TNAG-0476-FCO40-541-Strength-of-garrison-in-Hong-Kong-1974 — Page 31

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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