TNAG-0540-FCO40-635-Strength-of-garrison-in-Hong-Kong-1975 — Page 93

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SECOND REPORT FROM

ECONOMIC BACKGROUND TO THE REVIEW

5. The Expenditure Committees of Sessions 1971-72 and 1973-74 ex- pressed concern about the mounting financial pressure developing for the defence budget in the late 1970s'. In Session 1973-74 the Committee drew attention to the very serious implications for future expenditure if the Ministry of Defence continued to base their forward budget on unrealistic projections of growth in GNP, and warned that this practice could result in the imposition of damaging short-term cuts. The projections in the Public Expenditure White Paper for 19732 had been based on an average annual rate of growth of 2.5 per cent., but the then Chief Secretary to the Treasury had warned in January 1974 that that position had been overtaken by the changes of 17th December 1973, and that the figures for later years had to be regarded as subject to reconsideration3.

6. The Ministry stated that in formulating the defence review proposals they had assumed an average rate of growth in real terms of about 3 per cent. a year up to 1983-84. The Chancellor of the Exchequer has acknow- ledged that forecasts of growth are subject to wide margins of error', and we note that the record of recent years shows substantial fluctuations in growth and an overall average increase of less than 3 per cent. a year. Mr. Greenwood advised the Sub-Committee that in his opinion 3 per cent. average growth for the review period was not a realistic assumption (Q.4), that the actual rate was likely to be lower and that in that event the Govern- ment might have to look for more savings than were planned on the basis of the review proposals (Q.5). The Ministry stated in evidence (Q.44) that, if the average rate of growth fell below 3 per cent. a year, then the cost of sustaining the proposed programme would necessarily be somewhat higher than 4.5 per cent. of GNP in the mid-1980s. We consider that 3 per cent. average annual growth may be attainable over the review period, and could well be achieved by 1983-84 with the benefit of off-shore oil assisting economic growth. However, it is less likely to be achieved in the early years and we trust that, if this proves to be the case, the Government will give serious consideration to the effect on the morale of the Services and on our defence commitments before making further short-term cuts while the review decisions are being implemented.

7. We agree with Mr. Greenwood (Q.3) and with the Ministry of Defence witness (Q.45) that a major defence review in 1974 would have been inevit- able. The oil crisis and the slowing down of the economy had already led to the imposition of cuts totalling £262 million (at 1974 Survey prices) in the 1974-75 defence estimates and it was evident that the projections for later years would have to be revised downwards.

8. In public discussion and debate of the defence review proposals, much has been made of the fact that United Kingdom defence expenditure absorbs a higher percentage of GNP than the average for NATO as a whole, or

1 H.C. (1971-72) 516, para. 6, and H.C. (1973-74) 169, paras. 9-10.

2 Cmnd. 5519.

3 H.C. Deb., 29th January 1974, Col. 264.

H.C. Deb., 12th November 1974, Cols. 252–3.

5 See H.C. (1974) 308-Report of the Expenditure Committee on the 1974-75 Defence Cuts.