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10. Yet we maintain a defence programme of broadly comparable size to France's and Germany's, thus devoting a higher proportion of GNP to defence than they do on the NATO definition 6 per cent in 1973 compared with 4.2 per cent for France and 3.9 per cent for Germany (or 4.7 per cent including expenditure mainly civil-in Berlin). With a widening gap in resources, this puts us at an increasing disadvantage in the mariagement of the economy, where we face severe problems. We think it right to plan on the basis of an average growth of about 3 per cent per year in GNP. Our present balance of payments deficit, of about 24000 million, is equal to about 6 per cent of GNP in 1974. For the time being we must aim to borrow to meet a large part of this deficit, but since we cannot expect to borrow suoh large amounts every year until North Sea oil strengthens our balance of payments we must plan to move resources into exports to narrow the gap. We also have great difficulty in providing for an adequate growth in private consumption, and in meeting other priority claims in the public services.
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.11. A reduction of the defence programme to 4 per cent of GNP by 1978/79 would permit £1440 million about 2 per cent of GNP to be directed to alternative uses. Substantial manpower, much of it skilled, would be released both from the forces and the defence industries. A resource switch of this size equivalent to an extra two thirds of a year's growth - would make a sizeable contribution to meeting other high priority claims including those for the balance of payments and industrial investment. But it would cause serious problems of transition for particular industries and areas, Reductions to 4 per cent or 4 per cent of GNP over a longer period, or to 4 per cent of GNP by 1978/79, would all present less severe problems of transition, but would yield correspondingly fewer budgetary and economic advantages. The least severe option, 4 per cent of GNP by 1983/84, would yield savings of £900 million by 1983/84 and £700 million by 1978/79 on the LTC's. This would ease our economic difficulties as compared with the increased demands of existingdefence plans but would involve no reduction inthe resources taken by defence below the present level.
12. The foreign exchange costs of stationing forces in Germany have virtually doubled since 1971 and are now running at around £300 million a year, We have a powerful case for seeking an increase in German offset payments (currently about £18 million a year) when the current offset agreement expires in 1976, But all previous experience suggests that we shall have little or no prospect of securing such an increase. The attempt, nevertheless, must be made.
The NATO Requirement
13.
Our security depends on NATO, The great bulk of our forces and over 90 per cent of our defence expenditure are deployed in the NATO context. Ministers
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