The Cabinet Secretaries' Notebooks (CAB 195/7)

Return to list

Economic Situation

Economic Situation

H.M. 

Dangers of delay -  i. U.S. will expect us to have acted.
                               ii. Weak negotiatg. posn.
                              iii. Shd. appear in end to act under U.S. pressure.
We ought therefore to act soon.
We have done much - socialist economy - all the worse to drift now into a mess. Political as well as economic smash.
Importance of sound economy - incldg. for cold war. Signs of R. rejoicing already.
R.S.C.'s memo on Budget expenditure - rising expendre must mean no surplus to play for: taxation already as high as it can go: moving twds. inflationary Budget. He made no proposals for action.
Memo. on Signs of Disinflation - shows inflation not disinflation. Consumptn in April (as in my memo). Clearly inflationary. 
Wages: not enough co-opn for T.U.'s:  co-council roadmen have gone up 3rd time & hours down from 47 - 44.  M/T. memo. on Rlways show effect: coal prices & wages confronting rlways with dilemma. Socialised industies demandg. pensions.
Public opinion lulled re economic sitn.  Social survey has bn. good reflection of opinion: last one in March showed 55% (r 28%) thought things were going well. Shows we shall have to work hard to secure acceptance of hard decisions.
Exports to hard-currency countries. Still think devaluation right.
What other expedients?  Incentives - incldg. taxation devices. Improved salesmanship.
Public expenditure.  £3.000 m. out of 10 natl income. High and growing - & in some fields growing out of control. Factor in costs & production. Want to see our policy administered in controlled way wh. doesn't put intolerable burden on taxpayer.
Nearly £3.500 m incldg. l.a. expenditure.
Many aspects are marginal. 5% in public expendre isn't much: but wd. materially affect posn.
Supp. Estimates. Policy of R.S.C. needs applying.
Shd. not some Cttee of Ministers consider how to reduce & control expendre.
Public Staffs.  Have we done all we can to keep nos. down?
Planned redn by 19.000 (Ex. Survey) in Nat. Govt. Small target. Is it being reached?
Local Govt. planned to expand by 4.000. Last year, tho' C.J. nos. kept w'in ceiling; Local Govt. exceeded it by 17.000.
Rate at which Dollar & Gold reserves are going. We can't drift into a crisis - and be on our knees to U.S. & Canada.
Cabinet shd. frame a policy to put us right before W'ton talks.
Surely U.S. wd. be in better mood to talk if we had acted first.
It is a world problem. But we must play our part. Otherwise we can't hope for U.S. & Canadian support.

P.M. 

Don't discuss devaln this a.m.
But want to get broad economic posn.
Fallacies - "consumptn up". Because prodn is up.
Don't accept critics view we're living beyond means. We are in overall balance - Only dollars are difficult.
Budget. Remember how much capital reinvestment we are makg. out of income. Govt. expenditure isn't all waste: much is transfer.  e.g. medicine.
First establish truth re internal economy & relation to dollar.
Don't see the connection.

H.D. 

Publ. expre - shd. be judged on character as well as amount.
Opponents assert heavy expre & taxn as root of troubles. Believe this is economic fallacy. Think Keynes wd. agree. So wd. many young economists.
Mistake to let it be thght. tht. these matters have a close bearing on dollar trouble.
Some expre is excessive. Staffs. for example. Disappointed we haven't got that down. Esp. Local Govt.
But most of our expre is desirable & necessary.
Food subsidies. When said costs inflated - food subsidies operate as subsidy to low costs & exports. W'out them, wages wd. rise.
Other examples not so clear. But social services do keep wages down.
Taxation. Mistake to say 39% "taken" by Govt. Much of it put to profitable use cf. in cap. investment. Budget surplus:  new conceptn of overall surplus is v. virtuous for includes all capital expre covered out of revenue. Don't let's argue tht. Budget is out of balance when that turns negative. Real test is revenue a/c - wh. is still near £500 m. surplus. U.S. ended with deficit of $1800 m - this year. We are doing v. well compared with tht.
Times to-day quoting M/L. Gazette. No evce for rising inflationary pressure. Index at 108 - steady for months. Retail price index up by 2 points because adjustments in food prices, planned in Budget.
On other hand, disturbed at continuing dollar drain.
Have come round to view that devaluation wd. be right.
Agree Aug. will be wasted.  Diff. sitn in Sept. Agree with that.
But mistake to allow discn run off into internal situation.

H.W.

We are in overall balance.  Not therefore living above our means.
Reasons for sitn = decline in sales to dollar area of U.S.A. Our dollar sales aren't falling more in propn than Belgium & Switz.
Can't see tht. publ. expre is disinflationary.
But signs of returg. infl. pressure. Events in internatl field might intensify them.
Supp. Est. are increasg.
Not ques. of direct effects. But effect on opinion in Canada & U.S. - in Sept.  Need to do more to bring it home to them tht. deterioration isn't due to happenings in U.K. But even then. we shall be up against feeling tht. high expre in U.K. is part cause of sitn. R.S.C. wd. be in stronger posn if he cd. show we were doing somethg. on it.
Our costs are out of line with dollar costs. Will mean 20%-30% more for Comm. Countries to buy from us.

P.M. 

We must fight for the right. Don't surrender on false point.

H.W. 

Not wholly false. If p. expre reduced, there are items wh. enter into prodn costs. P. tax does affect level of wages. Income tax & profits tax probably don't enter into prodn costs.

P.M. 

Thought we had freed all but luxuries fr. p. tax.

H.W. 

Applicants for wage increases take a/c of other things than luxuries.
Some scope for economy in most Dpts. - w'out infringing on major Socialist policy.
Long-haired stuff. Managemt. Design, F/Britain - all prob. not paying their way. These cuts mght. avoid cuts on more fundamental policies.

P.M. 

They wd. be chicken-feed.  Not a "slashing cut on public expre".
Do we stand on ground tht. no large cuts are necessary?

H.W. 

Yes: we shd. But H.M.'s target of 5% cut is reasonable & shd. be tried.

A.B. 

Economies, if possible, shd. be made on merits - not in context of U.S. talks.
Deprecate 5% overall. Psychol. disastrous - admn we have bn. spending too much.
Might have a look at it when we come back in autumn.
Agree - ominous expansn in l.g. staffs. Believe it's due to lose of efficiency in l. govt. Also to transfer of functions to co-councils, where l.a. doesn't really control staffs.

P.M. 

Less financial responsibility because Grants?

A.B. 

A factor:  but not decisive. Lack of local control is more important.
Promised earlier to look into this. Thought it useless to ask l.a.'s for redns when work necessitated by central consents.
Also too narrow a control over capital expre by l.a.'s.
Cttee under Ty. Chairmanship: gone a long way on this: will in autumn put to l.a.'s drastic slimming of central consents & will then go out for big staff redns.
Much expre due to bad luck. E.g. N.H. Service rates for doctors etc., had to be negotiated in inflationary atmosphere.
Suppl. Estimates. On N.H.S. we shd. have had to contract the service.
Couldn't do it. Result of policy decision, not wasteful adminn.
Serious diffy: negotiate with reserves running down.
Must find some way of boosting reserves to strengthen our hands in negotiation. Now favour devaluation - as a preliminary to W'ton.

H.G. 

Agree little or no direct reln betwn. expre & dollars problem.
But an indirect reln thro' infln - wh. makes it diff. close gap.
Price control kept on to check diversion to profitable home market, but control can't extend over whole field. We are swimming r. tide. If it got worse, we shd. be in real diffy.
What closing gap mean?  Less imports or more exports. Result must be less in home market. Encourages inflation. Tobacco, cut imports & sales & erratic infln because loss of revenue. Cotton. Less for home market, & inflationary pressure.
Overall b/payments doesn't help us. For unrequited exports & investment abroad. Running down sterling balances e.g. by India does us no good. Surplus with other countries is investment or paymt. of debt.
That is the reln betwn. internal & external.
Is there infl. sitn at home?  Disturbg. signs of it.  Worse than 6 mos ago.  Budgeting sitn, judged by historical standard, is good:  but if inflation must deal with it.
What cd. be done? Capital investment: credit restriction.

H.D. 

Rate of interest is rising because fall in gilt-edged. But on short-term debt you cd. reduce Budget by increasing rates.

H.G. 

Wasn't suggesting any alteration in short-term rates.
Drop in industrials & gilt-edged is disinflationary. If it hadn't happened, we cd. & shd. have provoked it.
If devaluation, we must see tht. inflation doesn't run away. Action required might not have to be drastic. But we shd. make survey to see if we cd. get 5% cut:  by next Budget. It is relevant to ques. of confidence.

A.W. 

Cut in expre no good unless it releases production energy.
What guarantee tht. cuts in N.H.S. wd. help dollar problem?
Cuts on merits. But no immediate effect on dollars. Freeing of labour wdn't  help exports.
Doubtful about devaluation.
Lack of recognn by public of need to keep down costs - cop. by refraining from wage increases. Another round of wage increase wd. be fatal. Support H.M. on that.

H.McN. 

Don't know E.B.'s view. Official F.O. support H.M.'s memo.
Negotiation in Sept. No use if arguments aren't acceptable. If we can't get accommn with U.S. there might be immediate loss of confidence in our posn. Disastrous. 

A.B. 

Why?

H.McN. 

Drop in actual sales to dollar area in summer weren't so serious.
Drop must have bn. due to expectn of devaluation. That will be more strongly felt if we don't get accommn in Sept.
There are other things than logic. U.S. have come to concln tht. our high costs are due to high taxn. They will say: we must do somethg. to put our house in order.

P.M. 

Avoid posn in wh. we admit our policies even wrong.

H.McN.

Don't suggest we concede their case or take panicky action.
But believe we shall have to go some way to meet them if we want them to go a long way for us. 

H.D.

1931. Suicide.

A.B. 

Don't betray our friends in U.S.
Wd. damage Atl. Pact & W. Union.
Concessions to get help - 100% against that.  Not necessary.
Lack of confidence in sterling because we have bn. talkg. like mendicants - to avoid upsetting U.S. opinion.

P.M. 

Not merely economic qua U.S. talks. We have cards. They depend on us militarily and strategically.

A. 

True. But on H.M.'s memo. Our case isn't put to public -

B.   

a) Gravity of situation
b) What we have done.
     Don't like reserved attitude.
Take e.g. situation in R.O.F.'s y'day.  Why?  Because people don't appreciate gravity of situation.

J.S. 

Agree with H.G. But more pessimistic re increasg. inflat. pressure over next few months. Econ. & pol. dangerous to invite deflation.
But we shall have to work hard to hold infln back.
Mistake to concentrate on p. expre. It is expre as a whole - esp. in investment. That's when we cd. cut & increase counter-inflatn.
Wd. give direct & immediate relief. We are being over heroic. Trying to re-equip too fast.
Cd. we think out methods?

G.T. 

Drifted into sitn in wh. can't deal with genl. w'out the particular.
We have all refused to face a wages policy. But inflationary pressure is due to wage increases. In 3 yrs. a revolution.  
Miner is now getting same pay as teacher. Teachers now pressing for more, purely on ground of relativity to labourer.
We have bn. told wages & salaries cut be raised w'out any effects.
E.g. Chorley.
Must look at this. What about a ceiling? Not easy, I know.
Must take a stand somewhere. The levelling up of dirty industries has taken place. We have a chance now of a general settlement.

J. 

Must convince public of gravity.
Must convince U.S. they are asked to help a people prepared to help themselves.

A.V.A. 

U.S. attitude unfair.
"Our costs are out of line". Are they - save on mass prodn items. Vampires e.g. are cheaper and better than any U.S. type.
This impression artificially created by political critics.
And they are asking us to bolster W. Union, & increase defence expendre.

P.M. 

Tory criticisms. Put across here and in U.S.

G.S. 

Our engineering goods are competition.

H.W. 

Yes: but our consumer goods aren't. And it's those we are trying to sell in U.S.A.

C.E. 

Support G.T.
Social revolution of last 4 years. Middle Classes. Never again!

P.M. 

L.P.'s memo. shd. go to E.P.C.
Investment p'mmes may be too ambitious.
Want to be ready to check inflationary pressure.

H.W. 

Subsidy or bonus to dollar earners. Can't identify them.
Can't have free dollars floating around.
Ty. are considering remn of profits tax.

Taken from C.M. 50(49) - Meeting held on 28 July 1949.