(c) crown copyright
Catalogue Reference:CAB/128/60/12
Image Reference:0001
! D O C U M E N T IS T H E P R O P E R T Y O F H E R B R I T A N N I C M A J E S T Y ' S G O V E R N M E N T
COPY NO
CM(76) 34th
Conclusions
77
i
c
CABINET
C O N C L U S I O N S of a M e e t i n g of t h e C a b i n e t
h e l d a t 10 D o w n i n g S t r e e t o n
T H U R S D A Y 25 N O V E M B E R 1976
at 10.30 a m
PRESENT
T h e R t Hon J a m e s Callaghan M P
Prime Minister
tht Rt Hon M i c h a e l F o o t M P
lord P r e s i d e n t of t h e C o u n c i l
The R t Hon L o r d E l w y n - J o n e s
Lord Chancellor
Rt Hon D e n i s H e a l e y M P
Chancellor of t h e E x c h e q u e r
T h e R t Hon A n t h o n y C r o s l a n d M P
S e c r e t a r y of S t a t e f o r F o r e i g n a n d
Commonwealth Affairs
the Rt Hon M e r l y n R e e s M P
JNeretary of S t a t e f o r t h e H o m e D e p a r t m e n t
T h e R t Hon S h i r l e y W i l l i a m s M P
S e c r e t a r y of S t a t e f o r E d u c a t i o n a n d
Science and P a y m a s t e r G e n e r a l
It Hon A n t h o n y W e d g w o o d B e n n M P
s e c r e t a r y of S t a t e f o r E n e r g y
T h e R t Hon E r i c V a r l e y M P
S e c r e t a r y of S t a t e f o r I n d u s t r y
p k * Rt Hon P e t e r S h o r e M P
p b c r e t a r y of S t a t e f o r t h e E n v i r o n m e n t
The R t Hon Roy Mason M P
S e c r e t a r y of S t a t e f o r N o r t h e r n I r e l a n d
Rt Hon B r u c e M i l l a n M P
P * c r e t a r y of S t a t e f o r S c o t l a n d
The R t Hon John M o r r i s QC M P
S e c r e t a r y of S t a t e f o r W a l e s
M** Rt Hon F r e d M u l l e y M P
r Secretary of S t a t e f o r D e f e n c e
T h e R t Hon A l b e r t B o o t h M P
S e c r e t a r y of S t a t e f o r E m p l o y m e n t
8 t
Rt Hon D a v i d E n n a l s M P
e r e t a r y of S t a t e f o r S o c i a l S e r v i c e s
Rt Hon L o r d P e a r t
^^rfl P r i v y S e a l
The R t Hon E d m u n d D e l l M P
S e c r e t a r y of S t a t e f o r T r a d e
T h e R t Hon J o h n S i l k i n M P
M i n i s t e r of A g r i c u l t u r e , F i s h e r i e s
and F o o d
Rt Hon Roy H a t t e r s l e y M P
^ c r e t a r y of S t a t e f o r P r i c e s a n d
m e r Protection,
The Rt Hon William R o d g e r s M P
S e c r e t a r y of S t a t e f o r T r a n s p o r t
l u
M
Rt Hon Stanley O r m e M P
* k t e * for Social Security
T h e Rt Hon H a r o l d L e v e r M P
C h a n c e l l o r of t h e D u c h y of L a n c a s t e r
n
The Rt Hon Reginald Prentice M P
Minister for Overseas Development
ALSO PRESENT
The Rt Hon Michael Cocks M P
Parliamentary Secretary, Treasury
( I t e m s 1 a n d 3)
SECRETARIAT
Sir
Mr
Mr
Mr
Mr
Mr
Mr
John Hunt
G R D e n m a n ( I t e m 2)
W I M c l n d o e ( H e m 1)
D le B J o n e s (Item 3)
J A M a r s h a l l ( I t e m 3)
A D G o r d o n - B r o w n ( I t e m 1)
A K H A t k i n s o n (Item 2)
C ONTENTS
Subject
K
3.
Page
PARLIAMENTARY AFFAIRS
1
CAP STRATEGY
2
IMF NEGOTIATIONS
4
i
NTARY
^RS
1.
T h e C a b i n e t w e r e i n f o r m e d of t h e b u s i n e s s t o b e t a k e n i n t h e
H o u s e of C o m m o n s d u r i n g t h e f o l l o w i n g w e e k .
THE LORD PRESIDENT OF THE COUNCIL said t h a t the b u s i n e s s on
W e d n e s d a y 1 D e c e m b e r w o u l d b e t h e S e c o n d R e a d i n g of t h e A i r c r a f t
and Shipbuilding I n d u s t r i e s Bill, and a r e l a t e d p r o c e d u r a l Motion the
p r e c i s e f o r m of w h i c h w a s s t i l l u n d e r c o n s i d e r a t i o n .
This Motion
w o u l d n e e d t o c o v e r b o t h t h e t r u n c a t i o n of t h e C o m m i t t e e a n d R e p o r t
S t a g e s , a s had b e e n done in the p r e v i o u s S e s s i o n with the T r a d e Union
a n d L a b o u r R e l a t i o n s ( A m e n d m e n t ) B i l l , a n d t h e q u e s t i o n of h y b r i d i t y .
U n l e s s t h e G o v e r n m e n t i n d i c a t e d t h e i r i n t e n t i o n of p u t t i n g d o w n a
Motion t o t h e effect t h a t the B i l l should p r o c e e d a s a public B i l l , then
t h e B i l l w o u l d - u n d e r t h e n o r m a l p r o c e d u r e of t h e H o u s e - b e r e f e r r e d
t o the E x a m i n e r s for t h e m t o c o n s i d e r w h e t h e r it w a s h y b r i d , a p r o c e s s
which would t a k e two w e e k s o r m o r e .
Meanwhile it would not be
p o s s i b l e t o proce-od w i t h S e c o n d R e a d i n g s o t h a t , e v e n a s s u m i n g t h e
B i l l w a s found n o t t o b e h y b r i d , S e c o n d R e a d i n g w o u l d b e d e l a y e d u n t i l
after the Christmas R e c e s s .
The p r o v i s i o n s now a l l e g e d t o b e h y b r i d
w e r e t h o s e r e l a t i n g t o s h i p - r e p a i r i n g , not t h o s e on which the Speaker
h a d g i v e n h i s r u l i n g ef p r i m a f a c i e h y b r i d i t y l a s t M a y .
If t h e
E x a m i n e r s found t h a t t h e B i l l w a s h y b r i d , i t w o u l d t h e n b e r e f e r r e d t o
a S e l e c t C o m m i t t e e , which would h e a r a n y petitions a g a i n s t p r o v i s i o n s
of t h e B i l l a n d w h i c h m i g h t m a k e a m e n d m e n t s .
Parliamentary
p r o c e e d i n g s on the B i l l would t h e n d r a g on for m a n y m o n t h s .
He
hoped t h a t the p r o c e d u r a l Motion could be t a k e n after Second Reading
o n 1 D e c e m b e r , b u t t h i s m i g h t n o t b e p o s s i b l e If t h e q u e s t i o n of
hybridity w e r e t o be raised in the House before then.
The Motion
might p r o v o k e a c o n s i d e r a b l e r o w with the Opposition but t h i s could not
be helped.
In d i s c u s s i o n i t w a s p o i n t e d out t h a t t h e d e b a t e s o n t h e A i r c r a f t a n d
S h i p b u i l d i n g I n d u s t r i e s B i l l on 1 D e c e m b e r , a n d o n t h e S e c o n d R e a d i n g
of t h e S o c i a l S e c u r i t y ( M i s c e l l a n e o u s P r o v i s i o n s ) B i l l on 2 D e c e m b e r ,
w o u l d m e a n t a k i n g t w o d i f f i c u l t a n d c o n t e n t i o u s p i e c e s of b u s i n e s s :
i m m e d i a t e l y after the Debate on t h e A d d r e s s , which would s o u r t h e
a t m o s p h e r e a t t h e s t a r t of t h e n e w S e s s i o n .
It w a s , h o w e v e r ,
i m p o r t a n t t o m a k e e a r l y p r o g r e s s on both B i l l s , a n d t h e r e m i g h t be
difficulty In obtaining Second R e a d i n g for the Social S e c u r i t y
(Miscellaneous Provisions) Bill; the G o v e r n m e n t s majority was likely
t o be r e d u c e d f r o m Monday 6 D e c e m b e r .
The p r o c e d u r a l Motion on
the A i r c r a f t and Shipbuilding I n d u s t r i e s B i l l could b e justified on the
b a s i s that hybridity should not be u s e d a s a device to f r u s t r a t e the
o p e r a t i o n of t h e P a r l i a m e n t A c t ; a n d a r o w w i t h t h e C o n s e r v a t i v e s o n
t h i s B i l l o n 1 D e c e m b e r m i g h t h e l p w i t h t h e m o r a l e of b a c k b e n c h e r s ,
a n d r e d u c e t h e r i s k of d e f e c t i o n s i n t h e v o t e t h e f o l l o w i n g d a y o n t h e
S e c o n d R e a d i n g of t h e S o c i a l S e c u r i t y ( M i s c e l l a n e o u s P r o v i s i o n s )
Bill.
While those b a c k b e n c h e r s who had previously voted against the
G o v e r n m e n t on the e a r r i n g s r u l e for r e t i r e m e n t p e n s i o n e r s w e r e now
believed to recognise that the alternative to the G o v e r n m e n t s proposal
to r e s t r a i n a further r i s e in the earnings rule would be even w o r s e ,
t h e r e was considerable opposition to the proposal to r e s t r i c t payment
of u n e m p l o y m e n t b e n e f i t t o o c c u p a t i o n a l p e n s i o n e r s .
T h e r e could be
n o q u e s t i o n of f o r g o i n g t h i s s a v i n g of u n e m p l o y m e n t b e n e f i t , t h o u g h i t
m i g h t b e p o s s i b l e to offer t h e p r o s p e c t of s o m e g i v e I n C o m m i t t e e .
While f u r t h e r t i m e for c o n s u l t a t i o n with t h e P a r l i a m e n t a r y L a b o u r
P a r t y m i g h t h e l p t o r e d u c e t h e r i s k of f a i l i n g t o c a r r y t h e S e c o n d
R e a d i n g of t h e S o c i a l S e c u r i t y ( M i s c e l l a n e o u s P r o v i s i o n s ) B i l l , t h e r e
w a s n o o t h e r suitable b u s i n e s s t o b r i n g f o r w a r d t o 2 D e c e m b e r ; and it
would h a v e t o b e e m p h a s i s e d t o the P a r t y t h a t the a l t e r n a t i v e t o the
G o v e r n m e n t s policies was a Conservative Government.
THE PRIME MINISTER, s u m m i n g up the discussion, said that the
C a b i n e t a c c e p t e d t h e n e e d t o t a k e t h e S e c o n d R e a d i n g of t h e A i r c r a f t
and Shipbuilding I n d u s t r i e s B i l l and the r e l a t e d p r o c e d u r a l Motion, and
t h e S e c o n d R e a d i n g of t h e S o c i a l S e c u r i t y ( M i s c e l l a n e o u s P r o v i s i o n s )
B i l l , i n t h e following w e e k .
It w a s i m p o r t a n t t o d o e v e r y t h i n g p o s s i b l e
t o e n s u r e t h a t t h e l a t t e r B i l l w o u l d r e c e i v e a m a j o r i t y on S e c o n d
Reading.
The Cabinet Took note.
2.
T h e C a b i n e t h a d b e f o r e t h e m a m e m o r a n d u m b y t h e S e c r e t a r y of
S t a t e f o r F o r e i g n a n d C o m m o n w e a l t h A f f a i r s ( C P ( 7 6 ) 112) c o v e r i n g a
r e p o r t by the Ministerial Committee on E u r o p e a n Questions on a
s t r a t e g y for the C o m m o n A g r i c u l t u r a l Policy (CAP).
THE F O R E I G N AND COMMONWEALTH SECRETARY r e c a l l e d that the
C a b i n e t a t t h e i r m e e t i n g on 11 J u n e h a d e x p r e s s e d t h e w i s h t o c o n s i d e r
b e f o r e t h e e n d of t h e y e a r o u r s t r a t e g y t o w a r d s t h e C A P .
The
M i n i s t e r i a l C o m m i t t e e o n E u r o p e a n Q u e s t i o n s h a d In t h e f i r s t i n s t a n c e
r e m i t t e d t h e q u e s t i o n t o a s m a l l S u b - C o m m i t t e e of t h e M i n i s t e r s
m a i n l y c o n c e r n e d , c h a i r e d b y t h e M i n i s t e r of A g r i c u l t u r e , F i s h e r i e s
and Food.
After considering the Sub-Committee 's r e p o r t the
M i n i s t e r i a l C o m m i t t e e w e r e a g r e e d In r e c o m m e n d i n g m a t o u r l o n g ­
t e r m a i m should be to eliminate s t r u c t u r a l s u r p l u s e s by r e d u c i n g
C o m m u n i t y s u p p o r t p r i c e s , but t h a t in t h e m e d i u m and s h o r t t e r m we
should give p r i o r i t y to r e t a i n i n g for a s long a s p o s s i b l e the v e r y
s u b s t a n t i a l advantages we d e r i v e d f r o m t h e G r e e n Pound and should give
u p n o m o r e of t h o s e a d v a n t a g e s t h a n w a s n e c e s s a r y t o s e c u r e a n
acceptable price settlement.
2
In d l s c u B S i o n t h e r e w a s g e n e r a l a g r e e m e n t w i t h t h e r e c o m m e n d a t i o n s
of t h e M i n i s t e r i a l C o m m i t t e e .
In t h e s h o r t t e r m w e w e r e i n a s t r o n g e r
p o s i t i o n t o r e t a i n t h e b e n e f i t s of t h e G r e e n P o u n d t h a n t o r e s i s t
Community price increases.
It c o u l d b e a r g u e d t h a t w e c o u l d n o t
expect to retain those benefits much longer and should m a k e a virtue
of n e c e s s i t y b y s a c r i f i c i n g t h e m i n f a v o u r of i n s i s t e n c e o n a p r i c e
freeze for s u r p l u s c o m m o d i t i e s .
B u t t h i s wftB t o u n d e r r a t e o u r
ability to hold the G r e e n Pound a g a i n s t p r e s s u r e both f r o m t h e
C o m m u n i t y a n d f r o m o u r own a g r i c u l t u r a l I n d u s t r y , a n d I t w a s
n e c e s s a r y to r e c o g n i s e t h a t a n outright confrontation with o u r
p a r t n e r s o v e r p r i c e s would be u n p r o f i t a b l e .
It w a s h o w e v e r
i m p o r t a n t t o b e s u r e of a v o i d i n g m o r e t h a n a m i n i m a l c h a n g e I n t h e
G r e e n Pound d u r i n g our P r e s i d e n c y .
In t h e l o n g e r t e r m p a r t i c u l a r l y
BB a n d w h e n c u r r e n c i e s b e c a m e m o r e s t a b l e t h e r e w o u l d b e g r e a t
p r e s s u r e from the Community to abolish g r e e n c u r r e n c y differentials
a n d w e s h o u l d n o t l o s e s i g h t of t h e b a r g a i n i n g c o u n t e r t h i s w o u l d g i v e
us in holding down p r i c e s for surplus c o m m o d i t i e s .
Even at the next
p r i c e fixing w e s h o u l d p u r s u e t h i s a i m b y a l l m e a n s s h o r t of o u t r i g h t
confrontation.
But it w a s not c l e a r how far in p r a c t i c e c o n c e s s i o n s
on the G r e e n Pound could be u s e d t o s e c u r e r e s t r a i n t on p r i c e s and we
s h o u l d m a k e n o s u c h c o n c e s s i o n s t h a t w e r e n o t fully j u s t i f i e d b y t h e
need for an acceptable price settlement.
T h e r e w e r e good r e a s o n s
for believing t h a t the C o m m i s s i o n ^ p r o p o s a l s for a u t o m a t i c
a d j u s t m e n t of g r e e n c u r r e n c i e s c o u l d b e s u c c e s s f u l l y r e s i s t e d .
In f u r t h e r d i s c u s s i o n attention w a s d r a w n t o the d a m a g i n g
c o n s e q u e n c e s of t h e G r e e n P o u n d f o r N o r t h e r n I r e l a n d w h e r e
agricultural employment was much more important than in Great
Britain and where there was serious unemployment in r u r a l a t e a s .
T h e g r e e n c u r r e n c y d i f f e r e n t i a l i n f a v o u r of t h e R e p u b l i c r e s u l t e d i n
w i d e s p r e a d s m u g g l i n g of l i v e s t o c k t o t h e S o u t h a n d It h a d b e e n
n e c e s s a r y to subsidise supplies to Northern Ireland m e a t plants at a
c o s t of £ 1 m i l l i o n p e r m o n t h .
This was a b u r d e n which should be
s h a r e d by the United Kingdom.
THE PRIME MINISTER, summing up the d i s c u s s i o n , said that the
C a b i n e t n o t e d t h e s p e c i a l p r o b l e m s of N o r t h e r n I r e l a n d , b u t a c c e p t e d
t h e r e c o m m e n d a t i o n s of t h e M i n i s t e r i a l C o m m i t t e e on E u r o p e a n
Q u e s t i o n s s e t o u t i n t h e r e p o r t a t t a c h e d t o C P ( 7 6 ) 112, s u b j e c t i n
p a r t i c u l a r t o o u r t a k i n g a s t o u g h a l i n e i n n e x t y e a r s fixing of
C o m m u n i t y p r i c e s a s w a s c o m p a t i b l e w i t h t h e a v o i d a n c e of
confrontation and t o our only m a k i n g c o n c e s s i o n s on t h e G r e e n Pound
w h i c h w e r e fully j u s t i f i e d b y a n a c c e p t a b l e p r i c e s e t t l e m e n t .
f
The Cabinet T o o k n o t e , w i t h a p p r o v a l , of t h e P r i m e
s u m m i n g u p of t h e i r d i s c u s s i o n .
IONS
6
Minister^
3.
T h e C a b i n e t r e s u m e d t h e i r d i s c u s s i o n of t h e n e g o t i a t i o n s w i t h
the International Monetary Fund,
T h e i r d i s c u s s i o n and the conclusions
reached are recorded separately.
2
C a b i n e t Office
2 5 N o v e m b e r 1976
4
THIS
DOCUMENT
IS THE PROPERTY OF HER BRITANNIC
MAJESTVS
GOVERNMENT
The circulation of this paper has been strictly K ifed.
It is issued for the personal use of £&&r*&.L .M
T O P SECRET
Copy No.
3 g
CABINET
LIMITED CIRCULATION ANNEX
CM(76) 34th C o n c l u s i o n s , Minute 3
T h u r s d a y 2 5 N o v e m b e r 1976 a t 10. 30 a m
!**us
*)33rd
^ons.
THE P R I M E MINISTER said that t h e action a g r e e d upon a t t h e
previous Cabinet discussion had been taken.
He had sent m e s s a g e s to
P r e s i d e n t F o r d of t h e U n i t e d S t a t e s a n d t o C h a n c e l l o r S c h m i d t of W e s t
G e r m a n y ; a n d b o t h h e a n d t h e C h a n c e l l o r of t h e E x c h e q u e r h a d s e e n
The IMF
t h e l e a d e r of t h e I n t e r n a t i o n a l M o n e t a r y F u n d ( I M F ) t e a m .
n o w f u l l y u n d e r s t o o d t h a t t h e C a b i n e t w e r e n o t c o n v i n c e d of t h e n e e d
f o r d e f l a t i o n a r y m e a s u r e s ; a n d t h e y u n d e r s t o o d t h e n a t u r e of t h e
d i l e m m a f a c i n g t h e G o v e r n m e n t i n w h i c h if t h e a c t i o n t a k e n w e r e u n d u l y
s e v e r e t h e G o v e r n m e n t w o u l d l o s e t h e p r e s e n t c o - o p e r a t i o n of t h e
t r a d e u n i o n s , w h e r e a s If i t w e r e t o o m i l d i t w o u l d f a i l t o c a r r y
Contrary to their previous view,
conviction in t h e m a r k e t s .
neither G e r m a n y n o r A m e r i c a w e r e now p r e s s i n g for a n i m m e d i a t e
a g r e e m e n t with the I M F , and It w a s therefore not n e c e s s a r y t o push
He h i m s e l f would b e
m a t t e r s t o a conclusion in the p r e s e n t week.
a t t e n d i n g t h e E u r o p e a n C o u n c i l on M o n d a y a n d T u e s d a y of t h e f o l l o w i n g
w e e k , s o t h a t C a b i n e t w o u l d r e s u m e t h e i r d i s c u s s i o n of t h i s s u b j e c t o n
Wednesday 1 December.
In t h e m e a n t i m e , o f f i c i a l s of t h e T r e a s u r y
a n d t h e I M F w e r e e x a m i n i n g t h e i m p l i c a t i o n s of t h r e e p o s s i b l e
s c e n a r i o s , i n v o l v i n g d i f f e r i n g l e v e l s of t h e 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 (PSBR) a t £ 8 j billion, £ 9 billion and £ 9 £ billion in
1977-78.
He had spoken, on Privy Counsellor t e r m s , t o
M r L e n M u r r a y of t h e T r a d e s U n i o n C o n g r e s s ( T U C ) t o I n d i c a t e t h e
b r o a d n a t u r e of t h e p r o b l e m t o h i m , a n d M r M u r r a y w o u l d b e g i v i n g
the m a t t e r further thought.
In d i s c u s s i o n i t w a s a r g u e d t h a t i t would b e i m p o r t a n t , w h e n t h e
C a b i n e t r e t u r n e d t o t h i s subject t h e following week, t o h a v e p r o p o s a l s
c i r c u l a t e d o n p a p e r i n a d v a n c e of t h e m e e t i n g s o t h a t M i n i s t e r s w o u l d
have a n opportunity t o reflect upon t h e m before t h e discussion.
I n d e e d , i t w o u l d b e w r o n g if t h e s o l e p r o p o s a l s b e f o r e C a b i n e t w e r e
t h o s e w h i c h t h e P r i m e M i n i s t e r a n d t h e C h a n c e l l o r of t h e E x c h e q u e r
h a d a t t h e l a s t m e e t i n g s a i d t h e y would h o p e t o put f o r w a r d j o i n t l y .
It w o u l d n o t b e e n o u g h f o r C a b i n e t t o b e a s k e d t o a p p r o v e o r r e j e c t o n e
1
s e t of p r o p o s a l s .
T h e r e should be a n opportunity to d i s c u s s
alternative c o u r s e s , including the m o r e r a d i c a l alternative s t r a t e g y
w h i c h h a d a l r e a d y h a d s o m e d i s c u s s i o n In t h e M i n i s t e r i a l C o m m i t t e e
on Economic Strategy.
T h e Cabinet ought a l s o t o d i s c u s s t h e likely
c o n t e n t of t h e L e t t e r of I n t e n t w h i c h t h e I M F w o u l d n e e d ; a n d ft w a s
p o i n t e d o u t t h a t t h e 1975 l e t t e r g a v e a n a s s u r a n c e t h a t t h e G o v e r n m e n t
w o u l d n o t a d o p t t h e k i n d of i m p o r t r e s t r i c t i o n s w h i c h w e r e a t t h e h e a r t
of t h e a l t e r n a t i v e s t r a t e g y , ,
O n e p o s s i b l e c o u r s e of a c t i o n w o u l d b e t o
i m p o s e a w a g e a n d p r i c e freeze f o r a p e r i o d - a l t h o u g h i t w a s p o i n t e d
out t h a t , w h i l e i t m i g h t b e p o s s i b l e t o f r e e z e I n c o m e s , m o s t p r i c e s
w e r e d e t e r m i n e d by f o r c e s which w e r e beyond the G o v e r n m e n t s
control.
The Cabinet had, a t their last meeting, broadly agreed that
t h e r e w e r e no economic grounds justifying l a r g e deflationary m o v e s ;
b u t t h e r e h a d b e e n s o m e BUPPORT f o r t h e v i e w t h a t s o m e r e d u c t i o n i n t h e
PSBR would b e n e c e s s a r y t o r e a c h a n a g r e e m e n t with the I M F and t h u s
o b t a i n t h e l o a n w h i c h w a s n e e d e d t o g e t t h r o u g h t h e n e x t 12 m o n t h s .
T h e G o v e r n m e n t w e r e s u b j e c t t o t w o c o n s t r a i n t s : o n t h e o n e h a n d It
was n e c e s s a r y to satisfy the I M F , and p e r h a p s m o r e important to
satisfy the m a r k e t s , since u n l e s s t h i s w e r e done even a n agreement
w i t h t h e I M F w o u l d b e of l i t t l e v a l u e ; on t h e o t h e r h a n d , t h e r e w a s t h e
n e e d t o a r r i v e a t a package for which the G o v e r n m e n t could c o m m a n d
s u p p o r t i n t h e i r own P a r t y a n d I n t h e H o u s e of C o m m o n s .
On t h e
f o r m e r count, it was argued that the alternative strategy was quite
i m p r a c t i c a b l e , and that it was e s s e n t i a l t o avoid negotiating the IMF
into a g r e e i n g a p a c k a g e which t h e m a r k e t s would r e j e c t a s i n a d e q u a t e .
On t h e l a t t e r c o u n t i t w a s a r g u e d t h a t a n y p a c k a g e w h i c h i n v o l v e d c u t s
i n p u b l i c expendifcare a n d a c o n t i n u a t i o n of t h e r i s i n g t r e n d i n
u n e m p l o y m e n t w o u l d not w o r k a n d w o u l d d e s t r o y t h e B o d a l c o n t r a c t .
0
In f u r t h e r d i s c u s s i o n the following points w e r e m a d e ­
a.
M a r k e t c o n f i d e n c e d e p e n d e d n o t on s e c u r i n g t h e s h o r t ­
t e r m a p p r o v a l of t h e P r e s s a n d o t h e r s b u t on h a v i n g s o u n d
p o l i c i e s a n d e c o n o m i c s t r u c t u r e s w i t h a good p o l i t i c a l b a c k i n g .
T h e e s t a b l i s h m e n t of a s a f e t y n e t u n d e r t h e s t e r l i n g b a l a n c e s
would b e a m a j o r b o o s t for confidence.
b.
T h e a n n o u n c e m e n t of a n a g r e e m e n t w i t h t h e I M F w o u l d
n o w b e not v e r y w i d e l y s e p a r a t e d I n t i m e f r o m t h e p u b l i c a t i o n of
the economic forecast.
T h e r e was t h e r e f o r e a strong c a s e for
announcing, along with the loan a g r e e m e n t , m e a s u r e s to r e d u c e
u n e m p l o y m e n t i n 1977, p a r t i c u l a r l y t h e e x t e n s i o n of t h e
T e m p o r a r y Employment Subsidy, which placed a lower burden
u p o n t h e E x c h e q u e r t h a n t h e c o s t of r e d u n d a n c i e s .
Unless
a c t i o n w a s t a k e n on u n e m p l o y m e n t , t h e s o c i a l c o n t r a c t would
collapse.
c
T i m e would b e n e e d e d , a f t e r t h e Cabinet had c o n s i d e r e d
t h e C h a n c e l l o r of t h e E x c h e q u e r ^ p r o p o s a l s t h e f o l l o w i n g w e e k ,
s o t h a t o n c e t h e m a g n i t u d e of & o t o t a l p u b l i c e x p e n d i t u r e c u t
e n v i s a g e d w a s s e t t l e d , t h e r e c o u l d b e a r o u n d of d i s c u s s i o n
with the TUC about its allocation,
0
d.
T h e I M F h a d n o w a b a n d o n e d t h e c o n c e p t of a t a r g e t f o r
the PSBR in 1978-79, having been persuaded that the
u n c e r t a i n t i e s In s u c h a calculation w e r e too g r e a t ; and t h e y
w e r e m o v i n g t o w a r d s t h e c o n c e p t of a t a r g e t f i g u r e f o r t h e
adjustment, which would b e v a r i e d in relation t o growth.
It
w a s s u g g e s t s d t h a t if t h e t a r g e t I n 1 9 7 7 - 7 8 w e r e £ 8 f b i l t t o n ,
t h e c a r r y - t h r o u g h of t h e e x p e n d i t u r e c u t s t h a t w o u l d i n v o l v e ,
including the consequential reduction in debt i n t e r e s t ,
c o m b i n e d w i t h a c c e p t a n c e of t h e C h a n c e l l o r of t h e E x c h e q u e r ^
p r o p o s a l s on e x p o r t c r e d i t , would m e a n that relatively little
further expenditure savings would be needed,
e.
it should not h o w e v e r be a s s u m e d t h a t , for 1978-79,
p a r t of t h e s o l u t i o n c o u l d b e found i n a h a r d e n i n g of t h e t e r m s
of o u r e x p o r t c r e d i t s .
T h e p r o p o s a l s which had b e e n put
f o r w a r d , b u t not yet d i s c u s s e d , could m e a n putting the
i n t e r e s t s of m a n u f a c t u r i n g I n d u s t r y s e c o n d t o o t h e r
considerations.
T h i s would finally and totally u n d e r m i n e the
Governments industrial strategy.
f.
It would be i m p o r t a n t n o t t o u n d e r r a t e t h e p o l i t i c a l
r e a l i t i e s of t h e s i t u a t i o n .
The C a b i n e t s d e c i s i o n over safety
representatives had, a s predicted, upset the TUC.
The
m i n e r s , contrary to expectations, were displaying militancy
over the e a r l y r e t i r e m e n t Issue - and might, indeed, be trying
to m o v e t o w a r d s f r e e c o l l e c t i v e b a r g a i n i n g .
The
P a r l i a m e n t a r y Labour P a r t y was likely t o p r o v e difficult over
t h e p r o p o s a l t o r e s t r i c t t h e r i g h t of o c c u p a t i o n a l p e n s i o n e r s
to d r a w unemployment benefit.
It w a s n o t i m p o s s i b l e t h a t t h e
i n s i s t e n c e of t h e I M F o n h a r d t e r m s c o u l d l e a d t o t h e
G o v e r n m e n t losing office,
g.
W h i l e It w o u l d b e d i f f i c u l t t o c a r r y t h e L a b o u r P a r t y i n
a tough p a c k a g e , it m i g h t well p r o v e e v e n m o r e difficult t o
c a r r y t h e m i n a r e p e a t e d s e r i e s of s m a l l e r d o s e s m a d e
n e c e s s a r y because the m a r k e t was unconvinced by the adequacy
of t h e o r i g i n a l p r e s c r i p t i o n .
It w a s e s s e n t i a l t o e n s u r e t h a t
a n y c o u r s e which w a s c h o s e n would in fact w o r k in p r a c t i c e .
h.
The position was that the country had b e e n spending,
and continued to spend, m o r e than it earned.
This was true
b o m of t h e n a t i o n a n d of t h e G o v e r n m e n t .
In r e c e n t y e a r s , the
r e a l v a l u e of t h e s p e n d i n g of t h o s e on s o c i a l s e c u r i t y b e n e f i t s
h a d b e e n p r o t e c t e d b y l a w , w h i l e t h e r e a l i n c o m e s of t h o s e i n
w o r k had b e e n cut,
A c o n t i n u a t i o n of t h i s c o u l d d e s t r o y t h e
Labour Party,
The s e m i n a l issue was that in an economy
w h i c h w a s b o t h m i x e d a n d o p e n , d e p e n d e n t u p o n t h e l e v e l of
world t r a d e , t o spend m o r e than was e a r n e d m e a n t that the
country b e c a m e dependent upon foreign b o r r o w i n g , and thus
d e p e n d e n t u p o n t h e j u d g m e n t of t h o s e w h o f i n a n c e d t h e p u r c h a s e
of B r i t i s h g o o d s a n d w o u l d f i n a n c e t h e l o a n n o w b e i n g s o u g h t .
It w o u l d b e e s s e n t i a l t o c o n v i n c e t h e G o v e r n m e n t s s u p p o r t e r s
t h a t t h e s e w e r e f a c t s of l i f e w h i c h h a d t o b e f a c e d ,
THE PRIME MINISTER, summing up the discussion, said that none
of t h e c o u r s e s f a c i n g t h e C a b i n e t w a s a t t r a c t i v e o r c e r t a i n I n i t s
effect.
In t h e f o l l o w i n g w e e k t h e y w o u l d n e e d t o d e c i d e w h i c h c o u r s e
w a s l e n s t unpalatable and l e a s t r i s k y , and t h e n s e e k t h e m a x i m u m
support for it.
Ke understood the d e s i r e e x p r e s s e d by some m e m b e r s
of t h e C a b i n e t f o r a d i s c u s s i o n of a n a l t e r n a t i v e s t r a t e g y of p r o t e c t i o n ,
a l t h o u g h i t h a d t o b e b o r n e i n m i n d t h a t if n o a g r e e m e n t w e r e r e a c h e d
o n t h e I M F l o a n t h e p r o s p e c t of a n a r r a n g e m e n t t o d e a l w i t h t h e
s t e r l i n g b a l a n c e s , which now s e e m e d v e r y good, would a l s o d i s a p p e a r .
The a l t e r n a t i v e s t r a t e g y had h o w e v e r h i t h e r t o only b e e n d i s c u s s e d i n
t h e M i n i s t e r i a l C o m m i t t e e on E c o n o m i c S t r a t e g y a n d i t w o u l d b e r i g h t
for the Cabinet to d i s c u s s t h i s , in addition to r e s u m i n g t h e i r
d i s c u s s i o n of t h e I M F n e g o t i a t i o n s , i n t h e f o l l o w i n g w e e k .
H e would
a r r a n g e f o r t h e c i r c u l a t i o n of t h e n e c e s s a r y p a p e r s , h a v i n g r e g a r d t o
t h e s e n s i t i v e n a t u r e of s o m e of t h e p o s s i b i l i t i e s e n v i s a g e d .
The Cabinet T o o k n o t e , w i t h a p p r o v a l , of t h e P r i m e M i n i s t e r ' s
s u m m i n g u p of t h e i r d i s c u s s i o n .
C a b i n e t Office
25 N o v e m b e r
1976