SECSEGRET
lic expenditure and in private consumption imposed in present
circumstances by our slow growth rate and by our current problems
of high inflation and balance of payments deficit. They can thus
make a contribution to more successful economic management,
which
will be important both for the strengthening of our position in the
alliance and for stability in our internal affairs.
Anglo German Offset
42. The current Anglo/German Offset Agreement which expires on
31 March 1976, provides inter alia for five annual cash payments to
HMG of DM. 110M (currently about £18 M). These payments are made on
condition that there is no permanent substantial change in the level
of British Forces in Germany. The sterling equivalent of our annual
stationing costs in Germany has virtually doubled since 1971 (to
about £300M in 1974) while our balance of payments has deteriorated
very sharply over the same period. We have, therefore, a compelling
case for seeking a substantial increase in German budgetary payments
in any successor agreement. All previous experience suggests that
we shall have little or no prospect of securing such an increase.
We should therefore take our provisonal decisions on defence
expenditure on this assumption. However, we must try to get a
substantially increased budgetary contribution. During our discussions
with the FRG we should bring out the relationship between an increased
German contribution and the measures we may have to take on the Defence
Review. If as a result they were to increase their contribution, this
could be taken into account before final decisions were taken and
implemented on the level of our forces on the European Continent.
POLITICAL CONSIDERATIONS
IV.
43.
Because our national capability to protect or promote our vital
interests will be reduced we shall be more dependent than ever
strong military and political ties with our allies. Our relations
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