TNAG-0541-FCO40-636-Strength-of-garrison-in-Hong-Kong-1975 — Page 181

GOVERNMENT OBSERVATIONS ON THE

SECOND REPORT FROM THE EXPENDITURE COMMITTEE

SESSION 1974-75

THE DEFENCE REVIEW PROPOSALS

Background to the Review

1. The Committee's Report concluded that a long term Defence Review was necessary due to the deteriorating economic position of the country and that the previous programme in the 1974 Long Term Costing had become unrealistic (Conclusion 3).

2. The Government agrees that the economic position of the country necessi- tated a long term Defence Review, because of the current economic situation and taking into account the longer term economic considerations described in the Statement on the Defence Estimates 1975 (Cmnd 5976) Chapter I, paragraph 6. As a result, the 1974 Long Term Costing (LTC 74), which had been designed broadly to maintain the size and structure of the forces to meet the commitments as they then existed, had to be reviewed.

3. However the Committee also suggested that the Defence Review was based on projections of economic growth which might prove optimistic, particularly in the short term (Conclusion 1).

4. The Government accepts, as was made clear in the Public Expenditure White Paper (Cmnd 5879), that projections of the potential increase in GNP are surrounded by uncertainties which are particularly great in present circum- stances. In addition, particularly in the short-term, conditions may make it impossible to maintain an actual rate of growth similar to the potential increase in GNP and may affect the resources available for domestic use. It is because of uncertainties of this sort that it has been necessary for the Government to make the further cuts in public expenditure, announced by the Chancellor in his Budget Speech on 15 April, including a cut of £110 million from the Defence Budget in 1976–77.

5. Despite the need for these cuts, the Government is firmly of the view that the Defence programme should continue to be planned ahead over a ten year period in order to allow, among other things, for the long timescale required to develop major weapon systems. Such planning requires the making of assumptions about the future growth of potential GNP, i.e. GNP at a constant pressure of demand. While such assumptions are inevitably tentative, they are based on the best possible evidence available at the time. The projected average rate of increase of about 3 per cent. a year in real GNP up to 1983-84 used for the Defence Review (Conclusion (1)) was conceived as a central assumption, i.e. as neither optimistic nor pessimistic. If in the short-term, because of world recession, actual GNP is expected to increase more slowly than the projected growth rate of potential GNP, this does not of itself imply that the assumed growth-rate of potential GNP is over-optimistic. Over a ten year period pro-

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