our
f a i r share of the defence burden.
The G e r m a n a i r c r a f t contribution
would be s e v e r a l t i m e s l a r g e r than o u r s , while t h e i r A r m y contribution
was f i v e t i m e s g r e a t e r .
W e should be offering f e w e r a i r c r a f t than.
Italy and at the b e s t the same n u m e r i c a l o r d e r as the Dutch and the
Belgians.
A b o v e a l l , the a r g u m e n t that we w e r e making up in
quality f o r a r e d u c t i o n in quantity would have been r e m o v e d .
r
15.
Both f r o m the point of v i e w of g e n e r a l capability and our
r e l a t i o n s with N A T O , the w o r k I have done suggests that if we have no
F . 111 s the l e a s t unsatisfactory c o u r s e would be to buy at l e a s t a
further 75 P h a n t o m s .
T h e s e 75 Phantoms would produce a front
line of s o m e 50 to supplement the 20 a l r e a d y a s s i g n e d to N A T O and
the 20 which would l a t e r b e c o m e a v a i l a b l e to N A T O f r o m the Gulf
and F a r E a s t .
B e s i d e s being the only a i r c r a f t a v a i l a o l e when the
C a n b e r r a s a r e withdrawn next y e a r , the P h a n t o m s ability t o shoot
down e n e m y a i r c r a f t in the a i r would do something t o c o m p e n s a t e f o r
ending our a b i l i t y t o d e s t r o y e n e m y a i r c r a f t m e r e cheaply and
e f f e c t i v e l y on the ground.
Although in g e n e r a l it could b e said that
5 0 Phantoms can c a r r y about the same weight of weapons as
36 F. I l l s , this i s not a meaningful comparisonB e c a u s e of the
quite d i f f e r e n t p e r f o r m a n c e c h a r a c t e r i s t i c s of the P h a n t o m , in
p a r t i c u l a r its i n f e r i o r r e c o n n a i s s a n c e c a p a b i l i t y , its inability t o
strike in a l l w e a t h e r s , and its s h o r t e r r a n g e , the o v e r a l l
o p e r a t i o n a l e f f e c t i v e n e s s of our contribution would b e g r e a t l y r e d u c e d ,
e v e n if w e substituted this l a r g e r number of a i r c r a f t .
x
!
16.
The 1 0 - y e a r cost of 75 Phantoms r e q u i r e d would be
£275 m i l l i o n of which the d o l l a r content would be £ 118 m i l l i o n and
the additional D M stationing c o s t s £12 m i l l i o n .
The budgetary cost
in 1972-73 would be £34 m i l l i o n .
A p a r t f r o m these f i n a n c i a l
i m p l i c a t i o n s , t h e r e would be ether seriotxs i m p l i c a t i o n s not least f o r the
future of our a i r c r a f t industry.
The net savings f r o m cancellation of the F . 111
17.
I t h e r e f o r e a s s u m e that we should have to add b a c k s o m e
£275 m i l l i o n o v e r the 10-year p e r i o d t o pay f o r an additional
75 Phantoms.
The net saving we should s e c u r e by c a n c e l l i n g the
F . I l l would t h e r e f o r e be £115 m i l l i o n o v e r the 10-year p e r i o d
and £23 m i l l i o n in 1972-73.
-4­
H o w t o find a c o m p a r a b l e saving
18.
( a ) F o r c e s in G e r m a n y
A n unknown f a c t o r in the equation is the extent to which we
m a y r e d u c e our f o r c e s in G e r m a n y b e f o r e 1972 either because we
a r e unable to make a s a t i s f a c t o r y offset a r r a n g e m e n t or because
our a l l i e s cut their f o r c e s or because t h e r e a r e r e c i p r o c a l reductions
on both sides of the i r o n Curtain.
H o w e v e r , we cannot quantify such
savings,, s t i l l l e s s announce t h e m now -- a p r o b l e m which a r i s e s
s i m i l a r l y f r o m our g e n e r a l intention t o introduce s e l e c t i v i t y into
family allowances.
( b ) R e s t r u c t u r i n g of the S e r v i c e s
If c o n c r e t e savings m u s t be identified, the right way t o do it,
as I a r g u e d in C(68) 1 1 , is t o r e - e x a m i n e the whole of our f o r c e
structure, and support o r g a n i s a t i o n in the light of our m o r e r a p i d
w i t h d r a w a l into E u r o p e , but it w i l l take s e v e r a l months t o do so.
I c a n c e r t a i n l y undertaKe to find savings in 1972-73 t o f i l l the gap ­
as I have found all the savings r e q u i r e d of m e on four p r e v i o u s
occasions.
(c)
Immediate p o s s i b i l i t i e s
If h o w e v e r , m y c o l l e a g u e s d e c i d e that f o r presentational
r e a s o n s the G o v e r n m e n t must be able to announce s p e c i f i c further
cuts in dev. ence next w e e k e v e n though this m i g h t turn out t o produce
l e s s d e s i r a b l e savings than a thorough study would a l l o w , my v i e w s
would be as follows2­
( i )
( i i )
( i i i )
I would not propose cutting or c a n c e l l i n g the H a r r i e r
o r d e r , because though it has a l o w m i l i t a r y
p r i o r i t y I b e l i e v e the g e n e r a l advantages of continuing
the only B r i t i s h advanced co*nbat a i r c r a f t now take
precedence.
I would propose t o c a n c e l the o r d e r f o r the A n g l o - F r e n c h
M a r t e l m i s s i l e , thus saving £79 m i l l i o n in 10 y e a r s
and £17 m i l l i o n in 1972-73.
The i m p l i c a t i o n s of this
cut a r e explained in Annex C.
T o find the balance of the c o m p a r a b l e saving of
£23 m i l l i o n in 1972-73 I would choose b e t w e e n the
abandonment of the Bloodhound s y s t e m ( £ 2 m i l l i o n ) ,
phasing out some of the V - b o m b e r s m o r e quickly (up
to £10 m i l l i o n ) and stopping r e s e a r c h and development
on an A i r b o r n e E a r l y Warning ( A E W ) a i r c r a f t (£7 m i l l i o n ) .
T h e r e a r e a l m o s t c e r t a i n l y other p o s s i b i l i t i e s ,
Any of
these c u t s would be painful and u n w e l c o m e but they a r e
in m y v i e w a r e a s of l e s s c r i t i c a l i m p o r t a n c e than the
F . I l l capability.
19.
It m a y be suggested that the a r g u m e n t in p a r a g r a p h s 15-17
about the net as opposed t o the g r o s s saving is unacceptable.
I
s t r o n g l y d i s a g r e e ; although I acknowledge that in the short t i m e
a v a i l a b l e the a s s e s s m e n t of a compensating capability could only be
rough and r e a d y .
Some m a y say it is t o o big.
Some m a y argue
that it should not be made at a l l although this can only be tantamount
to asking m e t o find another £390 m i l l i o n off the defence budget o v e r
the next 10 y e a r s in addition t o the cuts which a l r e a d y r e d u c e the
p r o g r a m m e t o £ 1 , 6 5 0 m i l l i o n in 1972-73.
This would be a s t i l l
m o r e difficult and speculative task and inevitably i n v o l v e s looking
f o r w a r d into the second f i v e y e a r s (1973-1978) of the p e r i o d as t h e r e
is such a long lead t i m e in the defence p r o c u r e m e n t a r e a s ,
20.
I have b e e n able t o e x a m i n e such a p r o p o s i t i o n only v e i y
cursorily.
The a r e a I have indicated in paragraph I 8 ( c ) ( i i ) and ( i i i )
would save at l e a s t £100 m i l l i o n in the f i r s t f i v e y e a r s .
Their
continued e f f e c t , t o g e t h e r with the e l i m i n a t i o n of f i r m assumptions
in our 1 0 - y e a r c o s t i n g s such as the purchase of United States C5
t r a n s p o r t a i r c r a f t and a United Kingdom built A E W a i r c r a f t in the
second f i v e y e a r s , would r e s u l t in a total saving of some £400 m i l l i o n
equivalent t o the g r o s s cost of the F . I l l p r o g r a m m e l e s s only
cancellation charges.
I quote these only f o r i l l u s t r a t i v e p u r p o s e s ,
but h e r e a g a i n I can a s s u r e m y c o l l e a g u e s that I would b e p r e p a r e d
t o f o r g o those a? other i t e m s as of l e s s i m p o r t a n c e , both short and
leng t e r m , then the F . 111 s contribution t o our m i l i t a r y capability
and c r e d i b i l i t y .
!
Conclus ions
21.
I conclude t h a t : ­
(a)
T o e l i m i n a t e the F.1H f r o m our defence p r o g r a m m e without
r e p l a c e m e n t would put our fighting m e n at r i s k and seriously d a m a g e
our p o l i t i c a l and m i l i t a r y influence in N A T O .
(b)
It would a l s o m e a n spending an additional $60 m i l l i o n in
1968-69 and l o s i n g the advantages of the $825 m i l l i o n cffset t a r g e t I
have just negotiated.
(c)
T h e r e is no a i r c r a f t a v a i l a b l e which could r e p l a c e the
C a n b e r r a s f r o m 1969 and p r o v i d e an equivalent m i l i t a r y capability.
The n e a r e s t substitute would be the Phantom.
The p r o g r a m m e costs
of 75 Phantoms would amount t o some £275 m i l l i o n c o m p a r e d with the
next F . I l l saving of £ 3 9 0 m i l l i o n .
T h e c o m p a r a b l e saving v,hat I set
m y s e l f to find is t h e r e f o r e £115 m i l l i o n , of which £23 m i l l i o n would
f a l l in 1972-73.
(d)
I could guarantee t o find this c o m p a r a b l e saving in the c o u r s e
of r e s t r u c t u r i n g the f o r c e s f o l l o w i n g upon oui d e c i s i o n s on c o m m i t ­
ments.
(e)
If t h e r e is a d e s i r e f o r p r e s e n t a t i o n a l r e a s o n s that I should
identify these savings n o w , m y p r o p o s a l s a r e set out in p a r a g r a p h 18 c
( i i ) and ( i i i ) .
T h e s e cuts include a c o m p l e t e and publicly known
weapons s y s t e m , M a r t e l , which we a r e c u r r e n t l y undertaking in
c o l l a b o r a t i o n with F r a n c e .
(f)
If w e i g n o r e the costs of any substitution p r o g r a m m e and
take the t e n y e a r g r o s s costs of the F . I l l p r o g r a m m e l e s s c a n c e l l a t i o n
c o s t s - £390 m i l l i o n - I could guarantee t o find s a v i n g s o v e r the
1 0 - y e a r d e f e n c e budget.
Such savings would include those in ( e )
above and would go on in the second half of the 1 0 - y e a r p e r i o d t o
include the e l i m i n a t i o n of such m a j o r new equipment purchases c u r r e n t l y
in the p r o g r a m m e as the United States C5 t r a n s p o r t a i r c r a f t and the
construction of an A E W a i r c r a f t .
R e c ommendation
22,
I t h e r e f o r e r e c o m m e n d m y c o l l e a g u e s t o c o n f i r m the p u r c h a s e
of 50 F . I l l s .
D. W . H.
M i n i s t r y of D e f e n c e S. W , 1.
11th January, 1968
-7­
CONFIDENTIAL
-
20
ANNEX A The Offset Arrangement 1.
Some of the arguments used at the last meeting to write
down the value of the offset arrangement seem to me to he
unsound and I seek in the following paragraphs to explain the
position as I see it.
2.
It was argued that "export earnings under the agreement
did not bring in net benefit to the balance of payments;
they simply prevented the deterioration which would otherwise
result from purchase of the aircraft". This argument I do
not accept. We cancelled the TSR 2 partly because it was
not going to be ready in time, partly because of its very
high and rapidly escalating cost and partly to diversify
resources to civil industry, thus benefitting the economy.
It was implicit in that decision that a foreign aircraft
would have to be bought in its place, since there was no
other British aircraft in prospect that could meet the require­
ment. Indeed the P.Ill was the only aircraft that could do
so. It was because I was conscious that this unavoidable
purchase would involve expenditure in foreign exchange that
I obtained the offset arrangement. It would have been
unrealistic to expect the Americans to undertake to do more
than offset its cost; but, as shewn below, there is a good
chance that they may in the long run do much more than merely
"prevent deterioration". Meanwhile, during the immediate
future, the receipts from sales to America under the offset
are considerably exceeding the payments to be made for the
P.111.
3.
It was argued that "there was a good prospect that the
industrial resources now devoted to securing sales under the
offset agreement could be diverted to exports which would
bring a positive balance of payments benefit", I should like
to see some positive evidence to support this statement. The
facts are that during the U or 5 years preceding the signing
of the offset arrangement the US defence market had been
virtually closed to our industries. Under the Buy American
Acts, foreign competitors had long suffered a discrimination of
6% (or in some cases 12%) as compared with the American
producer; and this applied to all US Government corn-petitions.
In i 9 6 0 the US Department of Defense introduced a price­
differential of 50% inclusive of duty which could be applied
in the defence field whenever it gave a more penal handicap
to the foreign competitor than the 6% or 12% plus duty.
These restrictions made it virtually impossible for British
firms to obtain defence contracts in the United States unless
the US has no source of their own or for some special reason
wanted to buy abroad. What the offset arrangement did was to
break down these barriers and give British firms once more an
opportunity of competing for contracts on equal terms with the
Americans. Moreover the American Forces were instructed to
search out British equipment which would be suitable for their
needs and to provide opportunities for British companies to
tender for contracts. I am sure my colleagues will agree with
me in attaching importance to maintaining access for as many
British industries as possible to the enormous US market.
Over lk% of our exports go to the United States, which is
nearly three times as much as we export to any other country.
This seems to indicate that maintaining access to the US
defence market for as long as possible must be in itself
beneficial and more worthwhile than seeking to transfer the
effort to other exports which in may event we are doing all
/we ..... we can to obtain. Firms such as Elliott Automation who get their foot in the American door have a chance of establishing production lines out of all proportion to those appropriate for other markets. The competition is healthy for both countries: the Americans benefit from reduced prices even when the British firm does not win and the British firms have valuable lessons to learn from the high standards of American competition. k.
It was argued that gaining a foothold in the US market was "of limited advantage, since it was certain that, once the target for offset sales had been reached, the barriers to sales in tho United States would immediately re-appear". I do not know on what evidence this statement is based. The
Americans obviously could not make the offset arrangement open-ended; and they have naturally been cautious about public statements. There is, however, good reason to suppose
that the target figure will be exceeded. Moreover, before the target (including the extra $100 million) is reached, the
US balance of payments may improve, in which case the 50% price-differential would be removed since the American Forces
would be glad to make the budgetary savings which access to our highly competitive products would afford. In any event the arrangement is due to run for nearly 10 more years. 5.
Finally, the provisions of the offset arrangement dealing with collaborative sales have already given us access to a market hitherto regarded as a US preserve; this would also be true of any further collaborative sales, for otherwise we should not accept them as truly collaborative. ANNEX B
COMPARISON 0? EUROPEAN DEFENCE
f
A.
Expenditure
U
S
10/21 11/21 22/21
iSZi
UK Defence Budget (i)
less provision for
P. 111
£M
2,385
2,320
2,250
2,190
2 O&5
kO
38
36
s
per head of population
(ii)
£
U3
French Defence Budget
(iii)
£M
per head of population
(li)
£
W. German Defence Budget
(iv)
£M
per head of population
(ii)
£
2,h58
2,550
2,550
2,550
2,550
k9
51
50
50
50
2,130
2,210
2,310
2,380
2,1170
35
36
33
39
1+0
(i)
UK figures are "based on NATO definitions (ii)
Population figures for all 3 countries
projected at the annual UK rate of increase
of 0 72$ assumed in The National Plan,
a
(iii)
Record of meeting held between So of S and French Minister of the Armed Forces on
26th October, 1967o
Increased expenditure
of 30 milliard francs in 1969/70 assumed to
remain at that level from thereon,
(iv)
W. German reply to the Questionnaire for the 1967 Defence Planning Review, 0
B
5
Force Proposals 1972
(UK figures as reported but modified to take account of latest cuts, and exclusing F l l l ) 0
UK
Armoured Mechanised W. Germany
Holland
6
31
10
15
-
6
-
3
-
1
3
63
19
2h
A9
3
-
-
3
Other submarines
23
18
&
21
Maritime patrol aircraft
30
20
12
80
Brigades
Other brigades
Prance
NAVY (Categories A & B)
Aircraft Carriers
Cruisers, Destroyers, escorts
SSBN
2""
1
;.IR FORCE Fighter/bomber
kk)
Medium bomber
32 w 6
79 )
180)
-\
-)
72)
Fighter/Reconnaissance
-s
lilAJ
18
2A
72
36
1
15
5
SAM Units
SSM Units
A-
Light strike
All weather fighter
)
75
k
0
Figures for France are from Intelligence sources,
France not having made any recent declaration to
NATO0
They exclude the non-naval element of the
Force de Dissuasion, which will consist of about
50 bomber aircraft and 27 I R B M s .
!
+
Commando carriers ANNEX C Implications of Reducing or Abandoning the "
Martel programme The development of the Anglo/French Martel air-to­
air gu.ided missile, in both its anti-radar (AR) and tele­
vision-guided (TV) versions, is nearing completion but we have not yet placed any production orders. 2.
If we abandon Martel our strike aircraft will be
without any stand-off capability for attacking defended
targets both on land, and at sea.
They will be forced to
use less accurate weapons and to approach the target more
closely, thus increasing their vulnerability.
Retention
of the AR missile v/ould allow radar targets to be attacked,
which would be particularly useful at sea, but there v/ould
still be no stand-off capability against visual targets.
3*
Abandonment of Martel might cause difficulties with
the French who might find unwelcome the extra cost of
developing and producing their own small requirements
unilaterally and might be less willing to collaborate
with us on other projects,,
They would be more likely to
consider withdrawing from the helicopter programme than
from Jaguar,
Their withdrawal from the helicopters
would be serious though not catastrophic.
k.
On the other hand our judgment is that the French
have strong motives of self interest (as we have) in
continuing with both the Jaguar and helicopter programmes,,
On balance therefore, although the French might complain
at being let down on Martel, particularly so soon after
the signing of the Jaguar production agreement, there are
reasonable chances that ?/e might avoid any serious
repercussions.
The chances would be considerably
increased if v/e could complete development of the weapon
and continue with the AR programme.
5.
Abandoning production of Martel completely would save
about £75M in the ten-year period (£17M in 1972/73)
Confining production to the AR requirement as currently
stated would save about £50M (£13M In 1972/73).
0
6.
Cancelling the development of Martel at this late
stage would save only £kM out of the £25M which is the UK
half share of the cost of the joint development programme,,
We could therefore complete development for a relatively
small extra cost.
This would:
a
help considerably to avoid difficulties with the French which might affect other collabora­
tive programmes; b.
establish a stronger claim to a share of production to meet French requirements, although the share may not be large. e
The savings quoted in the main paper assume that develop­
ment is not completed.