250. Message From British Prime Minister Callaghan to President Ford1
Thank you so much for your message of 20th November. What you say about the sterling balances is very encouraging.
We have however now reached a most critical point in our negotiations with the IMF. The Cabinet discussed the matter at length this morning and find the proposals unacceptable. They wish me to put the position before you.
On present forecasts our public sector borrowing requirement in 1977–78 will be pounds sterling 10 and one half billion. The IMF are saying that we should cut this to pounds sterling 8 and one half billion with a further reduction in 1978–79 to pounds 6 and one half billion. Our immediate problem concerns 1977–78. Denis Healey thinks that he can negotiate the IMF up to a figure of pounds sterling 9 billion and put this to Cabinet this morning. The Cabinet were however not prepared to agree to either pounds sterling 8 and one half billion or pounds sterling 9 billion. They feel that the lowest PSBR which is politically acceptable next year is pounds sterling 9 and one half billion. In other words they are willing to contemplate, with great difficulty, making a reduction in the PSBR next year of pounds sterling 1 billion of which half would be found from further cuts in public expenditure. There is no need for me to tell you how uncertain all these figures are.
The Cabinet’s view is based on both economic and political reasoning.
First, economic. Unemployment here is higher than at any time since the 1930’s and is forecast to rise again next year even on the basis [Typeset Page 789] of existing policies. This situation, which provides no case for a further release of resources into exports, would be worsened if we took the action the IMF recommend. In short the Cabinet’s objection is to substantial deflation with even higher unemployment. The balance of payments is forecast to come into surplus next year. No independent economist here is advocating further substantial deflation on top of the pounds sterling 2 billion cut in the PSBR for next year which we made in July. The proposed deflation would reduce our expected rate of growth of GDP to no more than 1–1 and a half per cent.
Second, political. The Cabinet’s view is that cutting the PSBR by more than pounds sterling 1 billion would utterly destroy the partnership with our trade unions upon which our successful policy of wage restraint depends. They do not believe that we would be able to carry the necessary legislation in the House of Commons. Even a reduction of pounds sterling 1 billion will involve very grave risks for us. In any case with cuts of the order the IMF are suggesting on top of those we made only four months ago it would be impossible to spare our defence programme.
Forgive me putting these points to you so tersely: But time is very short. Denis Healey is reporting the Cabinet’s view to the leader of the IMF mission this afternoon and I shall be seeing him myself later today. I cannot of course forecast how Whittome will react but I thought I should let you know the position at once since the Cabinet will have to take a final decision on Thursday. I hope that you will feel able to intervene with the Managing Director of the Fund and impress on him the need to moderate their terms to what can be made politically acceptable in this country.
With best wishes and warm regards.
Yours sincerely,
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Summary: Callaghan replied to Ford’s recent message on the UK economic situation.
Source: Ford Library, National Security Adviser, Kissinger-Scowcroft West Wing Office Files, Box 25, UK (23). Secret. Forwarded under cover of a November 23 memorandum from Scowcroft, on which a handwritten notation reads, “President has seen.” In an undated memorandum, Scowcroft informed Ford: “We are in a difficult position. On one hand, pressure on the Fund to reduce their demands on the British could impair the credibility of the agreement and thus weaken confidence in sterling. On the other hand, Callaghan believes he is up against a dire political situation. The pivotal issue is 1/2 billion pounds.” (Ibid., NSC International Economic Affairs Staff Files, Box 3, Country File, United Kingdom (5)) In his November 24 reply to Callaghan, Ford characterized any U.S. intervention in the UK–IMF negotiations as “inappropriate,” but assured Callaghan that the U.S. would “move sympathetically” on sterling balances once the UK and the IMF had achieved substantial agreement. (Message WH61623 from Ford to Callaghan, November 25; Library of Congress, Manuscript Division, Kissinger Papers, Box CL 148, Great Britain, Chronological File, 15–30 November 1976)
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