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influences pushing up running costs. decentralisation and flexibility in public sector pay determination were highly desirable.

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d. High interest rates were necessary at present for the reason given in the Chancellor of the Exchequer's memorandum. But they were damaging both economically and politically, and the decisions on expenditure should do nothing to prolong the period for which they were necessary.

e. A tight fiscal policy was needed to support monetary policy. Tax reductions next year might not prove to be desirable especially since they would coincide with the introduction of the community charge in England and Wales. Going further, it could be argued that high interest rates alon were unlikely to be sufficient to end the overheating in the economy. Retail demand had proved to be comparatively insensitive to them and lenders, with the help of foreign funds deposited in the United Kingdom in response to high interest rates, had been successful in their efforts to persuade consumers to borrow more. Other means of restraining demand, including curbs on liquidity and higher taxation, world have to be considered, particularly since some areas of public expenditure, such as health and education, had a high political priority following the Government's refers On the other hand, the evidence was that the present policy was working and that the recent increase in demand has reflected spending on investment rather than consumption: moreover, tax increases would be very damaging to the government.

f. At present many of

overnment's supporters remained

to be convinced that the finance extra spending. persuasion was required. would deal with the poiri backbenchers before the recess.

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surplus was not available to major and early effort of ancellor of the Exchequer his usual letter to

THE PRIME MINISTER, summing up the dission, said that the Cabinet had agreed that the top priority as to get inflation down and that continued tight control ofobic expenditure was essential. They endorsed all the recommendations by the Chief Secretary, Treasury. He should now, as proposed, conduct bilateral discussions with spending Ministers against the objectives which had been agreed. She hoped that the bilaterals would result in agreement. If they did not, sheld at the appropriate time establish a small group to consideoutstanding issues and make recommendations to Cabinet. Medte le, the public line should be that the Cabinet had held it stal July discussion of public expenditure.

It had agreed objective should be to maintain the downward trend in

of public spending (excluding privatisation proceeds) to

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