Economic Situation - part 2

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Economic Situation - part 2


Exchanges with H.M. over week-end.
We have reached this point.  H.M. feels that, to take effective pull v. inflation, he must announce full list of his proposals this week.
At B'fd. I outlined policy of restraint & promised to consult industry on it.  This timing is therefore v. diff. for me.  Announcemt. wd. precede engineering wages award & my projected mtg. with T.U.C. next Monday.  I therefore suggd. tht. H.M. shd announce all proposals save bread & milk and deal with latter in Budget – in hope that it cd. contain some other factors to balance it.  For bread has become banner for bankers & red-rag to workers.  Inflated beyond its real importce.
Ready to add anything other than b & m., if that wd. help.


How many workers' wages are tied to c/living?


i)  About £5 M. p.a. wd. be cost of those direct increases.  3m. workers.
 ii) C/living index stationary last month : will be again this month, & may drop 1 point.
 N.C.B. meets Wed : engineers on Fri :  On latter, employers won't go beyond 7% increase : & unlikely that decn. will be reached at once.


i)  I remain of opinion expd. before P.M. went to W'ton.
 Fear wage claims won't be proportionate to addl. cost of b. and m.  That wd. be 1/8 : claim will be 5/= or so.  Every 1/= a week on wages totals £50 M. p.a.  This means an addl. £150 M. or more of inflationary pressure in the economy.
 ii) Mtgs. with T.U.'s.  Our policy is increased productivity : restraint in wages & dividends : redn. in restrictive practice.  Introdn. of such a policy depends on confidence betwn. Govt. & T.U. leaders.  This move wd. destroy that confidence.
 Agree continuance of this subsidy can't be justified in present circs.  But how do we help – temper wind to – those on v. small incomes.


Savings will be eroded by concessions to N.A. rates : &, in terms of inflation, by wage awards.
Can't therefore justify it save as part of movement wh. produced no net increase in c/l. index : i.e. in Budget, with other price changes.
But, w'out b & m is p'mme enough?  Need for real cuts in Govt. expenditure & plans.  E.g. 10% cuts in overseas staffs such as those in W'ton.


Favour abolition of bread subsidy.  But worried at wages consequences and esp. on P.M.'s mtg. with T.U. leaders.


Support abolition.  Part of policy we are pursuing.  Hope it will be done.  Timing turns on Budget : will it contain somethg. that will compensate?  If so, do it then.  If not, better have the row now.
The proposals as a whole seem to me to be insufficiently drastic.  Alarmed by his concldg. reference to doing more later.  This shd. be our last chance.  Better to do too much than not enough.  Support S.Ll. plea for another turn of the screw.
 Need for speed, so far as l.a. expenditure is concerned.


Don't under-estimate psych. importce. of b. subsidy in wage negotns.  But wrong to m'tain such a subsidy when we are pursuing disinflationary policy. Our efforts may be overcome by weakening of sterling over next few months.
Fear this package may not be tough enough to meet current events.  Do too much rather than too little.
Favour ending this subsidy either now or in Budget – as part of a formidable package.


How much danger to £.  Believe it's v. serious.  And it is more important than relations with T.U.C.  We aren't v. far off a run on £.
Not much money in bread subsidy.  But proof of our seriousness & our view that £ is more important than industrial relations. Don't think package, w'out b and m., will make enough impact.
Need is to spend less in next 6 months.


Public opinion expects all unpopular things to be done soon and all together.
Can we be sure that this will be included in Budget?
Support S.Ll. – more drastic action in other directions.  P'pone b. and m. meanwhile.


Agree with H.A.
Sympathise with views of M/Labour.
Want right moment & right package.  If we are at a point when c/l index may drop, and country expects unpleasant measures, is this not a good moment?


Pol. problem, as well as economic.
B & m. must be done – no doubt on that. 
But v. diff. moment for some members of Cab. – esp. for P.M. in light of B'fd. speech.
Disclosure of diffce. betwn. us on this wd. be fatal to £ and to Govt.  We ought therefore to be ready to compromise on timing.
H.M. shd. be supported in attack on inflation.  Bank rate shd. be a feature of any speech : & there shd. be enough in package to make that look like action from strength.
Cab. shd. also decide in favour of abolition of b. subsidy – w'out prejudice to timing.  Agree to do it in Budget.
Greatest disaster wd. be disagreement among us.  Therefore ask for more time in which to reach agreement.
Delay in printing Vote on Account cd. be attributed to deteriorn. in printing dispute.


Bread subsidy shd. go.  Public won't, however, accept it as means of curbing inflation.
If H.M. cd. use term "crisis", we mght get away with this.
If not, what about of redn. of subsidy to e.g. £10 M. & avoid compensns. e.g. to N.A. rates.


Much turns on estimate of dangers of situation.
Trade gap at £75 M.
Credit squeeze hasn't operated to reduce imports.
Alternatives: full package, incldg. b. & m.  Omission of those wd. make it insufficient for its purpose.  Never an ideal time to abolish b. subsidy : believe it best to combine it with other measures.  If we can't include b & m, I wd. seek other means of toughening this up.
If h. purchase were to be introduced on Wed., we wd. need a decision to-night.


This is a pol. problem.  Net saving will not be v. large.
Diffy. is to reconcile this with B'fd. speech & to explain to public tht. this contributes to battle v. inflation.  Public opinion is now favourable to such an attack – & stability is w'in reach.
Think it wd. be unwise to do this now.  T.U. reaction.  Industrial trouble likely to follow.
If it must be done, better in Budget than now : for there cd. then be countervailing measures.


Accept logic and banner argument.
But public are bound to retort : deliberate action raising basic food prices : and real anger & industrial trouble.  More therefore than wages.
Against it therefore – I fear, at any time.


Dislike this subsidy.  But doubt if it will have disinflationary effect, after takg. a/c of "erosions" known & likely.  This measure won't convince Unions we are in financial crisis. 
But ready to agree that it shd. be abolished in Budget, wtr or not countervailing concessions can be made.


No Parly. diffy. if Vote on A/C. were p'poned until Monday.


Home's views – read out letter.


Useful discussion – opinion is balanced.
 Concluding sentence of my covering memo. was intended to refer to import controls.  I was not specific because of danger of forestalling.
 Agree this is pol., as well as economic, problem.  Agree timing is difficult.
 But real test of solvency – trade figures – shows dangers of situation.  They are substantial.  Market is such tht. it brooks little delay.  Action is expected.  I have suggd. in only speech made, Budget is time : in order to hold posn. Loans are not being taken up : Kenya.  Talk is beginning abroad on devaluation.  We had to intervene to-day to buy t'ferable sterling.
 First ques : Can you wait for Budget?  I don't think so.  Even if you cd., what advantage.  No compensation, for it wd. give increased spending power.  Thus, only attacks on other classes.
 If you wait, what do you do m'while?  Bank rate, after emasculated statement, wd. seem action fr. weakness.
 Four elements in package  i) explain what we have done on Estimates.  I cd. strengthen that.  £300 M. less than when first presented.  Tho' £117 M. up, it's not bad considerg. increases.  Cd. also say that process continues : both on numbers and on policy (incldg. 3 outstanding Def. ques).  But Def. Estimates assume £50 M. fr. Germany.
  ii)  capital investment : p'ponement.  Action to support effect of squeeze in private sector.  This means largely natd. indies.  Can we go further?  Cab. happy in principle : will they accept in detail.
  iii) Consumption must play its part.  Food subsidies is all that is left.  Agreed now that it must, sometime, go.
 Diffies. a) Persuade public tht. infln. can be checked by increasing c/living.  Even R.S.C. had to stabilise subsidies at £400 M.  Retail prices rose, during Soc. rule, despite subsidies.  Answer to public : prices rose twice as fast when subsidies were m'tained at £400 M.
  b) Govt. supporters.  There has bn. a fair time enjoyed in our 4 years since austerity ended.  But middle class haven't had their share of it.  Want to help them in Budget.  Wd. have wished to get b and m. out of the way beforehand.  Get the money for it out of equity holders – not out of abolition of bread subsidy.  Don't appear to balance the wrong things.
  c) Trade Unions.  On this round of wage claims – don't want to do this 2 days after they have settled : better done while negotn. is procdg.  If it's accompanied by really stern measures – cdn't P.M. & I put it to them that it is really necessary to stop the rot and avoid devaluation.  That last wd. hurt them v. much more.  They wd. not have bn. surprised if this had bn. done in Oct.
 Mine is a gt. responsibility.  But it's a mistake to over-insure.  I cd. not, however, follow a wrong course in these circs.  N. Assistance.  Don't want to hurry Bd.


My personal feeling.  Easy to under-estimate effect of b. and m. on working people.  Think of re-action to October's pots & pans.  Believe it mght have produced strikes in Oct. 
Fear it may provoke real industrial anger, of the kind we haven't had since Tory Govts. of 20's and 30's.
How cd. I give you help, after B'fd. speech.


Hire-purchase.  40% or 50%?  Ready to accept 40%.


Pol. effects shd. not be under-rated.  They will operate on several indies. wh. are workg. short time or are in dev. areas.  There will be some unemplt.  Believe we shd. face this.
I wdn't press for 40%.  Let us make it 50% and 2 years in each case vice 18 mos.
Agreed 50% and 2 years.
Control over hire will stop a big gap in h.p. control.
There are gt. diffies. – e.g. in dealing with successive short-term hirings.


Assce. Bd. wd. not recommend increase in scales.  They wd. still be 1/= above 1945 values.  But they wd. follow a Govt. lead.


If we present bread as minimal, better to leave it to their direction.

Taken from C.M. 12(56) - Meeting held on 13 February 1956.