London, 20 December 1967
Top Secret
The meeting considered a memorandum on ‘Further Defence Cuts’ which was circulated by the Chancellor.
THE CHANCELLOR said that he was committed to announcing a large package of cuts in public expenditure by 17th January. This would need to cover both defence and civil expenditure. The cuts would be directed to producing eventually a reduction in home demand of over £800 million a year, and it was already clear that only part of this could be achieved by cutting public expenditure and the rest would involve a large increase in taxation. It was his intention to seek major policy decisions in the civil field in order to produce cuts of £300 million at least in 1968/69. There was severe political difficulty in obtaining support in the House of Commons for such a package of measures, and in his view it would be impossible to do so unless at the same time there were to be announced major policy changes in the defence field to produce eventually very substantial savings there also. It was already clear that there was practically no prospect of obtaining any further reduction in defence expenditure in 1968/69 and only a relatively small reduction in 1969/70. It was therefore all the more important that the statement of the changes in defence policy should themselves carry conviction. He believed that this would only be so if the announcement covered reductions in both our commitments and hardware. In order to focus discussion, he had circulated a memorandum which set out the kind of changes in commitments which in his view would be required and the reductions in hardware which would then flow from them. In particular, he believed that it would be necessary to announce withdrawal from our commitments in the Far East by 1970/71, and he hoped that it would be possible to withdraw also from the Persian Gulf in 1969 or by the end of 1968. The immediate object of the announcements would be to solve the problem of securing support for the required cuts in public expenditure as part of the economic measures which our situation necessitated. But the measures themselves were necessary not merely to produce a package that carried conviction but also to deal with that situation: we had come to the point of defeat on the economic road, and unless we took measures of the kind that he was proposing he saw no prospect of success for many years ahead. We had had several reviews of commitments in the past, and although there had been marginal adjustments in them, we had never wholly given up a commitment yet. It was only in the shock of such a situation as had now been revealed to the Government that he believed that it would be possible to obtain decisions to reduce our commitments; and it would be impossible unless we reduced the commitments for further material savings in defence expenditure to be secured. He appreciated that the process of review of commitments and of the consequential effect upon hardware could not quickly produce exact figures of savings, but he was seeking at the present time only sufficient indication of the framework of possible measures in this field, in a form which would be suitable for the announcement required next month.
THE SECRETARY OF STATE FOR DEFENCE said that it was only if he could be satisfied with the cuts to be made in the civil sector that he could consider further reductions in defence expenditure. He doubted whether the country, as opposed to the House, would find civil expenditure cuts of the kind indicated by the Chancellor so unpalatable, and the country might accept them simply as the means of obtaining a firm grip on civil expenditure generally. He had already reviewed defence expenditure no less than four times during his period of office, and on two occasions in the past year he had done so and had produced savings in defence expenditure on the understanding that substantial reductions in civil expenditure were to be made at the same time; but the savings on the civil side had proved to be well short of what he had been led to expect. Moreover he had given with the authority of the Cabinet an express assurance to the Services that the July review would be the last in the lifetime of the present Parliament. The increase that was taking place in civil expenditure this year was larger than the increase at any time since the Korean war. In considering any savings which were required in the coming years credit should be given to him for the £100 million savings which he had already found from defence expenditure in 1968/69. He was sympathetic to the Chancellor’s difficulty and wanted to help. But it would only be possible for him if cuts in our military capabilities were related to cuts in our commitments; and by the latter he meant specifically the ending of defence commitments by revision of our treaties. Changing the treaties would require negotiation, and this would be a matter for the political Departments. Experience had shown that a thorough-going review of the defence expenditure could take a very long time and even then the results might not be satisfactory. It was essential, in his view, for Ministers to try to agree rapidly on the basic political assumptions which were to underlie defence policy. At the same time, forecasting the course of the economy several years ahead was very hazardous, and the pattern of savings that might be required over the years would therefore be liable to change. In the light of previous reviews he believed that the only way to make substantial savings in defence expenditure was to eliminate altogether particular theatres, and the basic problem was whether in doing so we should look East or West of Suez. Cuts spread over all theatres would be liable to produce a deployment of forces which the Services would regard as wholly incredible. His own view of the changes in commitments which should be considered was broadly in line with that contained in the paper circulated by the Chancellor. This would entail rebuilding all three Services to suit the new pattern of commitments, and this process would take months. For this reason he could not give figures for the overall budgetary savings which would follow from the changes in commitments, but only orders of magnitude. The Ministry of Technology would need to be brought into studies of the effects on expenditure on hardware.
THE COMMONWEALTH SECRETARY drew attention to the need to negotiate our way out of existing patterns of commitments from which we wished to disengage. Inadequate consultation which would be interpreted as unilateral action on our part might be damaging to confidence in the British economy and currency. H.M.G. needed to maintain their credibility internationally as well as internally. He could not agree to enter into discussion on the basis of the paper circulated by the Chancellor until the assumptions regarding withdrawal from commitments were interpreted as assumptions to be investigated. He could not accept that we should abandon all commitments outside Europe. He could not agree that in order to meet a short-term political problem we must accept as binding—in carrying out the intended review—the assumptions which would make a permanent difference to the whole posture of British overseas policy. All possible courses should of course be examined, but this must be on their merits. Moreover, he could not regard as realistic the time scale proposed in the memorandum for withdrawal from Malaysia and Singapore by 1970/71. It would also be important that the Ministry of Overseas Development should be associated with the work done on the basis of the Treasury memorandum.
THE FOREIGN SECRETARY said that he hoped that it would have been possible for the Treasury to proceed by giving an indication of the order of magnitude of the savings required, both budgetarily and in terms of foreign exchange over a period of years ahead. He would then have been willing to seek to work out alternative plans whereby these savings could be secured, and in presenting these to his colleagues would have drawn attention to their respective advantages and disadvantages. He understood that it was recognised that the immediate effect of reductions in commitments could well be to increase budgetary expenditure. He believed that there was a risk that the Treasury might be seeking too big a reduction in demand, but he did not propose to question the Treasury’s judgement on this. On the other hand, he believed that it might not be practicable to obtain what was being sought without a reduction of expenditure in Europe. He suggested, however, that the Treasury and the political Departments should work very closely together. The political Departments would not be supported if they made themselves responsible for holding back the attempt to secure the required reductions in public expenditure. Given close co-operation between the political Departments, the Treasury and the Ministry of Defence he would be prepared to contemplate courses in future foreign policy which would involve substantial risks. It would be essential that there should be full consideration of the consequences in the foreign policy field of reductions of our commitments overseas, and time would be needed for this. He therefore suggested that in the light of the discussion, the Permanent Secretaries of the four Departments represented at the meeting should meet as soon as possible to consider how far the suggestions in the paper which the Chancellor had circulated and possible alternatives would match the requirements as assessed by the Treasury. Account would have to be taken of the consequences of withdrawal from our commitments, including the effects on those parties. He did not exclude the possibility of a further cut in Europe, but as between Europe and East of Suez he would prefer the latter.Without committing his Department, he said that his own personal view was that it might be possible to contemplate accepting the proposed timetables for disengaging from the Far East and the Persian Gulf. But it would be necessary to have the results of the study to be made by the Permanent Secretaries in time for the necessary consultations with the United States, which he would conduct himself, and the Commonwealth countries, which would fall to the Commonwealth Secretary.
It would also be necessary to prepare a guidance telegram for the Prime Minister’s use while in Australia for the Memorial Service for Mr Holt,1 since he would be likely to have discussions with the representatives of at least some of the countries that would be affected by decisions on our part to withdraw from commitments. It was essential that the Prime Minister should know of the conclusions that had been reached at the meeting in order to ensure that the Government’s policy followed a consistent line. The group of Permanent Secretaries should prepare a draft for consideration by Ministers on the following day and despatch to Australia in time for the Prime Minister’s arrival there.
The meeting–
(1) invited the Permanent Secretaries of the Foreign Office, Treasury, Ministry of Defence and Commonwealth Office to prepare urgently a report in light of their discussion on reduction of overseas defence commitments and of defence expenditure for Ministers’ consideration in the context of their review of public expenditure for an announcement in mid-January; and
(2) to prepare and submit to Ministers a draft telegram to the Prime Minister reporting the outcome of the discussion;
(3) took note that, subject to the comments of Ministers on the draft telegram prepared in accordance with the Conclusion (2) above, the Foreign Secretary would despatch the telegram to the Prime Minister under cover of a message from himself inviting him to be guided by the telegram in any immediate exchanges with representatives of countries affected.
1 Holt disappeared while swimming off the Victorian coast on 19 December 1967. An official announcement on 19 December said he was presumed dead; no trace of his body was found. A memorial service was held at St Paul’s Anglican Cathedral, Melbourne, on 22 December.
[UKNA: PREM 13/1999]