| CP(77) 91 -                                              | Economic Policy:                                                        | The Next Steps.                             |
|----------------------------------------------------------|-------------------------------------------------------------------------|---------------------------------------------|
| the Exchequer                                            |                                                                         |                                             |
| 92 -                                                     | Public Expenditure:                                                     | Action to assist the Construction Industry. |
| Memorandum by the Secretary of State for the Environment |                                                                         |                                             |
| 93 -                                                     | The Legislative P r o g r a m m e 1977-78 and The Queen's Speech on the |                                             |
| Opening of the New Session.                              | Note by the L o r d President of the                                    |                                             |
| Council                                                  |                                                                         |                                             |

94 ­ Wider Implications of the Industrial Strategy. 
Memorandum by the 
Chancellor of the Exchequer and the Secretary of State for Industry 
95 ­ 
The Queen 1 s Speech on the Prorogation of Parliament. 
Note by the 
Secretary of the Cabinet 

96 - 
Pay Policy. 
Memorandum by the Chancellor of the Exchequer 
97 ­ 
Ninth Report of the Select Committee on Expenditure 1976-77: 
Draft 
Government Response. 
Note by the Chief Secretary, 
T r e a s u r y 
98 
Pay Policy. 
Memorandum by the Secretary of State for Employment 
99 
The Queen's Speech on the Prorogation of Parliament. 
Note by the 

Secretary of the Cabinet 

| 100 ­    | The Queen's Speech on the Opening of Parliament.    | Note by the    |
|---------|-----------------------------------------------------|----------------|

Secretary of the Cabinet 

101 
Crown Agents: 
Fay Report. 
Note by the Secretary of the Cabinet 
102 
Crown Agents: 
The Fay Report. 
Memorandum by the L o r d Chancellor 
103 
Draft White Paper on "The Conduct of Company D i r e c t o r s " . 
Memorandum by the Secretary of State for Trade 
104 ­ **1978.79** National Insurance Contribution Rates in Respect of Employed 
Earners. 
Memorandum by the Secretary of State for Social Services 
and the Minister for Social Security 
105 
National Insurance Contribution Review 1977. 
Memorandum by the 
Chief Secretary, T r e a s ur y 
106 
Pay Policy and Low Pay. 
Memorandum by the Chancellor of the 
Exchequer 
1
0
 
7 
­ Nationalised Industrial Board M e m b e r s ' Salaries. 
Note by the L o r d 

- P r i v y Seal 
The 1974 Recommendations of the Three Review Bodies: 
Second Stage 

Payments. 
Note by the L o r d P r i v y Seal 

CP(77) 91 - 
Economic Policy: 
The Next Steps. 
Memorandum by the Chancellor of 
the Exchequer 
92 - 
Public Expenditure: 
Action to assist the Construction Industry. 
Memorandum by the Secretary of State for the Environment 
93 - 
The Legislative P r o g r a m m e 1977-78 and The Queen's Speech on the 
Opening of the New Session. 
Note by the L o r d President of the 
Council 
94 - Wider Implications of the Industrial Strategy. 
Memorandum by the 
Chancellor of the Exchequer and the Secretary of State for Industry 
95 - 
The Queen's Speech on the Prorogation of Parliament. 
Note by the 
Secretary of the Cabinet 
96 - 
Pay Policy. 
Memorandum by the Chancellor of the Exchequer 
97 - 
Ninth Report of the Select Committee on Expenditure 1976-77: 
Draft 
Government Response. 
Note by the Chief Secretary, 
T r e a s u r y 
98 - 
Pay Policy. 
Memorandum by the Secretary of State for Employment 
99 - 
The Queen 1 s Speech on the Prorogation of Parliament. 
Note by the 
Secretary of the Cabinet 
100 - 
The Queen's Speech on the Opening of Parliament. 
Note by the 
Secretary of the Cabinet 
101 - 
Crown Agents: 
Fay Report. 
Note by the Secretary of the Cabinet 
102 - 
Crown Agents: 
The Fay Report. 
Memorandum by the L o r d Chancellor 
103 - Draft White Paper on "The Conduct of Company D i r e c t o r s " . 
Memorandum by the Secretary of State for Trade 
104 - 1978-79 National Insurance Contribution Rates in Respect of Employed 
Earners. 
Memorandum by the Secretary of State for Social Services 
and the Minister for Social Security 
105 - National Insurance Contribution Review 1977. 
Memorandum by the 
Chief Secretary, T r e a s ur y 
106 - 
pay Policy and Low Pay. 
Memorandum by the Chancellor of the 
Exchequer 
107 - Nationalised Industrial Board M e m b e r s ' Salaries. 
Note by the L o r d 
- P r i v y Seal 
- 
The 1974 Recommendations of the Three Review Bodies: 
Second Stage 
Payments. 
Note by the L o r d P r i v y Seal 
Milk P r i c e s . 

Memorandum by the Secretary of State for F o r e i g n and Commonwealth Affairs 

The New Pensions Scheme. 
Memorandum by the Secretary of State for 
Social Services and the Minister for Social Security 
Top Salaries - National Health Service Consultants and Others. 
Memorandum by the Attorney General-. 

| Pay of Nationalised Industry Board M e m b e r s .    | Memorandum by the                    |
|-------------------------------------------------------|--------------------------------------|
| L o r d P r i v y Seal                                |                                      |
| Inquiry into the Crown Agents.                        | Memorandum by the L o r d Chancellor |
| Public Expenditure White Paper.                       | Memorandum by the Chief Secretary,   |
| T r e a s ur y                                        |                                      |

Benefits of North Sea Oil. 
Memorandum by the Chancellor of the 
Exchequer and the Secretary of State for Energy 
The Pay Scene. 
Memorandum by the Chancellor of the Exchequer 
A National Development P r o g r a m m e . 
Memorandum by the Secretary of 
State for Energy 
CP(77)91 
C O P Y NO 
10 October 1977 
C A B I N E T 

## Economic P O L I C Y : T H E N E X T S T E P S Memorandum By The Chancellor Of The Exchequer

1. 
           We have now gone a long way to consolidate the improvement in our 
financial position begun last winter. 
                                                           This has been widely recognised both 
at home and overseas - for example, at the International Monetary Fund 
( I M F ) meeting in Washington. 
                                                 As a result, we a r e in a position to consider 
further measures to strengthen domestic demand, and to i m p r o v e the outlook 
for employment. 

2. 
         Our prospects hinge, however, on the continuing success of the fight 
against inflation. 
                        The uncertainties surrounding the present round of pay 
settlements have important implications both for the size and the shape of 
the measures to which we should commit ourselves at this stage. 

## *- The Economic P R O S P E C T

3 ­ 
                    Economic activity has remained subdued thi s year and unemployment 
has continued to r i s e . 
                                                                    The main i n c r e a s e in demand has been through 
exports and, to a l e s s e r extent, industrial investment. 
                                                                                                                                                                   Public sector 
spending on goods and s e r v i c e s has probably fallen as planned and personal 
consumption has dropped sharply. 
                                                                                                       The balance of payments has improved 
strongly: 
                             and the current account is probably now in balance or modest 
surplus. 

4. 
          Retail p r i c e s have slowed down. 
                                                          The year on year r i s e may well 
be down to some 13 per cent in the final quarter of this year and should be 
down into single figures during the first half of 1978. 
                                                                            A s 1978 p r o g r e s s e s , 
however, the outcome will depend increasingly on the l e v e l of pay 
settlements during the coming round. 
                                                       The economic prospect which I 
outline below assumes that the i n c r e a s e in average national earnings is held 
to 10 per cent. 
                       But thu whole prospect could worsen if earnings r i s e 
significantly faster. 
                               F o r example, if earnings r i s e by 15 per cent, retail 
p r i c e s would probably be accelerating back into double figures before the 
end of 1978. 

5. 
          F r o m now on growth may pick up gradually as a r e c o v e r y in real 
personal incomes and consumption increases consumer expenditure and 
production. 
                    With exports and private sector investment continuing to r i s e , 
total output ( G D P ) could increase moderately fast (perhaps of the order of 
3£ per cent) during 1978. 
                                       Thus, in the absence of any new policy measures, 
the economy may be growing at a rate just above what would be needed to 

stop the upward trend in unemployment. 

6. 
          The balance of payments on current account i s likely to go on 

improving, mainly owing to North Sea oil, with a surplus vhich could be over 
£2 billion for 1978. 

7. 
          The Public Sector Borrowing Requirement ( P S B R ) for 1977-78 is now 

forecast at about £7 billion - that i s , £1.7 billion below the figure to which 
we committed ourselves last D e c e m b e r . 
                                             It is v e r y tentatively put at about 

£7 billion also in 1978-79. 

8. 
          In the first four months of 1977-78, the growth of domestic credit 

has been v e r y slow, while the growth of sterling M3 has been at the bottom 
of the target range of 9-13 per cent. 
                                       The outlook for the remainder of the 

current year is for the growth in £M3 to accelerate and to be towards the 
top end of the 9-13 per cent range for the year as a whole; a similar rate 
of growth could be envisaged in 1978-79. 
                                          Confidence in domestic markets 

is however closely related to the l e v e l of pay settlements and if these a r e 
in excess of the 10 per cent assumption, interest rates will be carried up, 

gilts will be m o r e difficult to sell, and consequently £M3 might be at or 
above the 13 per cent upper limit to the target range. 

## H- Assessment Demand For Resources

9 ­ 
T h e r e i s now a clear case for early action to stimulate demand. 

We must aim at creating the conditions in which unemployment turns f i r m l y downwards. 

1 0 ­ 
                    A t the same time, we must avoid the mistakes of our p r e d e c e s s o r s 
in 1972-73. 
                                     Beyond a certain point, the injection of money into the economy 
at this stage would be m o r e likely to r e c r e a t e industrial bottlenecks, suck 
in imports and stimulate inflation, than to increase our own domestic output 

a n d bring down unemployment. 
                                                                                                    Inflation in Britain is still higher than the 
Organisation for Economic Co-operation and Development ( O E C D ) 
                                                                                                                                                                                                            a
                                                                                                                                                                                                               v *
                                                                                                                                                                                                                      r
                                                                                                                                                                                                                        a 2
                                                                                                                                                                                                                                e
                                                                                                                                                                                                                                   ; 

there is uncertainty about the outcome of the current pay round; and both 
investment and consumers' expenditure m a y already be on the upturn. 
So excessive stimulus could create real risks, particularly when we look 
forward to 1978-79. 

## Monetary Prospects

11. 
         It must be our objective not to break the present virtuous c i r c l e in 
which, by keeping the money supply within the target range, we have helped 
to sustain the exchange rate, to bring down domestic interest rates, and to 
reduce expectations of inflation; 
                                             this in turn has strengthened confidence; 
and confidence in turn has made it easier for us to keep to our monetary 
objectives. 

12. 
        Because on present policies we may finish the year towards the top 
end of our target range for sterling M3, fiscal action on a l a r g e scale could 
imply some increase in the l e v e l of interest rates. 
                                                                This will depend 
crucially not only on the size of the fiscal package, but also on its nature ­
the extent to which it concentrates on measures which a r e consistent with 
the overall economic strategy to which the Government has pledged itself, 
and which therefore a r e likely to meet a favourable market response. 
                                                                                       The 
market's response will depend to an important extent on whether the 
Government is seen to be maintaining the f i r m control of public expenditure 
which it established last year. 

## Hi. Shape O F A N A U T U M N P A C K A G E

1 3 ­ 
A l l these considerations suggest that any package of measures should meet the following tests:­

a. 
          Both because we want the largest and quickest effect on 
unemployment and because we can count on significant headroom in 
1977-78, it should give a further significant stimulus in the current 
year; 
         but, because the outlook for 1978-79 is m o r e uncertain, it 

should not pre-judge the size and shape of the 1978 Budget m o r e than 
is essential. 

b. 
         It should be seen to be consistent with the G o v e r n m e n t s 
published targets for the monetary aggregates and with our I M F 
commitments for the current y e a r . 

c. 
           It should be seen as a natural development of the economic 
strategy which I announced in the Budget and which has been endorsed 
at international meetings. 

d. 
          It should be consistent with maintaining a sufficient surplus 
on the current account and enabling us to make a start on repaying 
our debt. 

!4. 
The measures will also, of course, have to take account of the 
present position in Parliament and the pact with the L i b e r a l s . 

15. 
        On balance, I believe that measures costing up to £1 billion in the 
current year (1977-78) can now be justified; 
                                                     we need to leave some of our 
options open for 1978-79, but we can, I think, now commit a further 
£1 billion in that year - or a total of £2 billion over the next 18 months. 

## Iv. A C T I O N A F F E C T I N G 1977-78

16. 
        The options for significant action in the current year are, for 
practical reasons, v e r y largely confined to cash transactions - either tax 
changes or transfer payments - and even here the administrative constraints 
are formidable. 
                      T h e r e is little scope for varying the Government 1 s 
purchases of real resources between now and next March. 

## Indirect Taxes

17. 

A cut in indirect taxes would contradict our stated objective to shift the tax burden from direct to indirect taxatior.. 

But it would in the long run have a similar demand effect to a cut in direct taxation and would Reduce inflation in the short run. 

The standard rate of Value Added Tax (VATJ 
could be reduced from 8 per cent to (cay) 6 per cent, and the higher rates of V A T from 12£ per cent to (say) 10 per cent. 

This would take effect from a current date in November and the demand effect would therefore be relatively small in the current financial year, since i t i s impossible to backdate changes in indirect taxation. 

Similarly, and also because of the lags in V A T collection, the cost in 1977-78 would be rather small ­
£115 million; but the cost in 1978-79 would be some £900 million. 

It would reduce the year on year inflation rate by 1 per cent straightaway. 

18. 

It would also be possible to reduce the specific duties, but this would 

aPPear particularly p e r v e r s e at a time when their r e al value has already 
fallen significantly in recent years and the arguments of energy conservation, 
transport and health policy point in the other direction. 
                                                                                                                                                                               Indeed, now that 
we are committed to the indexation of personal income tax allowances, there 
is a strong case in principle for raising these duties annually m line with 
inflation. 

## Income Tax

l 9 . 
                                              It is not possible for the Inland Revenue to make administrative 
 room for a cut in income tax in m i d - y e a r unless we exempt from tax in 
the current financial year the November i n c r e a s e in National Insurance 
pensions - at a cost of £40 million, giving a significant addition to the real 
income of about Z\ million pensioners. 
                                                                                                                                                                                                                                                                            On this condition, the Revenue 
 would be able to implement this autumn an i n c r e a s e in the personal 
 allowances for all taxpayers for the current financial y e a r . 
                                                                                                                                                                                                                                                                                                                                                                                                                  The obvious 
  course i s to introduce this autumn some or all of the increases in P h o n a l 
  allowances (indexation in line with p r i c e inflation), which under the 1977 
  Finance A c t we a r e required to implement next A p r i l unless we can get the 

House of Commons positively to vote against them. 
                                                    This would be an 
advance or "on account" relief. 
                                On present estimates, full indexation 
requires increases of around 12 per cent - that is £100 in the single 
allowance, £160 in the m a r r i e d allowance and corresponding increases in 
the other personal allowances. 
                                This would take nearly 1 million people 
out of liability to tax. 
                       If introduced in 1977-78 the cost would be 

£985 million. 
                T h e r e would be relatively little additional cost for 1978-79, 
over and abov? the indexation to which we a r e already committed under the 
1977 Finance A c t . 

20. 
        The increases in allowances would be backdated to A p r i l so thai; they 
applied to the whole of the current tax y e a r . 
                                                    Thus they would entail lump 
sum tax rebates payable in November or December of up to £40 for a 
m a r r i e d man, and £25 for a single person, plus additional tax relief of a 
little over £1 a week foi a m a r r i e d man thereafter. 

21. 
         Full indexation this autumn would represent a much m o r e substantial 
stimulus to demand in the immediate future than the reduction in V A T or 
the specific duties. 
                           It could be worth nearly half of 1 per cent of G D P by 
the first quarter of 1978, and it would thus have a quicker impact on the 
unemployment figures. 
                               A t the same time, it would represent a minimum 
additional commitment for the 1978 Budget. 
                                                         Thus, it would l e a v e us with 
the maximum flexibility to introduce further fiscal reliefs in the Budget if 
economic circumstances p e r m i t . 
                                            By the same token, it would give a 
reasonable assurance that we shall not have over committed ourselves, if 
events develop less favourably. 
                                          It would also give maximum help to the 
lower paid and enlarge the gap between income from work and income from 
benefits. 

22. 
        If we decided to give l e s s than the 12 per cent indexation of personal 
allowances at this stage - perhaps for the reasons discussed in paragraph 29 
below - the effects in paragraphs 19-21 above would, of course, be 
correspondingly smaller. 
                               It would in that case be important to make clear 
that we would r z i s e the l e v e l of allowances further in the Spring Budget so 
as to achieve then the full indexation p r e s c r i b e d in the Finance A c t 1977. 

## Public Expenditure

23. 

The Contingency R e s e r v e for 1977-78 has now been run down by our previous decisions to about £190 million. 

Depending on the form of assistance, the F o r d Erika project in South Wales i s likely to require this year some £30 million from the Contingency R e s e r v e ; 
but this could r i s e to as much as £45 million. 

I am sure that we should not exceed the Contingency R e s e r v e in only the second year of its operation as a control figure. 

24. 
        Within what remains there are a number of options. 
                                                                    F o r example, 
we could cancel the artificial administrative delay of 3 months m the 
payment of regional development grants and agricultural capital grants 

imposed as part of the **J976** expenditure cuts. 

This will have to be done 

some time since complaints will build up if the delays a r e maintained. 
                                                                       The 
release of funds would benefit industry in a3sisted areas, and agriculture. 
The cost is once for all. 
                          If i t w e r e done now, the cost would be around 

£100 million in 1 9 7 7 - 7 8 and perhaps £ 2 5 million in 1 9 7 8 - 7 9 . 

2 5 . 
              Another possibility might be to pay a £10 Christmas bonus to 
pensioners. 
                           This would also cost about £100 million, and would inject 
some quick spending power this y e a r . 
                                                                              The weight of argument in normal 
circumstances would be against i t . 
                                                                        While in theory it could be regarded as 
once-for-all, i t must lead to strong p r e s s u r e to repeat it in future y e a r s . 
It was suggested earlier this y e a r a3 something which might be done if 
prices over the previous 12 months proved in the event to have risen by 
m o r e than the amount of the November uprating, but it now appears certain 
that the November uprating will exceed the actual r i s e of p r i c e s . 
                                                                                                                                     The 
^\ million pensioners paying tax will get an unexpected bonus since they 

will not now be taxed on their pension i n c r e a s e for the rest of this financial 
year, while those on supplementary pension, the poorest, will again 
benefit from our winter fuel scheme. 
                                                It would also require legislation 
and there must be some risk of amendments which if carried would 
increase the figure further. 
                                     On the other hand, if we decide to i n c r e a s e 
personal tax allowances, people in work will be receiving substantial^ 
income tax rebates shortly before Christmas. 
                                                           T h e r e is a case for giving 
at the same time some cash sum to the majority of pensioners who will not 
benefit from the income tax rel i ef . 

26. 
        It is doubtful whether there a r e any other public expenditure 
measures which would contribute significantly towards stimulating demand 
in 1 9 7 7 - 7 8 , without carrying through automatically into 1 9 7 8 - 7 9 , when the 
problem will be v e r y different. 

## V. Measures A F F E C T I N G 1 9 7 8 - 7 9

27. 
        A s I have said, i t i s important that we l e a v e ourselves with the 
maximum flexibility in deciding the size and shape of our fiscal measures ­
increases in expenditure or reductions in taxation - for 1978-79o 

## Taxation

2 8 . 
              The shape of the 1978 Budget will need to be considered in the light 
of developments between now and next spring. 
                                                                                               T h e r e may well be little 
room for major fiscal stimulus in any case, depending on the l e v e l of pay 
settlements and the growth of economic activity in the coming months. 
However, it will be v e i y important, after the sacrifices of the last three 
years, that the Budget should be able to give some significant relief in the 
structure and burden of income tax for 1 9 7 8 - 7 9 . 
                                                                                                   In particular, A p r i l 1978 
will bring a big increase in superannuation contributions under the new 

scheme for "Better P e n s i o n s " and a further cut in child T a x Allowances to 

accompany the increase in child benefits. 
                                            M o r e o v e r , the 12 per cent 
increase in personal tax allowances required by indexation will still be l e s s 
than this y e a r ' s 14 per cent increase in National Insurance benefits. 
                                                                       T h e r e 
will thus be powerful political and economic arguments for further 
reductions in income tax in A p r i l , in addition to the m o r e general arguments 
which I summarise in paragraphs 35 to 40 below. 

29. 
        The svms at stake are v e r y l a r g e . 
                                                F o r example, the increase in 
National Insurance contributions and loss of child tax allowances could 
next A p r i l cut some £1. 50 a week off the take home pay of a man with two 
children on average earnings. 
                                   T o offset this in full could (on present 
estimates) cost between £1,750 million and £2000 million, depending on the 
form in which relief i s given. 
                                   This is one reason why we might be wise to 
give less than the full 12 per cent increase in personal allowances at this 

stage, so that something is left over to be paid in A p r i l . 

30. 
        Another possibility might then be to offset the cut in real take home 

pay next A p r i l by introducing a reduced rate band of income tax. 
                                                                       But again 

this could be v e r y expensive. 
                                   F o r example, a reduced rate band of £1, 000 liable t o tax at 25 per cent could cost £2,100 million. 

## Public Expenditure

31. 

Providing we do not o v e r - c o m m i t ourselves to m a s s i v e further cuts in taxation next year, I consider that we can plan for some increase in public expenditure in 1978-79. 

But we must beware of overcommitting ourselves there too. 

My proposal below would imply a central forecast 

for the PSBR of some £7f billion in 1978-79, before allowing for any 
further action in the next Budget or for any consequential effect if we w e r e 
to choose the indirect tax option for action this autumn. 
                                                         E v e r y addition to 

public expenditure reduces the scope for tax reliefs in the Budget and 
increases the risk that if events develop unfavourably, a net tax i n c r e a s e 

then may p r o v e unavoidable. 

3 2  

  - 
            My judgement is that we cannot afford to increase the planned total 
of p r o g r a m m e s and Contingency R e s e r v e for 1978-79 by m o r e than an absolute 
maximum of £1 billion in t e r m s of next y e a r ' s p r i c e s , or some £850 million 
at 1977 Survey p r i c e s - or 2 per cent above the planned l e v e l of this year 
(1977-78). 
                     Even this would risk dangerously limiting the scope for further 
action on direct taxation in the next Budget. 
                                                                               Of this increase, the measures 
we have already announced have committed over £500 million in 1977 Survey 
p r i c e s , of which the principal items w e r e the uprating of child benefit and 
other social security benefits, the youth and other employment measures 
and construction work -n the inner cities. 
                                                                           The main element of the 
remainder should be further help for the construction industry, which in 
July we p r o m i s e d to consider. 
                                                        This expenditure on construction will 
benefit a wide range of p r o g r a m m e s ; 
                                                                  and the balance, assisted by savings 

which Departments have identified, will enable us to m e e t many, though not 

I r e g r e t all, other bids put forward by Departments. 

Detailed proposals for the various p r o g r a m m e s are set out in the Chief Secretary's paper CP(77) 89. 

## Small F I R M S

33. 
        T h e r e i s a good deal of p r e s s u r e to do something for small f i r m s 
especially on the tax side. 
                                They a r e important to the economy as suppliers 
to large firms, as innovators and as employers providing m o r e than a fifth 
of total employment. 
                          They may play a valuable r o l e in dealing with the 
problems of the inner city a r e a s . 
                                         A t pr esent there i s a widespread lack of 
confidence among them and, rightly or wrongly, much of the blame for this 
is put on the weight of taxation. 
                                       Although I do not think we should be 
bemused by this p r e s s u r e into thinking that there i s a great deal wrong 
with the p r e sent tax r e g i m e , it i s an area where we can usefully provide a 
psychological stimulus to activity. 
                                          In conjunction with the Chancellor of 
the Duchy of Lancaster, who i s carrying out a special study ot their problems 

generally, we a r e therefore considering a number of tax and other measures 
whose benefit will be concentrated on email f i r m s . 
                                                    We could include these 
with the wider economic package but they would probably cost only £10 million 
in the current year and would not be expected to cost m o r e than £70 million 
next year. 

## Vi. 1979-80 A N D Subsequent Y E A R S

34. 
        Looking forward to the medium t e r m , the prospect remains v e r y 
much as I described it in m y paper of 1 July ( C P ( 7 7 ) 70). 
                                                                    In the optirmsiac 
case, where earnings i n c r e a s e by no m o r e than 10 per cent in 1977-78, it 
should be possible to sustain a growth rate of about 4 per cent a year on 
average from 1978 to 1982. 
                                 This would be a significantly faster rate of 
growth than we have been able to sustain in the past. 
                                                                However, we a r e 
unlikely to achieve this unless we i m p r o v e our international competitiveness 
and raise the l e v e l of industrial investment. 
                                                      T h e s e two conditions to a 
considerable extent go together. 
                                        Both would be at risk if inflation is not 
contained. 
               Both would be helped by the successful implementation of our 
industrial strategy. 

35. 
        Our assessment last summer assumed that public expenditure would 
be held to the Cmnd 6721 l e v e l in 1978-79 and to an annual growth of 
2 per cent thereafter - with any fiscal action to raise demand coming through 
cuts in taxation. 
                     The prospect for 1978-79 justifies us in raising the Panned 
total of expenditure by £1 billion (at output p r i c e s ) in that year and I would be 
content to see additions to the figures for 1979-80 and 1980-81 on the scale 
proposed in the Chief Secretary's paper. 
                                                 Over the medium term as a whole, 
however, there a r e still compelling reasons why we should give p r i o r i t y to 
reductions in taxation as a means of stimulating demand. 

36. 
        F i r s t , tax reductions can help us to continue the fight against 
inflation. 
            Reductions in income taxes increase real take home pay without 
adding to industrial costs, and help to reduce the pressure for increased 
money incomes. 
                    Reductions in taxation on industry reduce production 
costs. 
         Reductions in indirect taxes cut p r i c e s . 

37. 
        Second, the increase of public expenditure up to 1975-76 increased 
the tax burder to a degree which is widely felt to have become too heavy at 
all levels of income. 

38. 
        Third, tax cuts can help to expand the manufacturing and private 
service sectors of the economy, to which we must mainly look for future 
growth in employment. 

39. 
        Fourth, tax cuts a r e likely to give us m o r e r o o m to act against 
unemployment, because they command much m o r e confidence in financial 
markets than increases in public expenditure. 

40. 
        Fifth, the amount by which we will be able to stimulate demand in 
these later y e a r s is extremely uncertain. 
                                                 T h e r e may be much less room 
for manoeuvre than we expect at present. 
                                                 Taxes can be m o r e readily 
adjusted than expenditure p r o g r a m m e s . 

## Vii. Conclusions

41. 
I ask m y colleagues: 

a. 
          to a g r e e that a stimulus of up to £1 billion in 1977-78 i s 
appropriate and to express their p r e f e r e n c e as between the options 
I have described in paragraphs 17-25. 

b. 
         To agree that the public expenditure p r o g r a m m e s for 1978-79 
in Cmnd 6721 should be increased by £1 billion (at the outturn p r i c e s 
of that y e a r ) . 

c. 
           T o a g r e e the additions to public expenditure proposed by 
t h e Chief Secretary, T r e a s u r y , for 1979-80 and subsequent y e a r s . 

D W H 

T r e a s u r y Chambers 

10 O c t o b e r 1977 
 
C O F Y 
N O
CP(77) 92
 
U October 1977 

## Cabinet

P U B L I C E X P E N D I T U R E : 
A C T I O N T O ASSIST T H E 
C O N S T R U C T I O N INDUSTRY 
Memorandum by the Secretary of State for the Environment 

## Background

I. 

At our meeting on 14 July (CM(77) 25th Conclusions) we discussed the question of help for the construction industry. 

We noted that the 

Chancellor of the Exchequer would be announcing additional public 
expenditure of £100 million for this purpose in 1977-78 and agreed that there 
was a strong case for further assistance in 1978-79. 
                                                      Accordingly m his 

statement to P a r l i a m e nt on 15 July the Chancellor of the Exchequer said that 

the Government were considering, in the course of the normal annual r evi ew 
of public expenditure, what further help could be given to the construction 
industry in the next financial year (Hansard cols 992-3). 

2- 
         In CP(77) 71 I set out the problem facing the industry and stressed the 
overwhelming case for help. 
                                       L a t e r information has confirmed how deep was 
the recession affecting the industry in the first half of the year. 
                                                                                    Output was 
6 per cent lower than in the second half of 1976. 
                                                                Employment has fallen less 
than might be expected, with the implication that many men are being kept on 
in the hope of an early r e c o v e r y in demand. 

3- 
         I expect such a r e c o v e r y in the private sector, following the great 
improvement in financial markets. 
                                               But this will be barely sufficient to off­
set the further decline in public sector work that is allowed for in present 
Plans. 
           If those remain as they a r e , the industry's total output is likely to 
differ little next year from this year. 
                                                   This c a r r i e s with it the prospect of 
75, 000 m o r e unemployed by the end of 1978 and the possibility of severe 
damage to the capacity and efficiency of the industry. 
                                                                        Output per man has 
already fallen by 9 per cent since 1973. 
                                                      Urgent action to bring about an 
early r e c o v e r y in demand is essential. 
                                                     But we need to do that in the way that 
will best contribute to establishing a m o r e stable pattern of demand in the 
future. 
            That requires action now in relation to p r o g r a m m e s for this year 

and the two following. 

## Proposals F O R A C T I O N

4. 
          The present slump is partly due to greater-than-intended falls in 
expenditure this year: 
                                 experience suggests that cash limits tend to depress 
spending to a level some way below that of agreed p r o g r a m m e s , 
particularly in the construction field, where there are difficulties in making 
adjustments during the course of a year. 
                                                             I would therefore urge m y 
colleagues - as I have been doing in relation to m y own D e p a r t m e n t s 
programmes - to do their utmost to ensure that any shortfall on their 
construction p r o g r a m m e s is minimal, even to the extent of running some 
extra risk that cash limits on particular blocks may be exceeded, in 
exceptional circumstances. 

5. 
          Departmental p r o g r a m m e s now provide for expenditure on construc­
tion of £4, 769 million in 1978-79 compared with £5,100 million in 1977-78. 

M e r e l y to keep public sector construction demand in 1978-79 to this y e a r ' s 
level would therefore require an extra £330 million; 
                                                            to return it to the 

level of last year would require £920 million. 
                                                 A survey of the capacity of 

Departments to mount additional construction p r o g r a m m e s shows that they 
could usefully spend about £780 million in 1978-79 in addition to the agreed 
programme as set out in Cmnd 6721, of which £174 million is included in the 

additional proposals for expenditure detailed in Annex 2 of the 1977 Public 
Expenditure Survey Committee ( P E S C ) Report. 
                                                  The attachment to this 
memorandum sets out the detail. 
                                    There would be additional associated 
expenditure in 1978-79 of £15 million, and indirectly, expenditure on housing 
land and on loans for house purchase could amount to a further £45 million. 
The projects begun under any extra expenditure made available in 1978-79 
would entail further expea.dit.ure in the later y e a r s of the PESC period of 
roughly the same order. 

6. 
          In CP(77) 71 I proposed that public sector construction p r o g r a m m e s 
should be increased by £400 million in 1978-79 and that the increase should 
be maintained in subsequent y e a r s . 
                                                       I was conscious that this would do little 
more than keep the 1978-79 p r o g r a m m e s at their current l e v e l . 
                                                                                                 But the 
improvement in the economic situation now provides us with greater scope 
to make a positive contribution to helping the industry out of recession. 
My colleagues will be aware that the unions have been pressing for an extra 

£1,100 million. 
                  At the same time we must be realistic about what we can 
expect to achieve in the next 18 months. 
                                             On balance I believe that a 
package of not less than £600 million is needed in 1978-79 to demonstrate 
that we are taking the industry^ problems seriously. 
                                                             (This would include 
the additional proposals for construction expenditure in Annex 2 of the 1977 
PESC Report. ) 
                  It would add Z\ per cent to construction output and, allowing 
for a possible rise in private demand, would make the total demand in 1978 
about the same as in 1976. 
                              It would be worth 50, 000 jobs, though the direct 
fall in unemployment would be less than this. 
                                                    It would be desirable to add a 

sum of the same order to the p r o g r a m m e s from 1979-80 to get back to an 
acceptable level and to continue with further additions in subsequent y e a r s : 
even to stabilise on the l e v e l I propose for next year would require the 
addition of a minimum of £380 million in 1979-80. 

7. 
          The effect of such a package on the public sector borrowing 
requirement would be reduced by the net increase in Exchequer receipts 
from tax and national insurance payments and the abatement of unemployment 
benefit. 
              The net effect on the borrowing requirement of a package of 

£600 million would be £400 million in 1978-79. 

8. 
          Detailed consideration will need to be given to the way in which 
additional expenditure on construction should be allocated. 
                                                                                       We must try to 
see that help is concentrated on the sectors in greatest need, and the need 
to alleviate unemployment must be the first priority. 
                                                                               Housing, which 
contributes about hal of public sector demand, should have a large share; 
and a significant element should be devoted to civil engineering which has 
been particularly affected by cuts in public expenditure. 
                                                                                   T h e r e are also the 
claims of energy conservation to be considered and proposals now before the 
Secretary of State for Energy to allot about £50 million a year for thermal 
insulation and heating controls in public sector buildings w i l l m a k e a useful 
contribution. 
                      Much of the work would be done by local authorities and we 

shall need to consult them carefully about this in relation to their overall 

expenditure plans. 
                     I hope that they will accept the package as going some 

way to r e d r e s s the balance which past cuts have produced against capital 
expenditure. 

## Conclusions

9. 
         Despite the help that we have already provided, the c r i s i s in the 
construction industry will continue next y e a r - unless we take vigorous and 
positive measures now. 
                                Even m y present proposals will not be enough to 
prevent a further rise in unemployment. 
                                                      We have already undertaken to 
consider what further help can be given and we have the capacity within 
Departmental p r o g r a m m e s to make a contribution which will demonstrate 
our concern, and go some way to meeting c r i t i c i s m of our readiness to cut 

capital spending. 
                    But th- action we take must be seen to match the scale of 
the problem. 
                M o r e o v e r , because construction p r o g r a m m e s take time to 
mount it would be wrong to settle for some l o w e r figure now and wait until 
next year to see if it were enough. 

## R E C O M M E N D A T I O N S 10. I Invite M Y Colleaguefl:­

a. 
T o take vigorous action to ensure that 1977-78 p r o g r a m m e s are 
fulfilled. 
b. 
T o agreo that public sector construction p r o g r a m m e s should be 
increased by £600 million in 1978-79 and that the l e v e l thus 
^ 
established should at least be maintained in the later y e a r s o 
PESC period. 

c 
           To instruct officials to consider the detailed composition 
of the package in the light of the considerations set out in paragraph 
above. 

P S 

Department of the Environment 

10 October 1977 

## Summary Of Departmh *Tal Capacity* "Dsntifted In The

Sm 
at 
1
9
7
7 survey 
prices 
SO
SO 
PESO PROGRAMME 
DEPARTMENT 
1
I
j
 Construction E 
enent 
of 
Current Prcgrarse (Sup. 
Analysis 
F 
of Current
 1
5 77 PESC 
Report) 
I Construction Elenent 
1 of PESC 
3id 
in A
n
,
-
e
x 
2 
' of 1
9
7
7 PESO 
Report 
1
Addi 
iional 
Construction 
Oapici ty
Identified 
In Survey 
1 1
9
7
7
-
7
8 
J 
1978-79 
1978-79 
1970-79 
1 
Defence 
1
5
3 
1 
167 
M
0
2
5 
1 
in 
AD 
3 
Agriculture 
12 
12 
HAFF 
-
- 0.24 
A 
1.0 
4 
Trade 
98 
1
0
5 
E of 
Industry
D of 
Jxpioynent 
D of 
Energy
DOE 
3.1 
3.2 
1 
2
.
4 
3
2
.
0 
6 
Soada ft Transport 
724 
680 
DTp
D of 
Trade 
7.7 
7 
Housing 
2
3
7
7 
2314 
England: LA 
and 
New 
Towns 
6
5
.
0 
5
0
.
0 
LA Improvements 
80.0 
Private Sector Grants 
Housing Associations 
40.0 
1
0
0
,
0 
85-53 
A 
8 
Other Environmental Services 
8
9
6 
841 
DOE 
MAFF 
o 
Lay 
and 
Order 
92 
67 
3.3 
Lord Chancellors Office 
Hcae Cffice 
 
A 
1
3
.
0
i 
:o 
Education 
2?2 
DSS
6.C 
A 
50.0
2
5
3 
Health 
DHSS England 
3
2
0 
Public Services 
DOE 
75 
;
.
i 
1
3 
3
3
0 
5
1 
14 
Conrion Services 
DOS/PSA 
-
eo.o 
1 0
,
5 
1 
7.0 
AB 
TOTAL 
5
0
0
0 
4769 
TOTA
TOTAL 
1
2
9
.
1
2
9
.
0 
5
2
1
.
6
5
2
1
.
6
7 
A Includes provision 
for 
Vales 
SCOTTIS
SCOTTISH Offic
Office 
34
34.
.1 
58.1
58.19 
D
D 
V: Includes provision for 
Scotland 
VSLS
VSLSH Offic
Office 
1
0
.
1
0
.
9 
2
3
.
9
2
3
.
9
1 
C
C 
0 R*;pre''nts 5/85'
 0 ' bids vhich do 
not 
already include provision for 
\
f
a
l
e
s 
TOTA
TOTAL 
174.
174.0 
603
603.7
.7?
P Represents 
1
0
/
8
5
' of 
bids which do 
not 
already include provision for Scotland 

CP(77) 93 
C O P Y NO 
17 October 1977 
C A B I N E T 

## The L E G I S L A T I V E P R O G R A M M E 1977-73 A N D T H E Queen'S S P E E C H O N T H E O P E N I N G O F T H E New Session

Note by the L o r d President of the Council 

1. 
           I attach a r e v i s e d draft of The Queen's Opening Speech, incorporating 
the amendments which we agreed on 11 October. 
                                                                             These, and other 
amendments and additions to the text of Annex C to CP(77) 88, a r e sidelined 

2. 
T h e r e a r e four points for further discussion: 

a. 
          The paragraph on North Sea Oil (circulated separately 
under cover of a letter dated 17 October from the P r i m e Minister's 
P r i v a t e Secretary to the L o r d P r e s i d e n t s P r i v a t e S e c r e t a r y ) . 

b. 
         I appreciate the doubts expressed on 11 October about the 
inclusion in the Speech itself of a catalogue of Bills which we wished 
to introduce as soon as Parliamentary time could be found. 
Nevertheless it remains most important in my v i e w that the Speech 
should reaffirm our commitment to the Merchant Shipping and 
Post Office B i l l s , and a suggested form of words is in paragraph 8 
on page 4. 

c. 
          I have discussed with the Secretary of State for Energy how 
Parliamentary time could be found to fit the Electricity Bill into the 
legislative p r o g r a m m e . 
                                      The best way would be to combine this 
Bill not only with the Bill on Drax B but also with the A t o m i c 
Energy Bill. 
                      The Parliamentary time required for this combined 
Bill, together with the other two Department of Energy Bills, would 
be little m o r e than that needed for the Department's four Essential 
Bills if they remained separate. 

d. 
          I am in consultation with the Secretary of State for Employment 
on whether the Employment Bill should now be regarded as Essential, 
and will report the outcome as soon as possible. 

M F 

P r i v y Council Office 

## My Lords And Members Op The House Op Commons. -

I look forward to paying a State Visit to the Federal Republic of Germany next May. 

My Government re-affirm their policies in international relations and defence. They remain committed to the aims of peace and collective security; and of detente, disarmament and prevention of the spread of nuclear weapons. They will cmtribute fully to the work of the United Nations, the Commonwealth and the North Atlantic Alliance. 

My Government, while working for policies which fully reflect the interests of the United Kingdom, will play a full and co-operative part in the activities, the development and the enlargement of the European Economic Community. 

My Government will continue to contribute modern and effective forces to the North Atlantic Treaty Organisation, and to play their full part in the current Alliance studies of East/West relations and of the Alliance's defence programmes. They will continue to participate constructively in 

"
t
 h
  e important meeting in Belgrade which is being held as part of the 

follow-up to the Final Act of the Conference on Security and Co-operation 

in Europe, will abide by the provisions of the Final Act and will continue 

to seek fulfilment of all its provisions by other signatories. They remain, 

committed to the pursuit of detente in their relations with the Soviet Union 

and the countries of Eastern Europe. 

My Government will continue to take part in international efforts to com a 

recession and promote a 
                       more stable world- 
                                          economic order, and a fairer 

distribution, within an expanding world economy, of the world's wea between rich and poor nations; they will maintain their special eff 

to help the poorest countries and the poorest people. 

My Government will work for a just and lasting peace in the Middle East, and the further improvement of relations "between the United Kingdom and all the countries in the area. They will continue to co-operate with all concerned in the search for a lasting settlement in Cyprus, where they welcome'the resumption of interccmmunal talks. 

My Government will continue to work for a negotiated settlement in Rhodesia, on the basis of their proposals published in September this year, which are designed to provide a secure future for people of' 
all races. They will be ready during the current session to introduce legislation to enable Rhodesia to proceed to independence on this basis. 

## Members Op The House Op Commons,

Estimates for the public service will be laid before you. 

## My Lords And Members Op The House Op Commons,

The strengthening of our financial position and of the balance of payments opens the prospect for a continuing improvement in the economy and the maintenance of financial stability. My Government
1s main objectives are the speediest possible return to full employment and a sustained growth of output. In order to achieve these objectives my Government will give the highest priority to further reductions in the rate of inflation. 

My Government will continue to promote industrial training and to create and maintain jobs through manpower measures. 

[Paragraph on North Sea oil] 
My Ministers will continue to work in close co- peration with the Trades Union Congress and the Confederation of British Industry. 

My Government will continue to urge internationally that the stronger economies should take the lead in promoting a sustained growth in the world and that adequate official finance should be made available on appropriate terms to countries with continuing deficits in the balance of payments. 

My Government remain fimly committed to establishing directly elected Assemblies for Scotland and Wales. Separate Bills will be introduced for this purpose. 

In Northern Ireland my Government will maintain their aims of establishing a devolved Government acceptable to both parts of the community; and eradicating terrorism by the prosecution through the courts of those responsible for violence and by continuing to develop the effectiveness of the Royal Ulster Constabulary, supported by My Armed Forces. My Government attach special importance to co-operation on matters of security with the Government of the Republic of Ireland. They will continue to seek measures to strengthen the economy of Northern Ireland and improve its social environment. 

Legislation providing for the election of United Kingdom members of the European Assembly will be re-introduced. 

Further consultations will be held on industrial democracy, with a view to producing proposals which should command general support, and My Ministers will continue directly to encourage the development of industrial democracy in the nationalised industries. 

There will be a review of the legislation and institutions governing competition policy, to see that this makes its maximum contribution to­
improving industrial efficiency. 

My Ministers are considering further measures to assist small firms. 

My Government will hold consultations about encouraging profit-sharing through the tax system. 

Legislation will be brought forward to amend company law. 

A Bill will be introduced to provide public funds to finance payments to redundant shipbuilding workers in the public sector. 

Legislation will "
b e introduced to provide for payments to the Central Electricity Generating Board towards the cost of Irax B power station. 

Continued encouragement will he given to the efficient production processing and distribution of food with the. 

aim of meeting a greater proportion of our national needs from United Kingdom agriculture. My Ministers will seek improvements in the operation of the Common Agricultural Policy. 

My Government will continue to seek major reform of the Common Fisheries Policy. They will aim.to secure conditions which will meet the needs of the British fishing industry, conserve fishing stocks, and ensure adequate supplies to the consumer. 

A Bill.will be laid before you to increase the borrowing powers of the 
. 

Civil Aviation Authority and British Airways, to provide for a levy to finance aviation security and to amend the civil aviation Acts. 

Legislation will be introduced for the further development of transport policy to meet economic and social needs, including those of rural areas. 

Legislation will be brought before you to provide assistance for first-time home buyers. 

A Bill will be introduced to renew and revive the inner urban areas. 

In addition to My Government fs full programme of constitutional and other reforms for the present Session, they remain committed to bringing forward at the earliest opportunity a number of further highly desirable measures of reform. These measures include improvements in safety and discipline at sea and other aspects of merchant shipping, and the right of Post Office staff to take industrial action. 

Legislative proposals will be brought forward for the reform of section 2 of the Official Secrets Act 1911. 

Following the Report of the Connittee on the Future of Broadcasting, My Government will "bring forward proposals on the constitution, structure and organisation of broadcasting in the United Kingdom. An increase in the limit on public funds for the National Film Finance 

Corporation will "
                 b
                  e 
                    proposed before the present limit expires. 

Measures will be brought before you to reform public sector housing 

subsidies in Scotland; to improve criminal procedure and reform the 

criminal justice system; and to extend the powers of Scottish local 

authorities in relation to their direct labour organisations. 

My Government will make further progress with their programme of law 

reform. 

Other measures will be laid before you. 

## My Lords And Members Of The House Of Commons,

I pray that the blessing of Almighty God may rest upon your counsels. 

17 October 1977 
CP(77) 94 
C O P Y NO 
21 October 1977 
C A B I N E T 

## Wider I M P L I C A T I O N S O F T H E I N D U S T R I A L S T R A T E G Y Memorandum By The Chancellor Of The Exchequer And The Secretary Of State For Industry

1. 
           A t its meeting on 21 July (CM(77) 27th Conclusions, Minute 5), the 
Cabinet invited us to p r e p a r e a r e v i s e d draft paper on the Wider 
Implications of the Industrial Strategy, for submission to the National 
Economic Development Council ( N E D C ) . 
                                                                 The Ministerial paper for NEDC 
and the annexed report by officials have been r e v i s e d in the light of the 
Cabinet discussion, and of written comments from our colleagues (though 
we have not felt able to accept every one of the comments m a d e ) . 
                                                                                                       They 
have been further revised after discussion in a small group of Ministers 
( G E N 98). 

2. 
         Our earlier paper for Cabinet ( C P ( 7 7 ) 84) explained the work of the 
official group which had led up to the NEDC paper in its earlier draft. 
                                                                                        It 
went on to: 

i. 
             list the new commitments and proposals contained in that 

draft; 

i i . 
                  explain that certain important issues had not been discussed 
in the draft because it would be difficult to r a i s e them on a 
tripartite basis at present; 

i i i . 
                  list certain other policy areas which the official group wished 
to draw t o Ministers' attention; 

i v . 
               make proposals for further work in this field. 

3. 
         In this memorandum, we confine ourselves to summarising the 
main changes that hav^ been made to the earlier draft. 
                                                                      The main changes 
in the report by officials (Annex B ) a r e as follows: ­

a. 
          A section (paragraphs 1.10-1.12) has been added on 
Education and Training for Industry. 

b. 
The paragraph (1. 20) on the overlap of incomes of people 
in, and out of, work now has a concluding sentence to show that we 
a r e trying to take steps to o v e r c o m e this problem. 
c. 
In paragraph 3.2 there i s no longer the implied suggestion 
that employment legislation is to stop dead. 
The draft now says 
that the Government will take full account of the volume of measures 
c a r r i e d out in considering any fresh proposals in this field. 
d. 
T h e r e is now (in paragraph 5. 2) a r e f e r e nc e to the low l e v e l 
of company taxation in the United Kingdom, and also to the lower 
burden of social security contributions by industry than in other 
countries. 
e. 
Paragraphs 6.1 and 6.2 have been added to cover the point 
that industry are concerned to avoid o v e r - e l a b o r a t e inflation accounting and company reporting requirements. 
f. 
Paragraph 9.2 includes a r e f e r e n c e to the National Research 
Development Corporation. 
g. 
The passage on competition policy (paragraph 12.1) no longer 
includes a commitment to provide "guidance" on this to industry, 
since this is still for discussion by the Ministerial Committee on 
Economic and Industrial P o l i c y ( E l ) . 
h. 
Paragraph 13. 3 contains a clear commitment that we should 
aim for a greater interchange between the Civil S e r v i c e and industry. 
The passage now says that we should be aiming for exchanges 
approaching 200 at any one t i m e by the end of the decade. 

In addition, the covering paper (Annex A ) now gives m o r e emphasis to the 
crucial need to i m p r o v e our industrial performance, by all means possible, 
if we a r e to achieve our long t e r m social and economic objectives. 
                                                                       The 
drafting has also been tightened up. 

4. 
         The new commitments and proposals contained in the r e v i s e d draft 
a r e the same as in the earlier draft, except in the areas of employment 
legislation and competition policy already mentioned. 
                                                                      The commitments 
in these two areas now amount to: 

i. 
An undertaking to take into account the volume of recent 
measures in considering future employment legislation. 
i i . 
A r e v i e w of the r o l e of competition policy as part of the 
industrial strategy. 

5. 
          Our proposals for future work in this field remain as set out in 
paragraphs 8-11 of our earlier paper. 
                                                         Likewise, we would draw the 
attention of other Ministers as before to certain policy issues which the 
official group did not cover in their report, or did not cover fully. 

## Conclusion

6. 
The Cabinet i s invited ­
a. 
To approve the attached papers for submission to NEDC. 
b. 
To endorse the proposals contained in the papers (as 
summarised in paragraph 4 of C P( 7? ) 84 subject to the changes 
noted in paragraph 4 above). 
c. 
To approve the proposals for further work in this field 
as set out in paragraphs 9-10 of CP(7Y) 84. 
d. 
To take note of the points in paragraphs 5 and 6 of 
CP(77) 84. 
D W H 
E G V 
T r e a s ur y Chambers 
21 October 1977 

## ££Apt Nedc Paper Wider Implications Op The Industrial Strategy

Memorandum by the Chancellor of the Exchequer and the Secretary of 
^ a t e for Industry. 

## Jntroduction

1- 
Industry holds the key,to the generation of wealth. 

Irt the Post-war period we have been a f f l i c t e d with a climate of opinion ­
effete and wrong-headed - in the UK which has been at best indifferent a fid at worst hostile to the role of industry in society. 

This tendency is deeply rooted in our history, class system and social structure. 

Society has not given the men and women who work in our manufacturing industry - at a l l l e v e l s - adequate recognition of their key r o l e . 

M^ch
 
the best of our national talent has been brought up to believe o f
^ a t it i s not nice to dirty their hands at the workbench or in the engineering shop. 

They have been influenced towards employment outside industry- 
Of course manufacturing i s not the only sector v*ich creates wealth and contributes to our trading performance. 

But it is in our manufacturing industry, despite i t s t r a d i t i o n a l dominance a^d i t s concentration of capital and s k i l l s , that we have lagged most C obspicuously behind our major industrial competitors. 

2­ 
That i s why the Government, in the November 1975 White Paper "An approach to Industrial Strategy", committed i t s e l f to identifying the industrial implications of the whole range of i t s p o l i c i e s and undertook t o 
"give greater weight, and more consistently than hitherto, to the fteed for increasing the national rate of growth through regenerating industrial structure and improving efficiency. 

For the immediate future", i t said, 
"this w i l l mean giving p r i o r i t y to industrial development over consumption or even our social objectives. 

There is no other way of developing the industrial base on which the Government's whole programme of economic and social reform depends." 

## Mfiderlila!

3* 
The attached paper i s a f i r s t survey of the broad areas of Government policy (outside those directly covered by the work of 
"the sector working parties) which bear in one way or another on industrial performance and efficiency. 

I t also describes certain action already taken or now proposed to give a higher p r i o r i t y to 
"the needs of industry, and makes proposals, subject to the views of 
"the Council, on how this problem should be tackled in the longer term. 

i s no easy matter to change the deeply rooted attitudes and accumulation of p o l i c i e s which have contributed to industrial decline, 
^he change w i l l take many years; 
but the Government i s determined to continue with this work. 

The objective must be to ensure that B r i t i s h industry receives at least the same degree of support, and as favourable an environment, as is given to their own industries by 
"the countries which compete with us. , That i s the very minimum that we seek. 

## Future Action

^* 
The Government proposes, subject to the views of the Council, 
"to carry out further reviews of areas of policy which pose long-term Problems for industrial efficiency. 

These are outlined in the attached paper as follows: ­
( i ) 
the employment of graduates by industry (paragraph 
1 . 9 ) ; 
( i i ) 
public sector manpower policy (paragraph 
1.18); 
( i i i ) 
tax and social security in relation to work incentives 
(paragraph 
1 . 2 5 ) ; 
( i v ) 
the effect of standards and specifications on the export potential of products purchases by the public sector 
(paragraph 11 . 3 ) ; 
(v) 
mobility between the c i v i l service and industry 
(paragraph 13.5)5 ( v i ) 
the burdens on industry (paragraph 1 3 - 6 ) . 

5. 

In addition i t proposes that: 
(i) 
Ministers from the non-industrial Departments should attend NEDC from time to time to discuss their contribution to the industrial strategy. 

A start was made in July when the Secretary of State for Education and Science and the Secretary of State for the Environment attended the Council. 

(ii) 
SWPs should be invited to take note of the continuing work on the wider implications of the industrial strategy and to give their views on priority areas for changes,in Government policy. 

(iii) 
There should be regular reports to the Council on the progress made on the wider implications of the industrial strategy. 

## Conclusion

6. 

It is now impossible to imagine Britain's industrial scene without the tripartite Industrial Strategy. 

That is a measure of the success we are beginning to achieve. 

In the improving economic climate we must not relax our efforts. 

It would be disastrous if we now took it easy and cast away opportunities which may not easily return. 

7. 

As part of the work, we must make real progress on the wider implications of the strategy. 

The attached paper draws attention to a wide range of problems, to many of which there a r e no easy or quick solutions. 

The Government would welcome the Council's views on effective ways in which these problems might be tackled. 

## Wider Implications Of The Industrial Strategy Report By Officials

1. 

The attached report has "been prepared in accordance with a remit by the Prime Minister dated 16 February for a Group of o f f i c i a l s under Treasury chairmanship to prepare a draft paper for NEDC on the linking of industrial to other p o l i c i e s . 

The Group included representatives of the Departments of Education and Science, Employment, Energy, Environment, Health and Social Security, Industry, Prices and Consumer Protection, Trade, Transport, and the CSD, CPRS, FCO, MAFF and MOD. 

2. 

This report (with the omission of this page) i s intended to form an annex to a joint NEDC paper by the Chancellor of the Exchequer and the Secretary of State T o r Industry. 

## Contents

LABOUR 
Page 
schools education; higher and 
1 
1. 
Th
he
e S
Supply o
of
f Labour 
^o^Tndustry: 
further education; public sector 
manpower policy; incentives to 
work. 
2. 
Mobility of Labour; 
Housing; t r a n s f e r a b i l i t y of 
11 
pensions. 
3. 
Employment Legislation 
12 

## Capital

| 4-.   |                   |
|-------|-------------------|
| of    | C a p i t a r     |
| 12    |                   |
| 5.    |                   |
| 1     |                   |
|       | Taxation          |
| 13    |                   |
| ^*    | Company Reporting |
| 1M    |                   |

## Production And Distribution

| 7.                                      |                     |
|-----------------------------------------|---------------------|
| planning and land;                      | i n d u s t r i a l |
| 1U                                      |                     |
| development c e r t i f i c a t e s and |                     |
| office development permits;             |                     |
| building regulations;                   | roads;              |
| public transport.                       |                     |
| pollution p o l i c y ; energy policy;  |                     |
| 1?                                      |                     |
| S*                                      | Production and      |
| " Distributiorf"Costs;                  |                     |
| transport costs; water charges.         |                     |
| 19                                      |                     |
| Research and                            |                     |
| De velopmenf                            |                     |

## Sales

| 10.          |                  |
|--------------|------------------|
| metrication; | standardisation. |
| 20           |                  |

## Contents ­ Continued

Public Purchasing 

## Business Environment

Competition Policy 

13. 
Relations with Government; 
c i v i l 
service/industry 
mobility; burdens on 
industry. 

## Labour 1- The Supply Of Labour To Industry

1*1 
I t i s essential that a f a i r share of the nation's most able manpower - at a l l l e v e l s - i s employed in manufacturing industry, and that t he i r education, training and motivation are such, that their a b i l i t y can be f u l l y u t i l i s e d in industry. 

Therj i s good reason to believe that t h i s i s not happening, and has not happened 
£or a long time in the UK. 

A decisive shift of some of our most able manpower into manufacturing must be looked for i f the regener­ ation of industry i s to be achieved and sustained. 1*2 
Schools Education. 

-The influence of the education system on the economic performance of the country has been an important theme in. the current public debate on school education, in which representa­
tives from both sides of industry have played a f u l l p a r t . 

The Secretary of State for Education and"Science published in July 
1977 
a consultative document "Education in Schools" (dealing with England and V/ales) which set out conclusions and proposals for further action. 

Among the points in this document which are p a r t i c u l a r l y relevant to the industrial strategy are the following: 

i . 
- although there i s some public criticism of the schools, 
there i s no clear evidence of a general decline in standards. 
In some schools the curriculum may have become overloaded to the detriment of essential s k i l l s , including l i t e r a c y and 
numeracy. 
No other aims should divert attention from these 
essential elements of the curriculum; 
i i  
. 
the balance and breadth of the school curriculum in each 
l o c a l education area w i l l be reviewed by l o c a l 
education 
-authorities and t h e i r teachers, and industry and commerce w i l l 
be involved in this process; 
i i i  
. 
schools need to do more to prepare pupils for the 
transition to adult and working l i f e , in p a r t i c u l a r by 
equipping them with a basic understanding of the functioning 
of the economy and a c t i v i t i e s , especially manufacturing industry, which create the nation's wealth; 
i v . 

attention w i l l be given to the development of methods of monitoring the performance of the school system, especially in English, mathematics and science; 
v. 

various steps w i l l be taken to improve the quality of the teaching force eg by requiring applicants to teacher training to have minimum qualifications in mathematics and English, and by developing in-service and induction t r a i ni ng . 

( I n this connection the Secretary of State recently announced a special programme to t r a i n serving teachers or unemployed qualified teachers i n subjects important to the i n d u s t r i a l s t r a t e g y ) ; 
v i . 

encouragement w i l l be given to the recruitment to teacher training of people who have had experience outside education; 
v i i . attention must be given in i n i t i a l teacher training to acquainting teachers with the national importance of industry and commerce and to helping them to convey this to their p u p i l s ; 
v i i i . l o c a l education authorities w i l l in general need to develop more systematic approaches to the recruitment, career development, training and development of teachers, including procedures for assessment advice, and where necessary, early retirement; 
i x . 

communications between employers, trade unions and the school need to be improved especially at the local l e v e l . 

Joint efforts should relate to such matters as improving understanding of the importance to our national l i f e of productive industry and trade; the provision of work experience as part of a school course; increased opportunities for people in industry to v i s i t schools, and teachers and pupils to v i s i t f a c t o r i e s ; 
and the appointment of managers and trade unionists from industry as governors of schools; 
x. 

local education authorities, schools and industry should consider together how careers guidance can best/developed to ensure that young people get correct and up-to-date information about jobs and training opportunities in l o c a l industry. 

Many schools w i l l need to adjust t he i r p r i o r i t i e s to make room i n the curriculum for careers education for a l l pupils not l a t e r than the age of 
1.3 
Higher Education. 

As far as higher education i s concerned, the evidence suggests that the intake by manufacturing industry of graduates f a l l s short in "both quality and quantity. 

The recently published consultation document,"Industry, Education and' Management", reviews in d e t a i l some of the evidence for reaching such a conclusion. 

Many SWPs have also drawn attention to shortages in the supply of s k i l l e d manpower., p a r t i c u l a r l y qualified engineers and s c i e n t i s t s . 

1.4 
While there has been a substantial increase in the output of graduates entering employment over the past 25 years, the proportion entering employment in the manufacturing sector has decreased from a 1961 peak of 41% to 25-9% in 1975. 

The actual number of graduates recruited by industry has increased over the same period from 4611 to 
6098, but i n recent years has varied widely from year to year, reflecting such factors as the fluctuations in the economic cycle and the f a l l in employment in the manufacturing sector: the general level of recruitment in the 1970's has been lower than in the peak years of the l a t e 1960's (8238 in 1969)- 
These figures do not, however, reveal the f i n a l destination of the very large number of graduates who do not d i r e c t l y enter employment. 

The table below summarises an attempt to identify the sectors entered by a l l of those 
1971 graduates known to have entered employment in the United Kingdom whether after obtaining their f i r s t q u a l i f i c a t i o n or l a t e r . 

I t s t i l l relates to only about two-thirds of a l l 1971 university graduates: 

Percentage entering: 
Public Service 
15 
Education 
35 
 
^ c 
Manufacturing
Industry 
Other Industry 
7 
Commerce 
9 
Other 
19 
100 

1*5 
The evidence covering the supply to industry of highly q u a l i f i e d Manpower i s , however, complex and d i f f i c u l t to i n t e r p r e t . 

I t must 
"be noted, for example, that the stock of graduates in industry has 
?isen markedly and that graduates are spreading into occupational levels not t r a d i t i o n a l l y associated with them. 

Supply considerations are prominent among the matters covered in the recently published special report commissioned by the B r i t i s h Association for the Advancement of Science with Government support. 

The Government for its part i s making a detailed factual study, making use of a l l available data including the experience of University Appointments Boards. 

1*6 
I t i s , however, generally agreed that the quality of the graduates recruited by industry should be improved; 
manufacturing industry in p a r t i c u l a r has not been attracting i t s proper share of the most able young people in the country. 

Engineering graduates, of whom the large majority take jobs i n industry, have tended in the Past to have on average poorer A l e v e l qualifications than those i n most other subjects. 

While industry gets i t s f u l l share of the more 
4 
able amongst these graduates, a variety of factors including social attitudes and the fluctuating patterns of recruitment by industry have contributed to keeping the overall quality lower than i t should be. 

There i s , however, evidence that the trend i s beginning to change. An apparent shift in attitude has led to both a marked upturn in the number of applications for courses in engineering and science in higher education, and an increased willingness on the part of graduates to seek employment in industry. 

There i s also evidence 
"that industrial recruitment now i s steadier and more buoyant, while that of the public sector has abated. 

The institutions of higher oducation for their part have at present some spare capacity on 
"the science and engineering side, and though this may be f a i r l y quickly taken up, the opportunity exists for developing more courses with a clear industrial slant. 

1*7 
The long-term objectives for ensuring an adequate supply and u s e of h i g h l y - q u a l i f i e d manpower in industry must therefore be: 

i . 
to increase the quantity and quality of the graduate 
output seeking industrial employment; 
i i  
. 
for industry - p a r t i c u l a r l y small and medium-sized firms 
to a l t e r i t s recruiting patterns to absorb more of the output 
of higher and further 
education; 
taken i i i  
. to increase the account/of industrial needs in the planning of degree courses in universities and polytechnics; 
i v . 

to increase the knowledge and understanding of industry amongst teachers in higher education. 

1*8 
The following f i r s t steps towards these long-term objectives nave been taken: 
i . 

the DES has announced two financial incentives intended to attract able students into courses of p a r t i c u l a r value to industry: 
scheme ( s t i l l to be worked out in d e t a i l ) 
of industrial scholarships to be run in collaboration with industry. 

The f u l l support of industry w i l l be required i f this scheme i's to be successful, and the Government hopes that progress can be made as fast as p o s s i b l e ; 
b . 

a modification of the awards arrangements to enable employers to give students financial support up to 
1 £500 ( i n addition to present disregard of £185) without reduction of grant; 
i i . 

in the post-graduate sphere p r i o r i t y i s being given to the development of courses designed and run in close association with industry; 
i i i  
. 

a limited number of U n i v e r s i t i e s , selected because they are strong in both engineering and management studies, are setting up f i r s t degree engineering courses of very high standard, with a pronounced orientation towards industry, designed for exceptionally able students who are l i k e l y to move into senior £positions in industry. 

i v . 

the UGC and the Council for National Academic Awards are also considering what kind of degree courses can best meet the needs of the growing number of students who w i l l find t he i r way into a broad range of jobs in industry not t r a d i t i o n a l l y f i l l e d by graduates. 

*9 
       These are, 
                    however, only the first steps, and far-reaching 
Ganges in attitudes and practices may be required before the 

 0Hg-term objectives will be reached. The Government will give 
Either consideration to these problems in the light of the statistical 

Urvey mentioned in paragraph 1.5 above, and the British Association

                                                                                                                                                                                    1 
                                                                                                                                                                                      s 
^port. The enquiry under Sir Montague Finniston into the engineering 
^ofession which was announced on 4 July will also be relevant. 

* '0 
       Education and Training; 
                                       for Industry. Industrial training is 

Ceritral to the industrial strategy and largely falls outside the scope 0^ "
        t
          h
             i
               s 
                    paper. However, an increasing amount of training is carried out 

111 colleges of further education. One of the most important areas in 

l s respect is technician training. The Training Services Agency (TSA) 

h
a
 v
  e 
   recently launched courses for 
                               technicians in electronics and computei ^intenance (amongst other specialisms) and advised industrial training 

0ar'ds (ITBs) on developing a strategy for technician training. Moreover,! 

    e
^  Manpower Services Commission (MSC) 
                                                                                                               Review and Plan shortly to be 

^lished envisages 
                 giving high priority to extending the range of 

echnician courses particularly where these can be linked to the industrnl 

strategy. 

1 
         The main contribution of the 
                                                                                             national network of some 700 
                                                                                                                                                                                   further 

6 ^Cation (EE) colleges is in the 
                                                                                            primary education of technician, craft 

aQ(^ operative personnel for industry providing courses leading to 

6
ciihician and other qualifications. The EE sector also contributes to 

e "training and retraining of industrial personnel - by short 

eusrve courses mounted at the request of firms or groups of firms, and 
                                                                                                                                                                                            [ 

the EE element in 
                   MSC and TSA programmes. Colleges will provide 

0Urses to meet demand as they perceive it and 
                                                                                                                                    as needs are identified 

^-brought to their attention by, notably, employing organisations, 
                                                                  the 

i the ITBs and the various Regional Advisory Councils for Further 

C ation; and these arrangements will call for the closest co-operation 

At present the further education sector is 
                                          meeting the buoyant 

C
a
 r
  t
  e
   l 
     for vocational courses and appropriate curricula developments 

D e m g encouraged. It is also making a substantial contribution to 

ariagement and trade union education. Much, 
closer working 
Tetween 
cation and. 
training is being promoted in relation to Training 
Portunities Scheme and ITB courses, 
by means of the "unified 
a^ional preparation" schemes jointly fostered by DES and the 
TSA, and 
respect of the new Youth Opportunities Programme. 

1.13 
T W H r . R.r.tnr Manpower Policy- 
Many SWPs have expressed concern that the public sector is absorbing too great a share of able Manpower, particularly the well-qualified. So far, the Government 

h
-
  a
    s 
        not sought to adjust the intake of qualified manpower to the 
                                                                                                                                                                             public 

Sector on the grounds of its impact on the supply available to 

Schist 
      ry. 

1*14 
                As far as graduates are concerned, the proportion directly 
entering employment who eitered the public services (excluding 
e^cation) rose from 14.8% 
                                                                      in 1965 
                                                                                            to 26.2% 
                                                                                                                    in 1975 
                                                                                                                                         but fell 
                                                                                                                                                                  back to 

2 1 - 1 % in 1976. The recent decrease in the intake of graduates by 

public sector caused by public expenditure constraints has been 

associated with (although not necessarily the sole cause of) 
                                                                                                                                                                      an C r e a s e d number of graduates seeking industrial employment. 

W 
   Statistics relating to other qualified people entering public 

S e ^ i c e s are not available, 
                                                                                 but estimates based on the 1971 Census of 

?0Pulation suggest that whereas 47 
                                                                                            per cent of those with degree and 
equivalent qualifications are employed in the public sector (ie 
^lic services plus nationalised industries) 60 per cent of those 

V ith qualifications not of degree level but usually obtained after the 

aSe of 18 (a high proportion of which are in teaching and nursing but a Iso include HNC and END) were employed in that sector, as were 28 
                                                                                                                                                                                                                                          per cen 

0 f those with GCE A level or equivalent qualification but no higher 
^alifications. Nor comparison, slightly over a quarter of the total 
Population were employed in floe 
                                                                               public sector in 1971. The skills 

S e i s e d at the technician and craft levels are much more specific and^ 
^-related than 
                      tfose 
                               possessed by newly-qualified graduates. The public 

Private sectors are, 
                    generally speaking, in competition for those 

p 6 oPle only at a point when they leave school and before they are 
Gained. 

1.16 
        SWPs have in p a r t i c u l a r argued that, in many cases, manufacturing 

industry i s unable to compete with the pay and conditions 
                                                            offered 

by the public sector. 
                        I f this were widely the case, there would be a formidable combination of market and cultural forces which 

would lead to the public sector pre-empting qualified manpower in 

disproportionate quality and quantity. 

-

1.17 
        This i s , however, an area where facts are d i f f i c u l t 
                                                                           to 

establish, where care must be taken to examine comparable j o b s , 

and where generalisations are unlikely to be v a l i d . 
                                                           I t i s also 

necessary to take account of the r e l a t i v i t i e s between manufacturing 

industry and other parts of the private sector. 1.18 
        The Government believes that there i s reason to be concerned at the p o s s i b i l i t y of pre-emption by the public sector of resources 

of able manpower at the expense of industry. 
                                               I t considers that much 

toore account must now be taken in public sector manpower p o l i c i e s of 

their implications for the supply of labour to industry, and of 

Relativities between the public sector and industry where they are 

competing for the same type of manpower. 
                                          I t proposes to conduct a 

fcore searching examination of the facts about public sector recruitment 

of qualified manpower (including pay r e l a t i v i t i e s and other f a c t o r s ) . 1.19 
        Incentives to Work. 
                                  I t i s important from an i n d u s t r i a l 

Viewpoint that the taxation system does not d i s t o r t the labour 

Market to the extent that the normal wage structure f a i l s to provide 

an adequate incentive to work and to gain s k i l l s and promotion. 
                                                                       Yet 

there i s widespread feeling - at a l l l e v e l s - that the present 

taxation system has weakened the incentive to work throughout the 

economy. 

1.20 
        As far as the lower end of the labour market i s concerned, 

a problem which, has received much attention recently i s that of the 

Relationship between social security and welfare benefits for those 

Qut of work and earnings in work. 
                                                                                  This problem i s limited in s i z e , 

and i t s effects have been exaggerated. 
                                           But situations do exist in 

V ;bich the net income of those unemployed 
                                                                                                                                                                                      or absent through sickness 

can, at least for a period, exceed their net earnings while in work, 

and in which, for others, the net additional reward from working i s 

very small. 
                                        This problem i s caused not only by the l e v e l of benefits, 

kut also by features of the tax system (low threshholds, and refunds f tax for those out of work). As **well as the disincentive** effect on those not in work, the perception of this problem can be demoralising for those in work. The Government is taking steps to red-ace any such disincentive to work by tax reductions and by improvements in child benefits and similar measures when this is possible. 

1.21 
A closely related , but separate, problem i s that of the 
"poverty trap" which affects those in work, and which flows from the combination of current taxation l e v e l s and means-tested benefits. This does not in practice mean, as i s widely supposed, that those affected derive no net benefit from normal pay increases, because the income limits for means-tested benefits are regularly uprated and thus move up as pay moves up. 

But i t does mean that there i s a wide hand of low earnings over which net income increases l i t t l e i f at a l l . 

For example, for a married man with 2 young children claiming a l l the available b e n e f i t s , t o t a l net income does not increase at a l l between gross earnings of £30 and £4-5 a week, and increases by less than £5 between £4-5 and £60. 

There i s therefore l i t t l e incentive in this income range for a worker to increase his earnings - 
for example through working overtime, or through, gaining s k i l l s or promo­
tion, or through a change of job. 1.22 
There has been a long-term tendency for d i f f e r e n t i a l s in p o s t ­
tax pay between s k i l l e d and less s k i l l e d work to be compressed. 

As far as managerial pay i s concerned, several surveys have shown that managerial pay, in the UK, i s in general substantially lower than in other major industrial countries; though a large part of t h i s simply r e f l e c t s the overall difference in GDP per head, i t has undoubtedly made overseas employment and emigration increasingly attractive to the more mobile and talented managers. 

The D0I's contacts with both US and UK multinationals confirm that they are having increasing d i f f i c u l t y in persuading UK nationals to return to the UK after service abroad because of the weight of direct taxation and lower s a l a r i e s common here. 

1.23 
International comparisons of income taxation are never straightforward, p a r t l y because of the d i f f i c u l t y of establishing an acceptable basis of currency translation and p a r t l y because of the variation in the distribution of earnings. 

Despite the insurance principle which may underline them, employee's social security contributions are generally regarded by those who pay them as part 
0*" the income tax system, and in other countries are used to finance expenditure on items which in the UK are paid for out of general t a x a t i o n . 

Although the U
K income tax has a low threshold a n d high onset r at e compared with other c o u n t r i e s , the low r at e of employees' s o c i a l s e c u r i t y contributions means that a married man V l  t h two children earning half the average production workers' wage 

V
  l
     H 
            be paying out roughly the same percentage of his income in tax 

a n d insurance as his counterparts in other c o u n t r i e s . 
                                                                                                                                                                        However, at 

average earnings and above his tax and s o c i a l security 
                                                             deductions 

together make up a l a r g e r percentage of gross pay in the UK. 
                                                                    At 

V e*"age earnings, for 
                                                                              example, he surrenders 23$ of his income in 

tax and s o c i a l security payments,, at a marginal rate of 3k%, while 

the equivalent tax payer in France pays only h%, in Germany. 
                                                            22% and 

l
    n the USA and Japan about 15% ( i n c l u d i n g l o c a l income tax where 

a P p r o p r i a t e ) . 
                                                At f i v e times average earnings he surrenders 
                                                                                                                                                                                                       nearly 

50/ of his income in tax and s o c i a l s e c u r i t y payments, at a marginal 

^ate of 7 5 ^ 3 while the equivalent tax payer in France pays only 

and in Germany, the USA and Japan between 35 and k0% 
                                                     ( i n c l u d i n g 

local income tax where a p p r o p r i a t e ) . 
                                                   At these l e v e l s of 
                                                                              earnings 

the Netherlands is c l o s e s t to the UK with about the same average 

r a t e but a s l i g h t l y lower marginal r a t e . 
                                                                                                                                                                                     Only in Sweden are 

^ r g i n a l 
                and average deduction rates higher than in the UK. 

IHE long-term o b j e c t i v e must be to r e s t o r e a s i t u a t i o n 
                                                                    in 

vhich - at a l l l e v e l s - the labour market can operate 
                                                                                                                                                                                                        e f f e c t i v e l y 

and provide adequate i n c e n t i v e s to work, while continuing to 
                                                                                                                                                                                                         give 

P r o t e c t i o n to the poorer members of s o c i e t y . 
                                                 The i n t e r - r e l a t i o n 
                                                                      of 

S o c i a l 
                    s e c u r i t y b e n e f i t s 
                                                                           and tax i s , however, an area of 
                                                                                                                                                                               great 

C o i Q p l e x i t y , where g e n e r a l i s a t i o n s can be f a c i l e 
                                                                                                                                                           and where 
                                                                                                                                                                                            solutions 

ttay 
               be d i f f i c u l t 
                                                                       to 
                                                                                      f i n d . 

As stated in para .1.17 above the Government i s already 
                                                          taking 

st 

ePs to deal with these problems. 
                                                                                                                            Moreover, the Chancellor of the 

^ X chequer has given a commitment, as far as circumstances 
                                                                permit, 

^ 0 deduce the burden of income tax at a l l l e v e l s , and to 
                                                               increase 

th 

e l e v e l of personal tax allowances to the point where they stand 

c'k

QVe t j j e l e v e l s of the main s o c i a l s e c u r i t y b e n e f i t s . 
                                                                                                                                                                                                The 

G 
 o 

V ernment intends to g i v e further consideration to the 
                                                                                                                                                                                                       question 

i
    a
          f 
                        the i n t e r a c t i o n of the tax and s o c i a l 
                                                                                                                                                                                                                                                                            s e c u r i t y 
                                                                                                                                                                                                                                                                                                                                       system 

^eates d i s i n c e n t i v e s to work at lower l e v e l s of 
                                                                  earnings. 

## Mobility Of Labour

2.1 
The Government remains committed to i t s efforts to ensure through regional policy that dobs can go to workers in areas of high unemployment. 

But even in an economy with no regional imbalances, it would remain necessary to ensure that workers with p a r t i c u l a r skills can e a s i l y move to the particular vacant jobs requiring those s k i l l s . 

Even with the present high l e v e l s of unemployment, many cases are being reported by SWTs of shortages of key s k i l l e d workers. 

The machinery exists in the Employment Service Agency for circulating Particulars of vacancies and of available labour throughout the country and this machinery i s at present being modernised using the lastest computerised techniques. 

2.2 
Housing and Industrial Mobility,. 

Housing policy can greatly assist industrial regeneration by making i t easier for people to move house to new jobs. 

This was recognised in the recent Green Papers 1^housing p o l i c y . 

Many of i t s proposals w i l l help; in particular' 
ttider access to home ownership; more f l e x i b l e allocations and transfer p o l i c i e s in the l o c a l authority sector ( e s p e c i a l l y the ending of residential qualifications for access to waiting l i s t s ) ; 
further support for the growth of housing associations and new forms of tenure; and measures to sustain the supply of  
!quick access' 
accommodation in the private rented sector. 

Local authorities w i l l 
"be encouraged to think comprehensively about the needs of labour mobility in preparing the new local housing strategies each, year; 
aud central Government w i l l be able to take their proposals into account in allocating capital resources. 

A p i l o t scheme i s being s e t up to link l o c a l authority housing with vacancies for key workers so that these can be advertised by the ESA in other areas w i t h an offer of l o c a l authority accommodation; and the Royal Commission on Legal Services i s examining the cost of conveyancing of owner-occupied houses. 

## 2.3 T T G M R F F T R N B I L I T Y Of Pensions. While There Are No Statutory

obstacles to voluntary transfer of pension r i g h t s , there are certain Practical d i f f i c u l t i e s which may, in some cases, impede occupational labour mobility. 

The Secretary of State for Social Services intends to invite the Occupational Pensions Board to study the question of t^ansferability as soon as p r a c t i c a b l e . 

Housing Policy: 
A Consultative Document Cmnd 6851 
Scottish Housing: 
A Consultative Document Cmnd 6852 

## 5 * Employment Legislation

3.1 
Recent years have seen a large amount of employment legislation, such as: 
Equal Pay Act, 1970; 
Industrial Relations Act, 
1971; 
Contracts of Employment Act, 1972; 
Employment and Training Act, 1973; 
Health and Safety at Work Act, **197**^5 
Trade Union and Labour Relations Act, **1974** 
and 1976; 
Sex Discrimination Act, 1975; 
Employment Protection Act, 1975*. 
a
Proposals for occupational pensions and industrial democracy legislation are also under considerationfand progress towards industrial democracy in some industries is already well advanced). 

* 

3
.
 2 
      The Government is convinced that its major reforms are both necessary and 

desirable. If employees - and unions - feel more secure, they are mere likely to 

co-operate to increase productivity and efficiency. However, the Government 

will take full account of the volume of measures carried by both Conservative 

and.Labour Administrations in considering any fresh 

Proposals which come forward for further legislation in this field. The Department 

0 f Employment has also arranged for two pieces of research to be carried out on 

the impact of recent measures on employers, in particular to establish whether 

^ere i  validity in the view that these measures have made employers more 
      s

reluctant to take on new labour. 

## Capi T A L Cost And Availability Of Capital

Since last autumn, interest rates have fallen very substantially; by about 

1 0 * 0 %
                                                                                   bout 3% at the long end by 
                                                                                                                                                                                                 October . The main 
                a
                   t 
                        t
                            h
                               e 
                                     s
                                        h
                                            o
                                                r
                                                   t 
                                                         e
                                                            n
                                                                d 
                                                                     a
                                                                        n
                                                                            d  
                                                                                 a

questions relating to the cost and availability of capital are kept under review 

the Roll Committee, and the Wilson Committee is examining the whole area of 

l n stit tional arrangements for providing finance for industry; therefore these 
                  u

re not discussed in this paper. 

-2 
       The Government i s , however, concerned that the banks should 

show a proper understanding of the needs and importance of industry, Oust as (as i s discussed elsewhere in this paper) i t i s concerned that the c i v i l service and education should show a proper understanding o r* industry. 

The Government therefore wishes to see an increasing involvement of the banks in the i n d u s t r i a l strategy and welcomes the addition of bank representatives as members of SWPs. 

## Taxation

5*1 
Detailed questions on taxation (such as the future of the stock belief scheme) are not appropriate to a discussion of the wider 
^ p l i c a t i o n s of the i n d u s t r i a l strategy. 

However, i t i s appropriate here to emphasise that the Government's long-term taxation objectives include: 

i . 
maintaining s t a b i l i t y and continuity of the corporate 
tax system, to strengthen business planning and confidence; 
i i . 
reducing the burden of direct personal taxation at a l l 
l e v e l s , and achieving a better balance between direct and 
indirect taxation; 
i i i  
. reducing the complexity of the tax system (which at 
present places a heavy administrative burden on industry and 
on Government). 
Moreover, the Government considers i t an important objective to create an environment which promotes innovation (eg by measures to a s s i s t small f i r m s ) . 

These objectives constitute an appropriate fiscal background to the industrial strategy. 

5*2 
I t i s worth noting that by international standards the tax burden borne by the corporate sector i s comparatively low. 

The r e a l burden of corporation tax proper i s generally not heavy, l a r g e l y because of the impact of stock r e l i e f ; and, moreover, the social security contributions payable by the employer in respect of his Workforce are much lower than in most other European countries. 

This C o n t r a s t s with personal income taxation where the UK l e v i e s a high burden by international standards. 

i.1 
The Government has supported the Sandilands Committee recommen­
dation that current cost accounting should become the basis for the Preparation of company accounts, as giving companies a better and 
^ 
more r e a l i s t i c view of t he i r transactions than h i s t o r i c cost accounting. 

At the same time the Government has emphasised the importance of ensuring that the new system i s practicable, which means that i t must be kept simple to operate, especially for smaller companies and t h e i r accountants. 

In balancing the requirements for precision and simplicity, the Government w i l l continue to encourage the accounting Profession to avoid proposals which place too great a burden on companies. 

6.2 
There are also proposals for other aspects of company reporting in the Green Paper dust published by the Secretary of State for Trade, 
^his recognises that there may be a case for imposing l e s s onerous requirements on small firms, but again i t w i l l be necessary in reaching decisions to balance the case for a p a r t i c u l a r disclosure requirement against the extra work which companies w i l l face in collecting ana Publishing the information. 

## Production And Distribution ? A Infrastructure

1
7 "  
Planning and Land. 

A number of SWPs have drawn attention to the dlnger that" planning procedures may obstruct the industrial strategy, either because too l i t t l e p r i o r i t y i s placed on the need f o r industrial development or because of the slowness and complexity Q f Planning procedures (which, i t has been a l l e g e d , delay industrial development much more than i s the case in other c o u n t r i e s ) . 

The Government has taken the following steps: 

i.* 
as described in the paper put to the Council in July 
by the Secretary of State for the Environment, i t has asked 
local authorities now to give industry top p r i o r i t y in the 

handling of planning applications and in making land available 
for development and to be p a r t i c u l a r l y sensitive to the needs of small firms in both urban and r u r a l areas; 
i i . 

as far as the Department of the Environment i t s e l f i s concerned, matters r e l a t i n g to industrial development, including appeals and building regulations j u r i s d i c t i o n , w i l l now be given f i r s t p r i o r i t y . 

While average times for the handling of planning appeals by the Department have almost halved in the l a s t two years, the Government i s determined to achieve an even greater improvement. 

The Department therefore proposes for the future to give p r i o r i t y to the handling of a l l industrial planning appeals. 

I t also aims to transfer to inspectors a l l industrial planning appeals r e l a t i n g to buildings up to 1500 sq metres, as opposed to the existing upper limit of 500 sq metres. 

With these changes, the Department considers that i t could work to a period of 5 months as the normal maximum for the handling of most industrial planning appeals, with not more than about one case in five exceeding that f i g u r e . 

That proportion cannot be eliminated because the handling of a planning appeal depends on co-operation by the l o c a l authorities and the applicant, and also on the amount of local opposition that may be generated. 

Highly contentious or large applications for industrial planning permission are often called in by the Secretary of State as the most satisfactory way of handling them. 

The times for such cases are not included in the references above and they would normally exceed five months. 

Special considerations a P P l y also to mineral extraction cases. 

Steps are being taken within DOE to speed up the handling of such cases but many of them are complex and w i l l continue to present d i f f i c u l t i e s ; 
i i i  
. the Secretary of State for Scotland has published a consultation paper on the general operation of the planning system in Scotland: this includes possible means of speeding up the handling of planning applications. 

He also proposes discussions with the local authorities, STUC and CBI on the industrial strategy which w i l l include, among other things, consideration of the ways in which the planning system might assist industry; 
i v . 

similar steps to those of DOE ajre being taken by the Secretary of State for Wales. 

.

5
*
2 
The Government i s considering whether research can be Undertaken to monitor the effects of the above measures. 

*^ 
Industrial Development Certificates ( I D C s ) and Office Sgyelopment Permits (ODr,'s), While the Government i s committed 
"to retaining these instruments as an essential part of regional Policy, i t made relaxations in the IDC scheme in 1976, and has n o w announced relaxations in the ODP scheme (which also impinges on manufacturing i n d u s t r y ) . 

I t undertakes to operate both schemes l n as f l e x i b l e as possible a manner in the interests of the industrial strategy. 

Building Regulations. 

Industry also has a close interest i n 
"kne speedy handling of applications for building regulations aPproval. 

Work i s at present being undertaken: 

i . 
to develop a more f l e x i b l e and time-saving procedure for 
building regulation; 
i i  
. 
to examine the scope for r a t i o n a l i s a t i o n of the building 
regulations and other l e g i s l a t i o n r e l a t i n g to buildings, p a r t i c u l a r l y in respect of measures against 
f i r e . 
Roads. 

One of the principal objectives for future transport Policy set out in the Governmenfs White Paper (Cmnd 6 8 3 6 ) i s to C 0 * t r i b u t e to economic growth and higher national prosperity by giving industry and other sectors of production an e f f i c i e n t 
"transport service. 

To this end the Government w i l l give p r i o r i t y Within the national road programme to improvements on routes which S e r v e the main industrial areas and the p o r t s . 

Industrial t r a f f i c 
" i l l also benefit from the road schemes chosen to serve regional needs a n & "those designed to take heavy t r a f f i c out of b u i l t up areas. 

As as local Government i s concerned, authorities have been asked by 
^ke Government to r e f l e c t the p r i o r i t y for industry i n t he i r t r a f f i c Management p o l i c i e s and in their choice of road schemes. 

7 6 
Public Trap sport. 

Adequate public transport services are e s s e n t i a l i f the labour force i s to be properly matched with available e i nPloyment, and i f shift working i s to be f e a s i b l e . 

In i t s White Pap 
0 1 1 "transport Policy, the Government re-affirms i t s b e l i e f that the r a aintenance of an effective network of bus services i s an important aim of i t s transport policy and makes provision for a substantial and continuing commitment to financial support. 

The White Paper rejects any notion of imposing major cuts in the railway system, and sets Qut the main tasks for the railways, of which the carriage of people to and from work in London and the major conurbations, and the carriage of bulk freight especially between sidings, are p a r t i c u l a r l y material to this paper. ' 

## Production And Pistribujiion Costs

Pollution Policy. 

The UK's geography and climate gives i t au environment which can more e a s i l y absorb and disperse pollution than the environments of many continental countries. 

In order to Protect this natural competitive advantage, the Government re-affirms 
^-ts determination to work for the retention of the existing UK 
Quality objectives approach", which i s preferable in the circumstances Q f the UK on both economic and environmental grounds to uniform emission standards. 

*2 
As far as existing UK practices are concerned, the Government 
^-oes not consider that these in general are imposing an unreasonable burden on industry. 

However, there may have been cases where too abrupt changes or inconsistent decisions have been to the detriment o f industry. 

The Government: 

i. 
' has asked l o c a l authorities to cease imposing planning 
conditions in an attempt to deal with problems which are the 
subject of controls under separate l e g i s l a t i o n ; 
ii. 
w i l l make greater efforts to keep export industries i n 
touch with international moves towards higher environmental 
standards. 
Energy Policy. 

General energy policy issues have recently 
"been the subject of separate discussion in NEDC. 

A Green Paper 
0
n Energy Policy w i l l be published l a t e r this year. 

*^ 
A matter of concern to a number of SWPs has been that of energy pricing policy. 

In general, the Government considers that the prices to industry of e l e c t r i c i t y , coal, gas and o i l do not C ompare unfavourably with price l e v e l s in other European countries 5 
a t l (^ that the objective of proper economic pricing i s in the best l o n E - t e r m interests of industry as well as the economy i n general. 

8.5 
I t i s sometimes argued that, in order to hold down prices for the domestic sector, there has in the past been a degree of cross­
aabsddJsation within energy t a r i f f s and prices against industrial consumers. 

In fact for a number of years both domestic and industrial t a r r i f f s were well below economic l e v e l s . 

The move towards proper economic pricing has, however, been accompanied by a better general balance between industrial and domestic prices and t a r i f f s . 

The Government welcomes this move, and would not wish for the future to see discrimination against industrial consumers. 

8.6 
The real price of energy i s , however, bound to r i s e over the longer term. 

The return to industry from energy conservation Projects i s therefore equally certain to be increasingly l a r g e . 

The Government hopes that the Council w i l l use i t s influence to Persuade i n d u s t r i a l i s t s of the benefits for them, as well as for the nation, in undertaking investment in energy conservation. 

8-7 
Transport Costs. 

Two EEC issues could have important consequences for transport costs: 

" 
i . 
the new proposals for harmonization of maximum permitted 
l o r r y weights and dimensions (which, i f agreed, would reduce 
the costs of road freight and f a c i l i t a t e exports of l o r r i e s ) ; 
the introduction of EEC rules on commercial d r i v e r s ' hour 
(the increase in costs w i l l be severe unless we can achieve 
the staged programme of implementation for which we are negoti 
a t i n g ) . 

The Government w i l l attach p a r t i c u l a r importance to the industrial 
-^Plications in i t s approach to these two i s s u e s . 

## 8 R

' s The Government's intention to increase taxation on heavy lorries i s in l i n e with the principle of covering f u l l economic costs Sowever, i t w i l l continue to give f u l l consideration to the views of 
^-Udustry in deciding on the pace of increase in this taxation. 

M 
Water Charges. Water authorities arc under a statutory obligation to set charge,, high enough to break even. They are also required to fix charges with regard to costs, and to avoid undue discrimination between different classes of consumers. This effectively precludes them from discriminating in favour of industry: nor is it reasonable that they should, since they could only do so at the expense of the domestic consumers for whom water services charges are already a sensitive issue in the context of counter-inflation policy. Some industries have complained of particular difficulties arising from increases m 
^ade effluent charges, especially where charges had been kept artificially low in the past and are now being increased as a result of the general move towards equalisation within regions 
(agreed in principle with the CBI). These industries are considenn c r jointly with the water industry ways and means of solving these Problems. 

## 9 - Research And Development

9
.
 1 
      Z ^ ^ ^ ^ 
                        Poli^ initiatives have borne out the 
Governments determination to encourage R&D in industry. Selective 
assistance, 
          under Section 8 of the Industry Act 1972, 
                                                  has included 
Provision for product development assistance, and this is being 
^tended under the Process and Product Development Scheme announced 
on 18 
     July. On a smaller scale, the Manufacturing Advisory Service 
announced in April, to which £8 million has been allocated over 
5 
 Years, 
        will help smaller and medium sized firms in manufacturing 
^dustry, especially those engaged in metal working and assembly, 
to 
  make better use of proven technologies. 

9
-
 2 
      Through such schemes the Government aims to assist industry 

t 0 carry through its own research and development. Through the 

National Research Development Corporation (NRDC) assistance is 
already available both to industry and to private individuals for 

^search into and development of inventions. The management of 
^e Governments own research and development also has an important 

r ole to play ' In the research council sphere special efforts are 

b eing devoted to the development of research in areas likely to be 

o f special value to industry. For example, in science the resources 
*ovoted to "big science" (high energy physics, astronomy and space 

Science) are being cut back by 25% 
                                                                                       to preserve scope for initiative 

i n other fields (eg polymer engineering, marine technology and 

Mineral exploration). 

9*3 
The eight Requirements Boards which commission research work o n "behalf of the Department of Industry aim to increase the number of contracts placed i n industry or industry supported research associations, rather than "in-house". 

In aggregate the Boards Plan to commission fromindustry 40% of the work over the next few years. 

This can be compared to the following proportions over the last 4 years: 

| 1973-74    | 1974-75    | 1975-76    | 1976-77    |
|------------|------------|------------|------------|
| 12.7%      |            |            |            |
|            | 12.9%      | 17-2%      | 21.9%      |

Some work w i l l of course continue to be done by the Department's 
0
w n Industrial Research Establishments. 

However, the Government recognizes the importance of getting the f r u i t s of t h i s work out 
1 -ato industry for industry to develop as e a r l y as p o s s i b l e . 

9*4 
Moreover, a l l Government departments which sponsor technical developments have been asked to review arrangements to ensure that a s much as possible of the work i s done i n industry rather than 
" 
i l i - h o u s e , l c 
9*5 
The Advisory Council on Applied Research and Development 
(ACARD) has now been established under the Lord Privy S e a l ' s chairmanship. 

I t s work programme i s s p e c i f i c a l l y directed towards the industry-related aspects of R&D. 

I t w i l l , i nt e r a l i a , be considering the Government's r o l e as a commissioner of R&D and how 
^ 
U H industrial benefits can be gained from t h i s . 

## Sales

* M 
S i L . 

The Government has now put forward a - e t r i c r f x o " 
P r o g r e m m T T s T T a l i s f o r c o n s u l t a t i o n , and r e c o g n i s e s the r n d u s t , x a i importance o f the implementation o f m e t r i c a t i o n heing completed as Rapidly as possible. 

* .  
2 
Standardization. 

The Government i s urgently following up the 
^commendations addressed to i t in the Warner Report, which w i l l b e the subject of a separate report to the Council. 

3 
Consumer fi;'£t£ctdou. 

In general consumer protection measures operate at the point of sale and thus have no direct effect on manufacturing industry. 

Proposals on product l i a b i l i t y , under which TV--. 

defects m 
-Producers would be automatically l i a b l e for damage caused by/their Products, may have implications for insurance cover needed by manufacturers in certain sectors (notably pharmaceuticals, machine 
"tools, motor c a r s ) , but at present there i s insufficient evidence to Quantify the effect in r e l a t i o n to other costs. 

## ^* Public Purchasing

The scope for further increases i n the proportion of public Purchases made from UK manufacturers i s limited, given that nearly 
95% by value of current purchases are made from UK manufacturers 
(excluding raw materials where certain imports are inescapable and ^-nternetional defence collaborative projects which are designed to e
^  s e l f - b a l a n c i n g ) . 

However, the Government: 

i . 
i s looking for ways of reducing yet further the amount 
of public purchases which come from abroad; 
i i . 
w i l l consider ways i n which the UK content of purchases 
from UK suppliers can be maximised. 
*^*2 
An area in which greater progress can be looked for i s that 
0 x" the impact of standards and specifications on the export Potential of products purchases by the public sector. 

Attention s
.

 heen focused on problems here by the Warner and Brown Reports, a s Well as by SWP reports. 

The Government i s determined to make s u h s t a n t i a l progress here, and hopes that industry w i l l take every 
0Pportunity to draw attention to the p o s s i b i l i t i e s of concrete action in specific areas. 

*3 
The Warner Report noted a number of specific areas whose e x P o r t potential might thus be enhanced. 

By way of a p i l o t 

e 2 c e r c i s e , the Department of Industry proposes to examine in d e t a i l 
supply of broadcasting equipment. 
The Department w i l l discuss 
th purchasers and manufacturers whether there i s scope for 
e3\Port efforts to be improved by action along the l i n e s recommended 
1 1 1 the Warner Report. 

## Business Environment 12 12. . C A ^ I E T I T I O J I ^ I I^T Competition Policy

12.1 
Competition pol i cy has an important role to play, as part of the industrial strategy,, in improving the performance of B r i t i s h industry. 

The Government  i s reviewing the operation and effectiveness of competition policy in achieving this objective through the existing legislation and i n s t i t u t i o n s . 

13. 

Relations with Government l^ivJA service/industry mobility.  
I t  i s widely held that the 
-British practice of offering a f u l l l i f e career  i n the C i v i l Service, and of l i t t l e m i d - l i f e recruitment, leads to a lack of mutual 
^understanding between the Service and industry, and therefore a failure to give enough weight to industry's interests and concerns 
"hen policy  i s being formulated. 

Recognising that there  i s a degree of truth  i n t h i s , the Government and the CBI alike for more than a decade have accepted interchange postings between the C i v i l Service and industry as an aim of p o l i c y . 

By continuous effort on D o t h sides something has been achieved, but not on a large s c a l e . 

^5.2 
Between 1973 **and** 1975, for instance, some 35 c i v i l servants kave undertaken exchange postings to industry and commerce, and s : u a i l a r l y some 70 people from the private sector have done spells l n the Service -
mainly at middle management l e v e l . 

On top of these figures, some 60 recruits via the direct entry Principal C o&petition have joined the Service in the l a s t 5 years in m i d - l i f e after industrial and commercial experience. 

Despite strong 
0Pposition from the C i v i l Service unions this l i n e of recruitment l s being maintained even in present circumstances of manpower cuts. 

s benefits are cumulative, and nearly a l l of those recruited stay l r i the Service, so the t o t a l from this background continues to grow, further industrial and commercial experience has also been imported 

^ 
r e c r u i t m e n t from outside for posts where specific p r i o r experience 
l
s necessary or highly d e s i r a b l e . 
13,2 
w nevertheless, the Government considers that  i t  i s very 
^ Portant to achieve a much higher degree of interchange between e C i v i l Service and industry, and to promote a much greater degree 

o
f 
  mutual understanding on 
                        both, 
                             sides. Although, 
                                             there are very real 
difficulties in arranging exchange postings, they represent the best 
short-term prospect of further improvement. The Government therefore 
proposes to achieve a sharp and substantial increase in the number of 
civil 
    servants seconded to industry. More secondments of businessmen 
into 
    the Civil Service would also be desirable (although, 
                                                     the flow of 
secondments need not 
                  lalance either locally or generally). This is likely 
t
o 
  prove more difficult than secondments in the other direction because 
able 
   businessmen run greater risks than civil servants of jeopardising 
their careers if they leave them for crucial periods, and problems of pay 
a
n
 d 
   conflict of interest can also arise. To attain these two objectives 
t
h
 e 
   Government intends to aim to at least double the number of civil 
servants seconded to industry by the end of the decade and to ensure that 'j 
by 
  then the total number of exchanges in operation in both directions at 
any OIE 
     time will be approaching 200. This will require the active 
co-operation of all departments, and hence of a very wide spread of 
industrial and commercial employers; and the Government proposes to hold 
talks 
    with the CBI and leading firms to secure their assistance in achiev­
i
n
 g 
   the substantial increases which are needed. 

13.4- 
         There are attractions in making the secondments rather shorter 
than 
      the usual 2-3 years. This can usefully increase the number of people 
w
 h
  o 
     have had direct experience in commerce and industry, while also reduc­
i
 n
  g 
     the degree of sacrifice the parent organisation has to make. This 
change can be associated with linking the secondment to a specific 
Project, 
            whichhas a number of advantages. This approach has already been 
tried successfully on a small scale. It could well be a significant 
component in the further expansion of secondments. The use of joint 
Seminars (which have already proved useful) will be extended. The wider 
Use 
     of 
         training processes, 
                                        within the Service or in co-operation with 
the 
     business school, is in hand. 

"
1
 3
  .
   5 However, the Government considers that the question of civil 
service/industry mobility requires further consideration in the longer 
term. This may involve rethinking of issues which go much wider than 
the 
    matter of secondments. 

13.6 
       Burdens on industry- It is frequently alleged by industrialists 

that 
    the CTWiulative burden of Government requirements - such as 

collection of Information,' 
the complexity of the tax system, planning delays and legislative requirements - imposes unreasonable costs on industry, particularly on smaller firms, and damages efficiency. The Government therefore proposes, as a first step, to arrange for a fact­
finding exercise to be carried out to assess the total burden of Government legislative and administrative requirements on some representative firms. 

CP(77) 95 
C O P Y NO 
81 
20 October 1977 
C A B I N E T 

## T H E Q U E E N ' S S P E E C H On The P R O R O G A T I O N Of P A R L I A M E N T Note By The Secretary Of Ths Cabinet

I attach for the information of the Cabinet copies of The Queen 1 s Speech on the Prorogation of Parliament in the f o r m in which it has been submitted to the Counsellors of State fcr approval on behalf of The Queen. 

Signed JOHN HUNT 
Cabinet Office 
20 October 1977 

## Draft Prorogation Sfeech My Lords And Members Op The House Op Commons,

My husband and I look back with delight and gratitude on the events which marked My Silver Jubilee at home and overseas, and the visits which we made to many parts of the United Kingdom and the Commonwealth. 

I was pleased to welcome Commonwealth leaders in London for the 1977 
Commonwealth Heads of Government Meeting, for which My Government were the hosts. The intensive and friendly discussions there strengthened 

"
t
 h
  e Commonwealth relationship and contributed towards the solution of certain international problems. 

My Government played an active and constructive part in the activities of the European Communities, which included two meetings of the European Council, one in London, and held the Presidency of the Council of Ministers for the first six months of 1977. 

My Government have played a full and positive role in institutions to promote international development and efforts to create a more just and stable economic order, and in discussions on the problems of world unemployment and inflation; they were hosts to the Downing Street Conference of the leaders of the seven major industrialised countries. 

Legislation has been passed to enable the United Kingdom to ratify amendments to the Articles of Agreement of the International Monetary Pund and to assist United Kingdom trade and the provision of aid for the poorest countries. 

Special assistance has been given to southern African refugees. 

My Government have continued their efforts to promote a negotiated settlement in Rhodesia. 

My Government have been active, in co-operation with other Western members of the Security Council, in working for a settlement in Namibia which will bring the country to independence in a manner which will meet with international acceptance and will give the people a chance to select freely their own government. 

My Government have continued to attach importance to the development of detente, and of constructive political and economic relations, with the Soviet Union and the countries of Eastern Europe. They have continued to work for mutual and balanced force reductions in Central Europe. They are participating with the Governments of the United States and the Soviet Union in discussions aimed at the negotiation of a Comprehensive Test Ban Treaty. 

My Government were pleased to act as hosts at the Ministerial Meeting of the North Atlantic Council which was attended by Heads of Government in London in May, and which established new programmes of work in the political and defence fields. 

## Members Op The House Op Commons,

I thank you for the provision which you have mado for the honour and dignity of the Crown and for the public services. 

## My Lords And Members Op The House Op Commons,

My Government have given continuing priority to their policy of restraining Price levels, and of the fullest possible co-operation to this end with both sides of industry. The second round of voluntary pay policy has been observed throughout the economy, and the way has been prepared for an orderly return to normal collective bargaining. Legislation has been passed to make new provision for the scrutiny and effective control of prices, and a new Price Commission has been appointed. Successful stops have been taken to restore confidence in the financial markets and improve the balance of payments. 

My Government remain deeply concerned about the continuing high level of unemployment, and have introduced additional employment and training measures to tackle this problem, including the youth opportunities programme. My Government have maintained their policy of strengthening industry through the development of the industrial strategy, through industrial assistance schemes, and through the work of the **National** Enterprise Board and the Scottish, Welsh and Northern Ireland Development 
-Agencies. 

Legislation was enacted to bring into public ownership the aircraft and guided weapons, shipbuilding and marine engine building industries. British Shipbuilders have acquired by negotiation r. 

a major part of the ship-repairing industrj An Act has been passed to enlarge the Post Office board so as to allow an experiment in industrial democracy. 

Legislation has been enacted to give the National Coal Board additional powers and provide the framework for the further development of the coal industry, and to make further prevision for the financing of British Nuclear Fuels Limited and the Radiochemical Centre Limited. 

My Government are completing the award of licences, all involving majority state participation, under the Fifth Round of off-shore petroleum licensing. Steps have been token to ensure further safeguards in the management of nuclear waste, and full and public consideration of the problems relating to nuclear development; a public inquiry has been set up to examine the proposal for the construction of an oxide fuel reprocessing plant at Windscale. Legislation has been passed extending United Kingdom fishery limits to 
200 miles; tribute is due to the hard work of the fishery protection units in enforcing the new limits. 

A new and favourable Air Services Agreement with the United States of America has been signed, An Act has been passed to reform patent law and to make posssible the United Kingdom^ participation in certain international agreements including the European Patent Convention. 

In Northern Ireland the Royal Ulster Constabulary, supported by My x\rmed Forces, have continued to enforce the law with impartiality and deserve the highest praise for their success in reducing the level of violence. 

My Government have maintained the aim of a just and lasting constitutional settlement, and they have taken measures to combat the economic and social Problems in the Province, including new incentives for investment. 

% Government have published Green Papers discussing possible changes in the arrangements for financing local authorities. 

My Government have continued to develop a housing policy designed to deal more effectively with the most pressing needs and to broaden housing opportunities. 

Proposals have been published for a comprehensive housing policy for the longer term, and legislation has been enacted to place statutory responsibility for assisting the homeless on local housing authorities. 

My Ministers have announced new initiatives for the regeneration of inner Urban areas, including the expansion and adaptation of the urban programme and the offer of partnership arrangements between central government and selected local authorities. Proposals have been laid before you for strengthening the water industry and for the future of the British Waterways Board. 

% Government have reviewed the development programme of now towns in England and have established a new programme for their completion. 

My Government have published a White Paper setting out their proposals for the future development of transport policy to meet economic and social needs. 

*n Act has been passed to provide continued financial support to the British Railways Board and the National Freight Corporation. 

Provision has been made for increases in social security benefits and war Pensions. Legislation was enacted making a number of changes in the field of social security, including supplementary benefit. The new Child Benefit was brought into payment for all children, including the first. 

% Government have continued to promote and encourage voluntary effort and a sense of caring in the community and W  
e launched and will sustain a Good Neighbour Campaign aimed at involving the community in the care of its members. 

1 hope that the community spirit fostered by the celebrations of My Jubilee will be strengthened and developed in the years to come. 

% Government have published a Green Paper setting out proposals on education in schools, with particular regard to the curriculum, standards of performance, training and employment of teachers and the preparation of pupils for the needs of adult life. 

^ Act has been passed to amend the criminal law, particularly in relation to conspiracy, and to improve its administration; and the process of reforming the law has been continued with the Administration of Justice Act and other measures. 

% Government welcome the passage of the Unfair Contract Terms Act, which marks 
^ important advance in consumer protection. Grants have been made to maintain the provision of help to consumers. 

Among the Acts passed in relation to Scotland were measures concerned with the modernisation of the law of marriage and with the enforcement of planning procedures 

## M ^ Lords And Members Of The House Of Commons,

1 Pray that the blessings of almighty God may attend you. 

## W E D N E S D A Y 26Th October, 1977 - M Y Lords And Members Of The House Of Commons,

I 
was pleased to welcome Commonwealth leaders in London for the 1977 Commonwealth Heads of Government Meeting, for which M y Government were the hosts. The intensive and friendly discussions there strengthened the Commonwealth relationship and contributed towards the solution of certain international problems. 

My Government played an active and constructive part in the activities of the European Communities, which included two meetings of the European Council, one in London, and held the Presidency of the Council of Ministers for the first six months of 1977. 

        My Government have played a full and positive role in 
institutions to promote international development and efforts to 
create a more just and stable economic order, and in discussions on 
the problems of world unemployment and inflation; they were hosts 
to the Downing Street Conference of the leaders of the seven major 
industrialised countries. 

        Legislation has been passed to enable the United Kingdom 
to 
   ratify 
          amendments 
                        to 
                            the Articles 
                                          of 
                                              Agreement 
                                                          of 
                                                              the 
International Monetary Fund and to assist United Kingdom trade 
and the provision of aid for the poorest countries. Special assistance 
has been given to southern African refugees. 
-

        My Government have continued their efforts to promote 
a negotiated settlement in Rhodesia. 

My Government have been active, in co-operation with 

other Western members of the Security Council, in working for a 

settlement in Namibia which will bring the country to independence 

in a manner which will meet with international acceptance and will give the people a chance to select freely their own government. 

        My Government have continued to attach importance to 
the development of detente, and of constructive political and 
economic relations, with the Soviet Union and the countries of 
Eastern Europe. 
                They have continued to work for mutual and 
balanced force reductions in Central Europe. They are participating 
with the Governments of the United States and the Soviet Union in 
discussions aimed at the negotiation of a Comprehensive Test Ban 
Treaty. 

My Government were pleased to act as hosts at the 

Ministerial Meeting of the North Atlantic Council which was attended by Heads of Government in London in May, and which established new programmes of work in the political and defence fields. 

MEMBERS OF THE HOUSE OF COMMONS, I thank you for the provision which you have made for the honour and dignity of the Crown and for the public services. 

## M Y Lords And Members Of The House Of Commons,

M y Government have given continuing priority to their policy of restraining price levels, and of the fullest possible co­
operation to this end with both sides of industry. The second round of voluntary pay policy has been observed throughout the economy, and the way has been prepared for an orderly return to normal collective bargaining. 

Legislation has been passed to make new provision for the scrutiny and effective control of prices, and a new Price Commission has been appointed. 

Successful steps have been taken to restore confidence in the financial markets and improve the balance of payments. 

M y 
      Government 
                     remain 
                               deeply concerned 
                                                     about 
                                                              the 

continuing high level of 
                          unemployment, and have 
                                                     introduced 

additional 
            employment 
                           and 
                                 training 
                                            measures 
                                                        to 
                                                            tackle 
                                                                    this 

problem, including the youth opportunities programme. 

M y 
      Government 
                      have 
                              maintained 
                                             their 
                                                     policy 
                                                               of 

strengthening industry through the development of the industrial 

strategy, through industrial assistance schemes, and through the 

work of the National Enterprise Board and the Scottish, Welsh 

and Northern Ireland Development Agencies. 

Legislation was enacted to bring into public ownership 

the aircraft and guided weapons, shipbuilding and marine engine 

building 
           industries. 
                         British 
                                  Shipbuilders 
                                                  have 
                                                          acquired 
                                                                     by 

negotiation a major part of the ship-repairing industry. 

An Act 
        has been passed to enlarge the Post 
                                             Office 

board so as to allow an experiment in industrial democracy. 

Legislation has been enacted to give the National Coal 

Board additional powers and provide the framework 
                                                   for 
                                                       the further development of the coal industry, and to make further provision for 
               the financing 
                              of British Nuclear Fuels 
                                                           Limited 

and the Radiochemical Centre Limited. 
                                        My 
                                            Government are completing the award of licences, all involving majority 
                                                          state participation, under 
                       the Fifth 
                                   Round 
                                           of 
                                               off-shore 
                                                          petroleum licensing. 

       Steps have been 
                         taken 
                               to 
                                  ensure further 
                                                 safeguards 
in 
   the management 
                    of 
                       nuclear 
                               waste, 
                                      and 
                                           full 
                                                and 
                                                     public 
consideration of the problems relating to nuclear development; 
a public inquiry has been set up to examine 
                                              the proposal 

for 
      the construction 
                             of 
                                  an 
                                        oxide 
                                                 fuel 
                                                        reprocessing 
                                                                         plant at 

Windscale. 

        Legislation has been passed extending United Kingdom 
fishery limits to 200 miles; tribute is due to the hard work 
of the fishery protection units in enforcing the new limits. 

A new 
       and favourable 
                     Air 
                         Services Agreement 
                                           with 

the United States of America has been signed. 

       An Act has been passed to reform patent law and to 
make 
      possible the United 
                          Kingdom's 
                                    participation 
                                                 in 
                                                    certain 
international agreements including the European Patent Convention. 

          In 
               Northern 
                            Ireland 
                                      the Royal 
                                                     Ulster 
                                                               Constabulary, 
supported by My 
                        Armed 
                                  Forces, have continued to 
                                                                       enforce 
the law with impartiality and deserve the highest praise 
                                                                            for 
their success in reducing the level of violence. 
                                                           My Government 
have maintained the aim of a just and lasting constitutional 
settlement, and they have taken measures to combat the economic 
and social problems in the Province, including new incentives 
for investment. 

        M y Government have published Green Papers discussing 
possible 
         changes 
                  in 
                      the 
                           arrangements 
                                          for 
                                               financing 
                                                         local 
authorities. 

       My Government have continued to develop a housing 
policy designed to deal more effectively with the most pressing 
needs and to broaden housing opportunities. 
                                           Proposals have 
been 
     published for 
                   a comprehensive 
                                   housing 
                                           policy 
                                                  for 
                                                      the 
longer term, and legislation has been enacted to place statutory 
responsibility 
             for 
                 assisting 
                          the 
                               homeless 
                                        on 
                                            local 
                                                  housing 
authorities. 

        M y Ministers have announced new initiatives for the 
regeneration of inner urban areas, including the expansion and 
adaptation of the urban programme and the offer of partnership 
arrangements 
             between 
                      central 
                              government 
                                          and 
                                               selected 
                                                        local 
authorities. 

        Proposals have been laid before you for strengthening 
the water industry and for the future of the British Waterways 
Board. 

        M y Government have reviewed the development programme 
of new towns in England and have established a new programme 
for their completion. 

M y Government have published a White Paper setting 

out their proposals for 
                         the future 
                                     development 
                                                  of 
                                                      transport 

policy to meet economic and social needs. 

An Act has been 

passed to 
           provide 
                    continued 
                               financial 
                                         support 
                                                  to the British Railways Board and the National Freight Corporation. 

Provision has been made for increases in social security 

benefits and war pensions. 
                            Legislation was enacted making a 

number of 
           changes in the field 
                               of 
                                   social security, 
                                                  including 

supplementary benefit. 
                        The new Child Benefit was brought into 

payment for all children, including the first. 

M  
  y 
      Government 
                       have 
                               continued 
                                             to 
                                                  promote 
                                                               and 

encourage voluntary effort and a sense of caring in the community 

and have launched and will sustain a Good Neighbour Campaign 

aimed at involving the community in the care of its members. 

I hope that the community spirit fostered by the celebrations of My Jubilee will be strengthened and developed in the years to come. 

M y Government have published a Green Paper setting 

out proposals on education in schools, with particular regard to 

the 
     curriculum, 
                    standards 
                                  of 
                                      performance, 
                                                       the 
                                                             training 
                                                                        and 

employment of teachers and the preparation of pupils for the needs of adult life. 

An Act has been passed to amend the criminal law, 

particularly 
               in 
                   relation 
                              to 
                                   conspiracy, 
                                                 and 
                                                        to 
                                                             improve 
                                                                        its 

administration; and the process of reforming the law has been continued with the Administration 
                                   of 
                                      Justice Act 
                                                   and 
                                                        other 

measures. 

M y 
     Government welcome the passage of the 
                                                          Unfair 

Contract Terms 
                Act, which marks an important 
                                                 advance in 

consumer protection. 
                       Grants have been made to maintain the 

provision of help to consumers. 

Among the Acts passed in relation to Scotland were 

measures concerned with the modernisation of the law of marriage and with the enforcement of planning procedures. 

## M Y Lords And Members Of The House Of Commons

I pray that the blessings of Almighty God may attend you. 

1 

CP(77) 96 
                                                     C O P Y N O 
                                                                   8
                                                                   J
                                                                    . 20 October 1977 

## C A B I N E T P A Y P O L I C Y Memorandum By The Chancellor Of The Exchequer

1. 
           Our pay policy has reached a critical stage at which we need to take 
stock and consider what lines of action we should follow over the next few 
weeks. 

## Progress So F A R

2. 
         F r o m the starting point in July of widespread scepticism about our 
policy, general expectations of 20 per cent or m o r e as the outcome, and 
threatened or actual claims of inordinate increases, we have made 
sufficient p r o g r e s s to avoid the risk of an immediate and dramatic wage 
explosion. 
                This is on the credit side, and it is backed by: 

increasing public acceptance that the Government is pursuing its 
policy with determination (threat of using discretionary powers and 
their actual use in the Mackie case, and resistance to the A i r Traffic 
Control Assistants 1 claim in the face of industrial action, are two 
particular features which have had considerable impact); 

as far as actual settlements are concerned, approximately nine out of 
ten are believed to have been broadly "within the guidelines", 
although that phrase is interpreted as referring to the 10 per cent 
earnings target published in Cmnd 6882 and not to the desirability of 
reaching settlements well into single figures; 

there have been no significant settlements so far which have clearly 
breached the guidelines. 

3. 
But there is a debit side also: 
no really important settlements have yet been made at all, and the total of settlements so far is much smaller than at the same time in previous pay rounds; 
ten per cent has come to be regarded as a minimum l e v e l , without paying too much attention to elements of drift which are not obviously identifiable; 
some trade unionists seem to be working to establish 15 per cent as a "socially responsible" alternative to the Government 10 per cent; 
no lesway has been created for settlement of any anomalies or special cases where there might be some justification for settle­
ments considerably above any average. 

## P R O S P E C T S

4. 
          The tone of the present round is already beginning to be set. 
                                                                                                   The 
best interpretation one can put on it is that a substantial number of settle­
ments might be achieved at 10 per cent or v e r y little above, not allowing 
fully for drift, with some settlements a few percentage points above that 
level and almost none below. 
                                            This would indicate at best an outcome for 
the national average over the year as a whole in the 12-14 per cent range. 

5. 
           Even this, however, would depend on containing actual settlements or 
their repercussions, in a variety of important cases and types of cases 
coming up over the next few weeks. 
                                                       The main ones are probably the 
following: 

i. 
          Ford: 
                       it is not yet clear whether the offer of just under 12 per 
cent will stick, or what effect industrial action or the threat of it 
will have. 
                     What is clear is that there will be a widespread 
tendency to interpret a settlement on the basis of the present offer as 
being 12 per cent plus, and that many other important negotiations 
will take that as the standard. 

ii. 
         Local Authority Manuals: the employers are reckoning to 
settle "between 9. 99 per cent and 10 per cent" on earnings. 
                                                                                                  They 
are conscious that this will make it difficult to settle within the same 
limit for the F i r e Service, and they would like to settle higher for the 
police. 
              It would in their view be difficult to justify for any other 
local authority group less than the manuals get. 

iii. 
         P o l i c e : the Police Federation is intensifying its campaign for 
an excessive pay increase for the police. 
                                                                   The Conservative P a r t y 
has made such an increase part of its policy. 
                                                                         In the course of 
discussions about a Round Two settlement the T r a d e s Union Congress 
( T U C ) was sounded unofficially about giving the police special treat­
ment and advised strongly against, indicating that anything conceded 
to the police would be demanded by others. 
                                                                     This is bound to be true 
too in the present situation, where any offer in excess of the 10 per 

cent guideline will be taken as a green light not only by other public 
sector groups such as the firemen but aluo by heavyweight 
industrial unions who are already seeking to break the guideline. 
iv. 
M i n e r s : 
the proposed productivity scheme is due to go to ballot 
on **2 6 / 2 7** October after a v e r y small majority on the National 
Executive. 
The result is expected on 1 N o v e m b e r (subject to any 
delay due to legal action now under consideration by the defeated 
m e m b e r s of the Executive). 
It remains to be seen whether It will be 
approved; 
and even if it i s , whether it will take the steam out of the 
pay claim for £135 a week as we have been promised. v. 
Vauxhall. 
it is reported that they are proposing a reopener 
clause t r i g g e r e d by any increase in prices exceeding 8 per cent - a 
figure which comes dangerously near to guaranteeing a reopening. 
vi. 
Road Haulage: 
there is no sign of a reduction in the l e v e l of 
the proposed settlement which seems to involve at least 15 per cent earnings increase. 
vii. 
Heating and Ventilation: 
in the construction industry, in spite 
of its poor l e v e l of activity, the proposed 20 per cent settlement 
could set a totally unacceptable standard. 
viii. 
Productivity Deals: 
as was always to be feared, there are 
indications that such deals are being devised w h e r e v e r there is any 
colourable excuse for them without questioning if they are self­
financing. 
ix. 
Special Cases: the current mood of negotiation gives no hope 
that special cases and anomalies can be dealt with by increases above 
other settlements without creating resentment. 
x. 
L o w Pay: 
in wages councils and elsewhere it is argued that 
special help should be given to the low-paid, which implies another 
addition to the average, even if repercussions can be avoided. 
(A 
note at Annex A gives the case for and against setting a floor on wage 
increases for the v e r y low paid. ) 

6. 
           If any significant number of these problems is left to develop on the 
lines currently indicated, the pattern of settlements is all too likely to c r e e p 
gradually higher, and we shall end the year with national earnings increasing 
by something approaching, or even exceeding, 15 per cent. 

## O U T L O O K F O R F U T U R E I N F L A T I O N

7. 
          Developments o v e r the next few weeks are likely to determine the 
position we shall reach early next summer. 
                                                                The alternatives can be 
starkly illustrated. 
                             Assuming no major change in other factors which 

influence inflation, we can be confident that the y e a r - o n - y e a r rate of 
inflation measured by the Retail P r i c e Index will fall below 10 per cent 
around the late spring of 1978, almost irrespective of the immediate 
prospects on the pay front. 
                                  But we then have two possibilities: ­

a, 
        If we are succeeding in running a relatively tight overall pay 
policy, with prospects for the national earnings average rising over 
the y a  
         r by not much m o r e than 10 per cent, the climate cf 
expectation - and the reality - will be that the rate of price inflation 
is likely to continue downwards. 
                                                  This will obviously provide us with 
the best possible basis on which to c a r r y forward the attack on 
inflation subsequently and to encourage higher growth in the economy. 

b. 
       If, however, the earnings increase is towards 15 per cent (and 
of course particularly if, as would be only too likely in the 
circumstances postulated, financial confidence weakened, our 
international competitiveness was being undermined, and the exchange 
rate was going down) we could expect a renewed increase in the rate 
of inflation. 

## R E N E W I N G T H E A T T A C K On I N F L A T I O N

8. 
          We need to consider what we can do ourselves as Government, and 
whether we can now resume discussions with the T U C and probably also 
with the Confederation of British Industry ( C B I ) for help in securing our 
objective. 

9, 
         A s regards our own action, we must show continued determination 
on each and e v e r y case which comes before us, with particular regard to 
those which threaten repercussions. 
                                                We need to make sure that our inter­
nal procedures secure that significant public sector cases continue to be 
cleared interdepartmentally and if necessary considered by Ministers 
before offers are made. 
                                 M o r e generally, as I have suggested to the Sub-
Committee on Pay Negotiations of the Ministerial Committee on Economic 
Strategy, we should try to tighten the current application of policy, building 
on the degree of relative moderation achieved so far and the falling rate of 
price inflation. 
                      F o r example, we should: 

i. 
re-emphasise the difference between settlements and earnings 
and reiterate publicly and frequently the need for individual pay 
settlements to be well within single figures; 
ii. 
in assessing individual settlements, take a m o r e critical view 
of the possibil ;ties of wage drift and seek maximum allowance for it; 
iii. 
where there is the chance of securing a below-average settle­
ment, in both private and public sectors, this should be encouraged. 
10. 
I would now add three further points for consideration: 

i. 
           we should continue to use discretionary power to withhold 
financial benefits, and even possibly some other benefits, in cases 
arising during the next few weeks; 
                                                                 in suggesting this, I am fully 
conscious of the difficulties of l ong - t e r m use of a policy of this kind, 
and the need for extreme care in handling individual cases (a note at 
Annex B summarises the conclusions on this of the Sub-Committee on 
Pay Negotiations); 

ii. 
         we should avoid making any concessions or accepting any 
special cases during the next few critical weeks; 

iii. 
         we should take particular care to demonstrate firmness in 
relation to all public sector settlements - there are comparatively 
few in the coming weeks but our action on them will be taken as 
exemplary. 

11. 
          I think it is also for consideration whether the time has come to 
renew discussions with the T U C , 
                                                 If we do so, we should certainly also talk 
with the CBI, although I r e g a r d that in present circumstances as being both 
less difficult and less important. 

12. 
         There can be no doubt that we have a basis for a new approach to the 
TTJC. 
          "We can put the following points to them: 

a. 
        The declining rate of inflation has been clearly established: 
all commentators agree that we are on the road to single-figure 
inflation. 

b. 
       We have decided and are about to announce a package of 
m e a s u r e s , to be implemented immediately, which will have 
considerable appeal to the T U C . 
                                           We are able to show that restraint 
in wage demands is not only compatible with, but positively helps, an 
improvement in the standard of living - if wage settlements c r e e p up 
and bring rising inflation in the second half of 1978, then we will have 
little chance of bringing unemployment down and of winning the next 
Election. 

## Conclusion

13. 
I invite m y colleagues: 
i. 

T o endorse the need for further effort to i m p r o v e the prospects of success in the current pay round. 

ii. 
To consider the possible lines of action indicated in this paper 
and suggest others which may occur to them. 
D W H 
T r e a s u r y Chambers 20 October 1977 

## The Application Of Pay Policy To Low Paid Groups ' The Incidence Of Low Pay I - - - - - -

Some 1.8 million full time adult employees are currently earning less than. £40 per week, about 1.5 million of them women. 

It is not certain how many of the 300,000 men are heads of households; 
estimates suggest that the number of such workers with families of two children may be up to about 50,000; 
among the women, also, some will be the main breadwinner i n a family group. 

It is also-estimated that there are some 100,000 
families where the head is in employment and which are eligible for means tested FIS. The Supplementary Commission have recently pointed out, in their evidence on low incomes to the Royal Commission on the Distribution o f Income and Wealth, that low levels of'pay are now constraining the scales of benefits which they would otherwise think appropriate lor those who are not in work. 

## Spj^Ial Provision For The Low Paid

2. 

Pay policies have generally made special provision for the low Paid. It can be argued that some progress has been made thereby, in 
^hat the lowest decile of the earnings distribution, now about £50.per W eek, is some 68 **per cent of the median, when in** 1970 it was only 65 per cent. But such progress is at best slow and the need to make further lmProvements points to a case for making special provision in the current 

P
t
 y 
   round as much as in 1975 and 1976. 
                                            It is true that the TUC did not Pass a HUPE motion for a £50 minimum wage, but this was against a back­

t
v
 f
  o
  u
   n
    d of a return to free collective bargaining in which negotiators 

Could press^ a special case for the low paid. 

J* 
           In the context of the present pay guidelines, the case for special 

Provision rests mainly on the difficulty of defending a restriction to 

- 
 per cent of the earnings of those who are paid £40 or less for a 

formal week. 
               This is particularly true for Wages Council rates, the 

^Oority of which ere around £30, and some well below. 
                                                        Some independent 

Sobers of important councils are known to feel strongly about this and move towards recommendations and statutory orders which Government 

                               This could lead to a serious 
would 
    have no powers to alter. 
                               i
                                n
                                x
                                 f
                                  a 

confrontation over pay policy. 

. 
   .
       ,  
              to allow freedom for 
       n
         w

collective bargaining 
                     below a/w WAW 
                                           .  
                                                                      O R 

^ a 
   modification of the present 10 per 
          . 
                          x. no -npT cent limit to a 
                                                xxmxo 

1 0 per cent whichever is the 
                                                                              higher.. 

5. 
These proposals are however open to doubt in two important respects. 

O U I there is evidence that special increases at the lower end of U e Pay range do not affect more than a small proportion of those who 
^
ee(l help because of family poverty; there is also evidence, contrary 
^ that adduced above, that special provision for minimum pay increases 

 0 e s not in fact improve the earnings distribution in favour of the lower 
P
  a
    i
      d
        . 

## 6. N

Uji the first point, it has bcr-n established that only a very small 
^Portion of the low paid belong to poor households. The figures in uB3?aph 1 above show the relatively small number of families in real u who would be affected by special provisions covering nearly 2 million ers. Moreover, the evidence also suggests that even such benefits 
1ght accrue in the short run are not in fact maintained. While the xstics in paragraph 2 above suggest some slight improvement for the 

^ 
   * 
     decile in the earning range, similar statistics for 
                                                      the 
                                                         lowest one 

.

 
   C ent of the earnings distribution show that there has been no 

vement at all over the years. The lowest percentile of the earnings 

^ibution now bears the same relation to the median as it did in 
                                                               1970, 

             S
p
               suggests that such attempts as there have 
                                                                                                                                been to help the low 

U J-

have worked right through the earnings distribution, raising the 

                     o
                       f
^
                         earnings but meanwhile leaving an impression of an 

e v£l

         Pt
,
            by Government to compress differentials. It was one of the aims 

eDl'

^ *

e guidelines put forward in Cmnd 6882 to provide for earnings 

^.

 
  a s e s in percentage terms, 
                                                                       without any suggestion of compression at 

e r u ^

 Q£
Jtw.

61
 the scale and special provision now intended to provide a 
^ pay increase for the low paid would run counter to this principle. 

## Use Of Discretionary Fowers In Support,Pjmmg^Y^Olicy

At'its discussion on Friday 14 October ( E Y ( P ) ( 7 7 ) 16th Meeting, item 1) the Sub-Committee on Pay Negotiations had before them Spor t s by the O f f i c i a l Committee on Prices and Incomes (attached to E Y ( p ) ( 7 7 ) 6 2 ) **and by the Attorney General ( E Y ( P )** ( 7 7 ) 6 5 ) . 

*he Sub-Committee noted the p o l i t i c a l and l e g a l d i f f i c u l t i e s and dangers inherent in the present unsatisfactory position, resulting from the use of measures which were not purpose-built to support the pay policy and from the lack of a precisely defined 
* 
Pay l i m i t . 

There was general agreement that the Government could 
*ot rely on the use of discretionary powers as the solo or main instrument of pay policy. 

and that 
-they were not an 
^ f e c t i v e substitute for the support of the TUC and CBI. 

^ e y were weaker than the sanctions available in Rounds 1 and 2 
and the price sanction was almost non-operative. 

While i t was true 
^ a t in some instances as in the Mackies case the Government could a*gue that the pay policy was entirely consistent with the original purposes of the instrument being used, no general system Qf legal sanctions could operate in the absence of a r i g i d Pay formula and in these conditions the only available course vas to handle each case carefully on i t s merits. 

It w s s therefore agreed that : 
( i ) 
while the Government could not rely on discretionary Powers as the sole or main instrument to enforce the pay policy x t could not afford to abandon their use at this stage; 
i i ) 
departments should he given"fresh guidance on the policy to he adopted in threatening and using discretionary powers over the coming months. 

In particular they should avoid making threats which could not he substantiated; 
seek 
:' 
legal advice in a l l cases of doubt; and take great care in how they were applied making sure they had legal clearance. 

The Sub-Committee noted that the problems raised by the use of discretionary powers and possible options open in the longer­ term would be covered in the Chancellor of the Exchequer's-submis­
sion to Cabinet on the future of pay policy. 

## Jment Is T H E P R O P E R T Y O F H E R B R I T A N N I C M A J E S T V S G O V E R N M E N T

CP(77) 97 
C O P Y NO 
20 October 1977 

## C A B I N E T N I N T H R E P O R T Of T H E S E L E C T C O M M I T T E E On E X P E N D I T U R E 1976-77: D R A F T G O V E R N M E N T Response Note By The Chief Secretary, T R E A S U R Y

1. 
           The Ninth Report of the Expenditure Committee, 1976-77, was 
published in July and comprised an introduction by the main Committee 
and chapters prepared separately by the specialist sub-committees. 
                                                                                                        The 
subjects covered by the chapters w e r e : Defence and Overseas Services; 
Export Credit Finance: Housing: 
                                                  Employment of Civilians for P o l i c e 
Purposes; Health and Personal Social S e r v i c e s ; 
                                                                         and H M Stationery Office. 
The chapters varied considerably in content: aome dealt with policy; 
                                                                                                        some 
with presentation in the public expenditure White P a p e r ; 
                                                                                    and some contained 
both kinds of recommendations. 

2. 
         The attached response has been prepared by the T r e a s u r y and other 
Departments concerned; 
                               and has been agreed at official l e v e l . 
                                                                             Since it is 
made on behalf of several Departments, it is proposed to publish it as a 
White P a p e r . 
                  I am therefore circulating it for the Cabinet's information: 
subject to any comments I r e c e i v e by 26 October, I will arrange for the 
response to be published as a White P a p e r as soon as possible. 

J B 

T r e a s u r y Chambers 

20 October 1977 

# Reply By The Government To The Ninth Report From The Expenditure Committee, Session 'L976-77

## Introduction

1. In their Ninth Report of the l9'/b-77 Session, the Expenditure Committee­
considered a number of programme chapters in Part 2 of the White Paper setting out the Government's expenditure plans ICmnd **6/21).** The Government welcome the contribution which has been made by the Committee in directing public attention in this way to the objectives of selected expenditure Programmes. 

2* The Government have given careful consideration to the observations made by the various sub-committees. This White Paper gives the Government's reply to 

the various recommendations. The Committee pointed out in paragraph k of 
                                                                          t
                                                                           r
                                                                           i
                                                                            e 

report that a number of these recommendations concerned the provision of additional 

information, and suggested that it might often be preferable for such information 

to be provided in separate departmental papers rather than in the 
                                                                       public expenditur 

White Paper itself. This general observation has been taken into account in 
                                                                           the 

Government 
          *s response to the recommendations concerned. 

## Chapter I; Defence And Overseas Services Defence Recommendation

Treasury and Ministry of Defence to consider carefully inclusion in the Public Expenditure White Paper, and possibly also in the Statement on Defence Estimates, a table setting out details of all changes in the Defence Budget for 1975-7** 
and subsequent years caused by public expenditure reviews or policy decisions 
(paragraph 1.4). 

3* The Ministry of Defence will be ready to respond, by way of written evidence, to any future requests from the Committee for tabular information of this nature, delusion of such information in the public expenditure White Paper would 
^balance a document intended to explain changes in the Government*s expenditure 

Piant, 
      during the previous year and 
                                        not to give a full historical record of 
                                                                                       all 

changes during a longer period. With the passage of time a financial presentation 

starting from 1973 would become increasingly inappropriate. 

Notification of cases in which compliance with the cash limit on defence spending 
has been possible solely or largely as a result of slippage or offsetting savings 
(paragraph 
            1.5)­

k. 
     The Committee will be informed of instances where slippage has played an 

identifiable significant part in assisting the Ministry to keep within its cash limit or where this has been achieved only by deliberate reductions in the 

programme. It is often difficult in practice to draw a clear distinction between unexpected slippage and the additional delays occasioned by the pressure of the 

cash limit. 

## Overseas Aid And Other Overseas Services Recommendations

Changes since the previous White Paper to be broken down by sub-programme 
(paragraph 
1.7); 
Significant changes to be explained in the Part 2 text (paragraph 
1.8); 
e Inclusion of a table in every Public Expenditure White Paper showing the cumulate effect of changes in each programme for each year (from 1973-7^ onwards) since th original estimate was drawn up (paragraph 
1.8). 

16 
5- 
The Government agree that explanations of significant changes in this program"
e since the previous White Paper should be included in the text following the tabl at the head of the programme chapter (table 2.2 in Cmnd 6y2l). Inclusion of sX^ 
the tabular information requested could tend to make the White Papers unmanageably large. This information may best be given annually in the form of regular written evidence to the Committee. 

## Chapter Ii; Export Credit Finance Recommendation

The costs of the interest support scheme should appear in the Trade, Industry and Employment table of the Public Expenditure White Paper (paragraph 2.^7). 

if 
6. 

The Government accept the recommendation that interest support costs for rate export credit should appear separately in the international trade section the trade, industry and employment table of the White Paper. The corresponding 
, H i t entry in respect of the interest support costs for the home ship-building crea*-
T t  
i
5 
will be made in the general support for industry section of the same table. * 
hoped to include the figures in the next White Paper. 

' Paragraph **2.19** of the report states that the Department of Industry do not e part in discussions about the possible mutual effects of trade policy and e xPort credits. 

The Department of Industry do in fact participate in discussions 
0 t l the factors to be assessed in the granting of export credit. 

## ^ 2 A I N - Housing Commendations

1gUres of public expenditure on housing should be shown in greater detail 

## ^ G R A P H S Jj.6, 3.7 And 3.8).

The Government accept in principle the recommendations that more detailed 
^^yses should be made available of the figures in the housing table 
^able **^.7**  i  Cmnd **6/21);** that the distinction between capital and current n xPenditure should be clear; and that expenditure on goods and services should l stinguished from that on transfer payments. 

A a e layout proposed by the Committee in paragraph **3-9** w i l l therefore be adopted Setieral for the housing table in the next public expenditure White Paper. 

However, local 
, authorities w i l l have greater freedom to determine p r i o r i t i e s within the new A n S investment programme system and the Government propose to issue block O cations which w i l l cover programmes separately identified at present. 

Further, n after block allocations for capital expenditure have been made for a 
^-cuiar year, authorities w i l l have the a b i l i t y within defined limits to increase 
^nditure of one kind i f they reduce expenditure of another. 

Any detailed nment projections for the survey period would therefore be no more than N a t i v e (except in the aggregate) and, particularly for the l a t e r years, less 
^ l e d expenditure analyses might accordingly be more helpful. 

Further consideration 
^ave to be given to this point as the new system of capital allocations i s 

S l o p e d . 
10. 
      rn 
          . 

^  
   x o help local authorities to make fuller use of the White Paper, i t i s 

^ C essary to show how the figures in the housing table can be reconciled with 

S e with which they are familiar in the rate support grant settlement and ewhere. 
                            Such a reconciliation was circulated to local authorities in England 

a X e  s in April (DOE circular 37/77) and recent evidence suggests that this i s 
eetirig the need to which the Committee has drawn attention. 
Subject to 
r
^  
*  oonsultation with the local authority associations, the Government propose 
l ssue a similar reconciliation each year in explanation of the public expenditure 
^  
raper figures. 
In Scotland, information i s provided to local authorities 
o uSh the Convention of Scottish Local Authorities. 
In view of the bulk of the 
A a i involved i t seems better to provide i t in these ways than in the White 
Additional supporting information should be provided in the Public Expenditure a X 1^
White Paper and in an annual Housing White Paper (paragraphs 3*11, 3*16
3.18). 

11. 

The Government accept that mortgage interest relief is relevant to consideration of housing policy and will include in future White Papers estiva of the cost of such relief for past years and the year of publication. 

The results of a study in **197^,** to estimate the effect on supplementary benefit expenditure if housing costs were excluded from the calculation of requirements, will be included in the next White Paper. Information will also be provided of the amount of loans outstanding under guarantee by the Housing Corporation. The Government will continue to provide a substantial amount of non-financial information about past performance and will keep under review the possibility of increasing the amount of sucfl information. 

12. 

More generally, the Government share the Committee's view that there is a need for information on housing to be collected together and presented systematically in addition to the regular publication of data as in housing and construction statistics. They accept that the housing chapter of the public expenditure White Paper should include information relating directly to table **2.7** and will consider what further information could usefully be provided. They do not consider, however, that an annual housing White Paper 
 
0  
i tied to the public expenditure White Paper would be the most effective way presenting a wider range of material. The Green Paper on Housing Policy 
(Cmnd **6851)** foreshadows the establishment within Department of the Environmetf of a special unit to analyse information about housing and to monitor e progress. It will be one of the functions of that unit to produce from tim to time analyses over the whole housing field bringing information together and updating material given in the Green Paper and Technical Volume. This will help to maintain the wide range of background information now available against which public expenditure decisions and government statements of housing policies can be considered.. The comparable arrangements" 
in Scotland and Wales will have to be considered further in the light of the proposals for devolution. 

## Chapter Iv; Employment Of Civilians For Police Purposes ^£Commendation

study on "civilianisation" should be completed as quickly as possible, and its results be reported to the House (paragraphs 4.17 and 4.25). 

13. This recommendation is accepted. The area covered by this chapter of the 
^port has involved, and will involve, difficult decisions on the best use of resources for the police service. The restrictions on goods and services and 
0Ji civilian staff were suggested to police authorities as being the least harmful means of keeping within the limits of expenditure laid down by the Government and explained in Cmnd 6/21. 

The economies in the police service were a*t designed to secure a reduction in total police expenditure but rather to help accommodate the higher cost of particular items such as police pensions (which 
^ n l y reflects an increase in the number of police who have retired); total expenditure on the police service is still planned to rise in real terms. 

The Government remain of the view that, within the police service, priority should be given to bringing the strengths of police officers up to authorised establishments, even if a small proportion of the additional officers has to b* used on tasks normally the responsibility of civilian staff; if the number o f Police officers exceeds the estimated growth, provision will be made for a*litional expenditure within authorised establishments. Any growth in expenditure 
0 * other parts of the police service has to be limited by the country's general economic position and at present must be kept within the programme in Cmnd 6721. 

*h* local authority associations, with the advice of their financial and Professional advisers,accepted the priority for the recruitment of police officers reluctantly agreed that restrictions on civil staff and cadets would have a I ess damaging effect on operational policing and force efficiency. 

15- Until the current rate support grant negotiations have been completed it is n o t possible to say what the position will be in the coming financial year. The V i*ws of the Committee in paragraphs 4.16 and 4.17 will be taken into account in 
^ i n g any reassessment necessary, as well as any views which may emerge from t h e study of civilianisation, arrangements for which are now going forward. 

## ^ £ £ A A S G U D A T I O N

A fun e w should be made of cadet recruitment both from a qualitative and r e v i quantitative point of view (paragraphs 4.23 and 4.26). 

16. 

This recommendation is being implemented. 

The general principles set out in paragraphs 13-15 
above apply with equal force to police cadets, who do not make any appreciable contribution to immediate operational efficiency. 

Although the unit cost of a cadet is £1,607 per annum, this figure does not include the cost of training; the overall cost of passing a 1
6 year old cadet through to 

attestation as a police officerat 1
                                   8
                                    -
                                    J is of the order of £6,000-£7,000. 

17. 
      Consideration was already being given to an enquiry into the need for 

cadets before the Committee began its work. The Home Secretary proposes 
                                                                       to set up a working party of the Police Advisory Board for England and Wales to consider the matter with the following terms of reference: 

"To consider the place of a cadet system in contributing towards obtaining 

sufficient recruits of the right quality to enable 
                                                  force strengths to reach 

authorised establishments". 

It is hoped that it will report in time for any changes to be reflected in the 

September 1978 intake of cadets. 

## Chapter V: Spending On The Health And Personal Social Services Social Security Recommendation

The Department of Health and Social Security to improve its forecasting of the benefit implications of the levels and patterns of unemployment (paragraph 5*8)* 
18. 

Every effort is being made to improve the forecasts of expenditure on benefit' 
Considerable research has been undertaken, as a result of which revised and more s complex estimating techniques have been developed. 

Past experience is not alway a reliable guide and this makes forecasting difficult. 

The cost of benefit at any unemployment level depends, inter alia, on the number of the unemployed who are women, how many of them are married, and how many of the total men and women on the register have exhausted their entitlement to unemployment benefit or are not entitled to benefit because they fail to satisfy the contribution conditions or for some other reason. 

Where unemployment benefit is not payable or is insufficient to meet a person's or his family's need, supplementary benefit may be payable. And all of these factors are variable because of the large turnover of people registered as unemployed, even when the level of unemployment is high. 

*

   n future the assumptions made when making an explicit provision for uprating 
^Provements should be clearly set out in the White Paper. There is no reason 
. 
     * 
          the social security programme should have its own private contingency reserve 
paragraphs 5.11 and 5-13). 

19. The Government have noted the Committee^ views on the presentation of the 
social security programme, and this will be kept under review 

0*

for the reasons previously given to the Committee, the Government see considerable 

Advantages in publishing the economic assumptions underlying the expenditure 

Ejections. Future expenditure on the individual benefits was expressed in the White 

P

ei" in terms of the average levels of benefit during 1976-77, which amounts to 

Ssuming increases from year to year at the same rate as prices. In practice', 

aj- expenditure on the social security programme is determined by a number of 

actors which cannot be provided for with certainty in advance. The commitment 

increase pensions and other long-term benefits in line with the increase in 

a r n *

n g s , where this exceeds that in prices, 
                                                                                                                            implies a trend of improvement in 

e s e benefits in real terms; and the real cost of benefits in the event will 

"

S o be affected by the actual movement of prices. In addition, the demand 

^
o
 r y
   , 

oenefits will be substantially affected by demographic and economic factors. 

place of the broad allowance described as providing simply for uprating 

Movements in previous White Papers, it was, therefore, decided to make a 

^

neral provision for variability in the factors likely to affect the cost of 

5c,cial security programme. This provision could have been added to the l ngency reserve and not shown separately in the social security programme. 

ince it represented the Government's judgement of the most appropriate 

Ovision for the cost of the social security programme taken as a whole, its clusion within the contingency reserve would have been less informative, and 

e c i the function of the contingency reserve as an instrument of operational 

c^troi. 

## General Comment

22. 
     The Committee lay emphasis in their Report on the 
                                                                 need for 
                                                                            more detailed 

analysis of the costs and benefits of the 
                                          health and personal social services, 

for more specific criteria.for 
                              tneasuringprogress towards objectives and 
                                                                        for 

indicators of performance of different kinds. The Government wish to improve 

and develop such measures, which provide the basis for 
                                                       the proper distribution 

of resources and planning of services. This work is subject to two constraints: 

there is great difficulty in defining and 
                                          measuring the final output of health 

services, and a limit to the capacity of the Department to undertake the analysis 

and refinement of data. Of necessity, therefore, measures of an intermediate kind ­

levels of provision of facilities, throughput, etc 
                                                   - often have to be used and 
                                                                               the Department must concentrate its efforts on what will serve practical purposes most 

1 

directly and immediately. But the Government acknowledge the 
                                                              need for the longer-tern

e 

to improve analysis and to develop new indicators, and within the resources availabl

will continue both their own 
                            work and support for research by others. 

## Recommendation

The Department should make sure that it is in a position to monitor unplanned cuts that may result from the operation of the cash limits system and to check that they are implemented in the least damaging way (paragraph 5*15). 

23. The Department guides and controls the health authorities primarily through the planning system. The authorities are responsible for implementing their plans within the resources provided. The Department looks to the authorities themselves to secure any economies that may be necessary to comply with cash limits in whatever way the^ 
judge least damaging to the planned pattern of their erit services. The effect of the authorities
1 decisions can be monitored by the Departm in the subsequent planning round when any measures necessary to deal with imbalances 
5 
in the provision of services can be considered. If the operation of the cash limit system appeared likely to have serious and immediate effects on standards of patient care during the current year, the Department would expect to be consulted by the authorities concerned about the action required. 

## Recommendation

Details of the income from personal social services charges should be included in the White Paper (paragraph 5.17). 

^Portunity and information should be given for more discussion in toe House of 

Co**ons ^ 
                              elsewhere of the 
                                                                                 policy options when imposition of NHS 
                                                                                                                                                                                                    and personal 

S 0 !*al services charges is being considered (paragraph 5-19). 

?5. Opportunity for 
                                                                 discussion and for 
                                                                                                                                   the 
                                                                                                                                                 provision of information about the position of 
           NHS charges is presented when the necessary statutory instruments 

the NHS (Consolidation) Act, 1977 are laid before Parliament. Charges for 

? e ^ n a l social services are essentially a matter for individual local authorities. 

A s indicated in the Green Paper on Local Government Finance (Cmnd 6813), the 

^emmant have accepted the 
                         Layfield Committee's recommendation for 
                                                                a joint review 0 f central and local government policies towards charging for 
                                                                                                                                                                                             local services. 

review will cover the personal social services and the Department of Health 

^ Social Security will take part in 
                                   it. 

## ^Amendation

p r^
o rities between current and capital spending should be reviewed without 

d
e
d
e
l
l
y to ascertain whether an imbalance which ought to be corrected has been 

a t e c i (paragraph 
5.2h). 
Ane balance between current and capital spending is one of the issues to 
0nsidered in a review of the use of health capital and of the revenue consequences aPital investment now being undertaken. 

## ^Mendatd^N

Partment should set in train studies to examine the relationship between 
^
6 t I )ent costs suitably defined and patient care (paragraph 5-26). 

## ? ?" Th N

ne Government believe that efforts to secure the most cost-effective use 

                e r a e n ^
i
 f
  t
    d
     -
                                 skills must be based on careful and objective appraisal by 

a ^
lvidual health authorities, who will have to take account of many local 

 in deciding where management costs can 
                                        be reduced without damage to 
t services. The outcome of these reviews will be monitored both in 
                                                                   the 

^

   u a l m 
t 
               Planning cycle 
                                                        andby the Department against the national target of a 
            cent reduction to be achieved by the end 
                                                                                                                                   of 1979-80. This continuing

          o s
,
              e examination of management costs will take account of the need to 

^ep j 

1 1

reasonable balance the costs of services for 
                                             patients and of management. 

studies would be unlikely to establish any clear-cut and generally 

r elationship between management costs and such indicators as level of 
i Q n , throughput, waiting lists and unit costs, especially as 
a variety 
C a l factors would have to 
be taken into account. 
The Committee should receive regularly figures from DHSS which distinguish between increases in unit costs that reflect lower manpower productivity and increases that reflect improved resource provision for patients 
(
. 

paragraph 5*31)* 
28. 

The Committee will be provided with regular figures derived from the Departments monitoring of unit costs. Where there has been improvement in the conditions of service of staff it is not easy to determine to what extent increased costs should be ascribed to this, rather than to improved patient care. For example, if junior doctors were to work fewer hours this might benefit doctors (by increased leisure) and also patients (by having less tired doctors attending them). The Department is studying historic data with a view to improving the method lor analysing the causes of increases in unit costs, and will keep the Committee informed of the results. 

## Recommendation

The expenditure planning and priority-setting of DHSS should be synchronised so as to enable Parliament to examine the relationship between the two 
(paragraph 5*32). 

29. 

The Department's annual reassessment of priorities is in fact linked with the expenditure forecasts in the White Paper. In future years the aim will be to issue planning guidelines annually to health authorities in March, indicating resource assumptions for the forthcoming public expenditure period and to provide regularly for a forward year within the survey period an illustrative projection of the average level of provision and current expenditure on various services that is consistent with priorities and with planned public expenditure. Local authorities will receive similar guidance as respects the personal social services. It is hoped that this timing will facilitate examination by Parliament. 

## Recommendation

The Department should publish its analysis of the regional responses to the 
1976 Consultative Document, and an explicit statement of the criteria used in deciding whether or not local divergencies from national priorities are justified (paragraph 5*33)* 
^' Revised policy guidance published by the Department in September 1977 
lllcluded  summary of comments on the Consultative Document (including those a y regional health authorities) and also a brief analysis of the main points 
"^ging from the strategic plans submitted by the regional health authorities s
^  year. A judgement as to whether local divergencies from national 
^ioriti  are justified can only be made after discussion between the Department es wie particular region, and it is not possible to lay down rigid criteria for A fuller analysis of the regional plans will be published early in 1978, blowing discussions with individual regional health authorities. 

## Lamentations (1)

i d e 
3
6 a rly set out the cost of policies so as to allow Parliament to ftQ
 
l r y costs which arise from new commitments as distinct from those arising on-going commitments; 
c :*-fy criteria for measuring the progress towards achieving the policy 

o
b
i 
^
ctives implicit in new commitments; 
evl ^ovide a more detailed analysis of who benefits in what ways from public S u t u r e . 

p ^ g r a p h 5.35) 

## 3 1

commentary in Cmnd 6721 (Part 2) on the health and personal social 

          C e  
              s
,
                programme gave some indication of how far expenditure plans catered 

l , ^

 
       e
         w

t
            as distinct from on-going commitments. The Department will continue 

Provide this information and consider how it might be improved. Most of the 

eveln 

-
"
 -
  o
  p
   m
    e
     n
     t
      s in the health and personal social services programme do not take 

o^m of specific new commitments, but are developments of existing services. 

0 f t
       h 

         n e
^
             s e , the annual planning guidelines and the programme budget issued 

SUlarly ^ 
               Department give a better indication of the projected 

opment of services than can be provided in the public expenditure White Paper. 

W
  l H also give a measure of progress towards policy objectives, and an 

^lon of the projected distribution of resources between different groups 

esult of these developments. Copies will be placed in the Library of the 

* Further information on the distribution of resources and on benefits 

11 tev. 

ms of services and facilities will be available from the analysis of regional 

                               r
                                 o
                                    m
voi '  
                           ^ 
                                      other material published from time to time, such as the annual 

m
  e of Health and Personal Social Services Statistics and the Hospitals In-Patienti 

Suiry. 

The Department should begin now to develop, for the longer-term, indicators 
of performance. The Department should in particular develop ­

(a) Measures of access to show how far people in different areas have the 

same chance of obtaining treatment of care and whether access is improving 
over time. And 

(b) Measures of quality provision to show improvements (or deteriorations) 
in the physical environment, amenities and patient satisfaction 
(paragraph 5*36). 

32. The Government recognise the importance of measures of the kind suggested. 

Some indicators are already in use within the Department and in the NHS to 

monitor the development of services and to establish targets for the distribution 

of financial resources. Planning the best use of resources available for the health 

and personal social services will always involve decisions and judgement that 

cannot be precisely quantified. The levels of provision of specific facilities and 

the length of time on waiting lists are also used as indicators, monitored regularly 

and published in DHSS Annual Reports and statistical publications. Indicators of 

relative need for resources for hospital and community health services have been 

developed by the Resource Allocation Working Party. Througn the NHS planning sys Department will be able to analyse progress towards greater equality of provision regions, areas and districts and changes in the balance of provision of different types of service for different patient groups. In the personal social services lev^
of provision are similarly monitored, and attempts are being made to refine the indicators of need and to improve the distribution of the rate support grant. 

33. As indicated in paragraph 22 above, there are difficulties and constraints in the further development of indicators. The methodological problems of measuring performance and patient satisfaction are considerable; the work is costly and uses scarce staff resources. But some work is being undertaken witnin the Department and research elsewhere is being supported. The Department will continue these efforts. 

## Chapter Vi - Stationery And Printing (Home) Recommendation

The introduction in principle of repayment and a trading fund for HMSO 
(paragraph 6.16). 

As was stated in evidence the main objective in the period immediately ahead must be the development of the new management accounting systems and fading accounts. These will enable more information to be made available Q Parliament and the public. These developments will not prejudice the t question of introducing general repayment and a trading fund; indeed they are a Pre-requisite of these developments, decisions on which will need to be taken 
11 the light of experience gained in operating the new management accounting Procedures. The views of the Committee will be taken fully into account at t he time. 

## ^£Commendation

dicing policies should be considered and any price reductions adequately advertised (paragraph 6.19). 

Pricing policy for government publications is kept under continuous e view, and any price reduction will be advertised as the Committee recommends. 

*e Government agree with the Committee that the financial aim (break-even taking 
0 t l e year with another) conflicts with the widest possible readership of Publications. The price of the daily parts of Hansard is already below the marginal cost. The number of copies sold to the public is amall 
(currently about 2,000) and has been declining over the last 20 years. 

* 
Price reduction could stimulate some increase in sales, but would 
^crease the overall cost to the Government. As regards other HMSO 

Plications, if £kg  
                  p i 
                       t  the public could be reduced, additional sales 
                   r
                     c e
                         0

"
u
 -
  S
  h
   t follow, the revenue from which could suffice to offset the cost of producing 

the extra copies. But if the price reductions were brought about by making 

the copies produced for official use bear all the initial publication costs, 

the overall effect would again be to increase the net cost to government of 

e o vernment publishing. 

## ^^Ommendauon

'JtL 
a e annual report should give a detailed account of all Stationery Office ctivities. The General Sub-Committee should be consulted before decisions 
6 taken about the form of the accompanying accounts (paragraph 6.22). 

56. 

The Government w i l l take account of the Committee's views in reaching final conclusions about the content of the annual report, and in determining the form of accounts. 

57. 
     The Committee also suggested that the cash limits fixed for H
                                                                             M
                                                                               S
                                                                                O for 
                                                                                       1977­

appeared to be lax, in that they amounted to £116 million against expenditure in Main Estimates of £90 million. 
                                   The cash limits covered some expenditure on behalf of the National Insurance Fund which in the Estimates, unlike the 

cash l i m i t s , i s offset by receipts from the Fund. 
                                                          The amount provided in the 

Estimates, comparable with the figure of £116 million in the cash l i m i t s , i s 

therefore £100 million and not £90 million. 

s 

CP(77) 98 
C O P Y NO 
21 October 1977 
C A B I N E T 

## P A Y P O L I C Y Memorandum By The Secretary Of State For Employment

1. 
          The Chancellor of the Exchequer r e f e r s in paragraph 5x. and 
Annex A of his paper (CP(77) 96) to the case for some modification of the 
general limit on the level of settlements for the low paid. 

2. 
         This case was set out m o r e fully in the paper attached to my minute 
of 30 September to the P r i m e Minister which was circulated to my Cabinet 
colleagues. 
                 M y proposal is that we should not seek to l i m i t any increase 
to less than £4 for a normal week. 

3. 
         This would be m o r e than 10 per cent for die 1.8 million full-time 
adult employees currently earning l e s s than £40 for a normal week, up to 
13 per cent for those earning £30. 
                                              29 per cent earn l e s o than this. 
More details of the distribution are given in the Annex to this paper. 

4. 
          If fully taken up, which is unfortunately doubtful, this would of 
itself add only 0. 1 per cent to the national wage and salary bill additionally 
to the current policy. 
                                 I do not believe this v e r y modest flexibility for the 
relatively small numbers of w o r k e r s at these v e r y low l e v e l s would have any 
significant repercussions. 
                                       It is of a quite different o r d e r f r o m the £ 2 . 50 
minimum attached to the 5 per cent Stage 2 l i m i t which benefited the much 
more substantial proportion of the labour force who w e r e then earning l e s s 
than £50 a week, and by far m o r e than 5 per cent. 

5. 
          M o r e o v e r in reality we have v e r y little choice in the matter. 
                                                                                                     Over 
half those concerned are covered by Wages Councils. 
                                                                                The independent 
members of the most important Councils have already indicated to m e in the 
strongest t e r m s that they propose to support w o r k e r s ' representatives' 
claims exceeding 10 per cent for those on these l e v e l s of earnings, which they 
regard as quite consistent with the G o v e r n m e n t s national earnings objectives. 

6. 
          Unless I a m able to dissuade them f r o m their cause, which i s I think 
v e r y unlikely, the Councils will accordingly confirm statutory o r d e r s , which 
I have no power to delay or o v e r r i d e , in contravention of the G o v e r n m e n t s 
Policy. 
             My colleagues have already agreed that in such circumstances there 
could be no question of applying sanctions to the employers affected. 

7. 
          In m y judgment the repercussions of such clear breaches would be 
more damaging than a well-defined concession on the lines proposed in 
paragraph 2 above. 

A B 

Department of Employment 

21 October 1977 

## Estimate Numbers Of Employees In Paye Schemes With Gross Earnings Excluding Overtime Pay O F Less Than £ 1 Per Hour In April 1977

Full--Time 
P a r t - t i m e 
Total 
Number 
Percentage 
Number 
rr 
Percentage 
( 0 0 0 ' s ) 
of 
a l l 
( 0 0 0 ' s ) 
of 
a l l 
( 0 0 0 * s ) 
of 
a l l 
employees 
employees 
employees 
21
i over 
a
n
c
Male 
290 
3 
100 
42 
380 
4 
female 
7 4 0 
19 
1020 
46 
1760 
2 9 
J
f
' 18 to *w 
Male 
200 
34 
10 
81 
2 1 0 
35 
female 
280 
46 
10 
57 
290 
46 
founder 18 
Male 
230 
88 
10 
89 
2 3 0 
88 
female 
220 
87 
10 
89 
2 3 0 
87 

y
?
A
 T
  E
   D EARNINGS "DISTRIBUTION IF FULL TIME EMPLOYEES IN PAYE SCHEMES WITH GROSS 
    EXCLUDING OVERTI^IE OF UNDER £40 PER WEEK IN APRIL 1.977 

Under £ 3 0 
£ 3 0 - £ 3 2 
£ 3 2 - £ 3 5 
£ 3 5 - £ 3 7 
£ 3 7 - £ 4 0 
T o t a l 
29% 
1 1 % 
l90/o 
16% 
25% 
100% 

1 
Between A p r i l and July 1
.
9
7
7 average earnings g e n e r a l l y increased by a 
l i t t l e over 1%. 
3 The estimates do not include a. 

people on the margins o:f the labour market with earnings below PAYE l i m i t s . 

b. 

those o f f work and r e c e i v i n g no pay at a l l f o r the r e l e v a n t pay­
/
period.. 

c. 

others who did not r e c e i v e f u l l pay for the whole of the pay-perioc D
E New Earnings Survey, CP(77) 99 
C O P Y NO 
25 October 1977 
C A B I N E T 
T H E QUEEN'S S P E E C H O N T H E P R O R O G A T I O N O F P A R L I A M E N T 

# Notfc By The Secretary Of The Cabinet

I circulated under cover of CP(77) 95 for the information of the Cabinet a 
copy of The Queen's Speech on the Prorogation of P a r l i a m e n t in the f o r m 
in which it had been submitted to the Counsellors of State. 
                                                             The Speech 
has subsequently been revised to take account of The Queen's wish to have 
the opening paragraph transferred from the Prorogation Speech to the 
Opening Speech and has accordingly been resubmitted to the Counsellors 
of State. 

Signed 
        JOHN HUNT 

Cabinet Office 

25 October 1977 
 
C O P Y N O
CP(77) 100
 .81 
31 October 1977 
C A B I N E T 

## T H E Q U E E N S S P E E C H O N T H E O P E N I N G O F P A R L I A M E N T Note By The Secretary Of The Cabinet

I attach for the information of the Cabinet a copy of The Queen's Speech on the Opening of Parliament :.n the form in which it has been approved by the Counsellors of State on behalf of The Queen. 

Signed JOHN HUNT 
Cabinet Office 
31 October 1977 

## My Lords And Members Of The House Of Commons,

% husband and I look back with delight and gratitude on the events which marked My Silver Jubilee at home and overseas, and the visits which we made to many parts of the United Kingdom and the Commonwealth. I look forward to paying a State Visit to the Federal Republic of Germany next May and to opening the Commonwealth Games in Edmonton in August. In pursuit of peace and collective security,the United Kingdom remains committed 

"
t
 o 
  the aims of detente, disarmament and the prevention of the spread of nuclear weapons. My Government reaffirm their policies in international 

relations and defence, and will contribute fully to the work of the United Nations, the Commonwealth and the North Atlantic Alliance. 

While working for policies which fully reflect the interests of the United Kingdom, My Government will play a full and co-operative part in 

"
t
 h
  e activities, the development and the enlargement of the European Econonic 

Community, 

They will continue to contribute modern and effective forces to the North 

Atlantic Treaty Organisation, and to play their full part in the current 

Alliance studies of East/West relations and of the Alliance^ defence pro­

grammes. They are participating constructively in the important meeting in 

Belgrade which is being held as part of the follow-up to the Final Act of the 

Conference on Security and Co-operation in Europe; they will abide by the Provisions of the Final Act, and continue to seek fulfilment of all its Provisions by other signatories. They remain committed to the pursuit of 

detente in their relations with the Soviet Union and the coun+riee of 

Eastern Europe. 

% Government will continue to take part in international efforts to combat 

recession and promote a more stable world economic order, and a fairer 

distribution, within an expanding world economy, of the world's wealth between ^ich and poor nations; they will maintain their special efforts to help the 

Poorest countries and the poorest people. 

They will work for a j
                     u
                      f
                      f
                       f
                        c and lasting peace in the Middle East, and 

the further inprovement of relations between tho United Kingdom and 

all the countries in the area. They will continue to co-operate with 

all concerned in the search for a lasting scttloment in Cyprus, where 

they welcome the resumption of intercommunal talks. 

Efforts will be maintained to achieve a negotiated scttloment in Rhodesia, 

on the basis of "y Governments proposals published in September this 

year, which are designed to provide a secure future for people of all races. 

;
'
 .
 y Government will be ready during the current session to introduce 

legislation to enable Rhodesia to proceed to independence 
                                                         on this basis. 

## Members Op The House Op Commons,

Estimates for the public service will be laid before you. 

## Kt Lords A1Id Members Op The House Op Commons,

The strengthening of the country*s financial position and balance of payments opens the prospect for a continuing improvement in tho economy and the maintenance of financial stability. My Governments main objectives are the speediest possible return to full employment and a sustained growth of output. In order to achieve those objectives they will give the highest Priority to further reductions in the rate of inflation. 

t
!

y Government will continue to take action to reduce high unemployment through manpower measures and to promote industrial training. 

They will ensure that the benefits of North Sea oil are used to achieve a lasting improvement in our industrial performance and therefore to provide more jobs, higher real incomes and improved public services. 

% Ministers will continue to work in close co-operation with the Trades Union Congress and the Confederation of British Industry, internationally My Govornront will continue to urge that tho stronger economies should take the load in promoting a sustained growth in the world a n & that adequate official finance should be made available on appropriate terms to countries with continuing deficits in the balance of payments. 

% Government remain firmly committed to establishing directly elected Assemblies for Scotland and Wales. Separate Bills will be introduced for this purpose. 

In Northern Ireland My Government will maintain their aims of establishing 

a 
 devolved Government acceptable to both parts of the community; a
                                                                  n
                                                                   d 

eradicating terrorism by the prosecution through the courts of those 

responsible for violence and by continuing to develop the effectiveness of 

Royal Ulster Constabulary, supported by My Armed Forces. My Government 

attach special importance to co-operation on matters of security with the 
G
 o
  v
  e
   r
    n
     m
      e
       n
        t of the Republic of Ireland. They will continue to seek measures 

t o strengthen the economy of Northern Ireland and improve its social 

environment. 

legislation providing for the election of United Kingdom members of the 

European Assembly will be re-introduoed. 

^ t h e r consultations will be held on industrial democracy, with a view 

to 
  producing proposals which should command general support, and My 

listers will continue directly to encourage the development of industrial 

democracy in the nationalised industries. 

There will be a review of the legislation and institutions governing ^petition policy, to see that this makes its maximum contribution to 

^proving industrial efficiency. 

% Ministers are considering further measures to assist small firms. 

Th-ey will also hold consultations about encouraging profit-sharing through he tax system. 

Legislation will be brought forward to amend company law. 

4
B i U will be introduced to provide public funds to finance payments to redundant shipbuilding workers in the public sector. 

Legislation will be introduced providing for changes in the structure of the electricity industry and other natters affecting the industry. Continued encouragement will be given to the efficient production processing and distribution of food with the aim of meeting a greater proportion of our national needs from United Kingdom agriculture. My Ministers will seek improvements in the operation of the Common Agricultural Policy. 

My Government will continue to seek major reform of the Common Fisheries Policy, They will aim to secure conditions which will meet the needs of 

"
t
 h
  e 
   British fishing industry, conserve fishing stocks, and ensure adequate 

supplies to the consumer. 

A Bill will be laid before you to increase the borrowing powers of the 

Civil Aviation Authority and British Airways, to provide for a levy to 

finance aviation security and to amend the civil aviation Acts. 

Legislation will be introduced for the further development of transport 

Policy to meet economic and social needs, including those of rural areas. 

Legislation will be brought before you to provide assistance for first­ time home buyers. 

A Bill will be introduced to renew and revive the inner urban areas. Legislation will be introduced on the composition and certain functions of 

"
t
 h
  e General Medical Council. In addition to My Government's full programme of constitutional and other 

reforms for the present Session, they remain committed to bringing forward 

at the earliest opportunity a number of further highly desirable measures 

of reform. These measures include improvements in safety' 
                                                         and discipline 

a"t sea and other aspects of merchant shipping, and the right of Post Office 

staff to take industrial action. 

Legislative proposals will be brought forward for the reform of section 2 

of the Official Secrets Act 1911. 

Following the Report of the Committee on the Future of Broadcasting, My Government will bring forward proposals on the constitution, structure and organisation of broadcasting in the United Kingdom, An increase in the limit on public funds for the National Film Finance Corporation will be proposed before the present limit expires. 

Measures will brought before you to reform public sector housing subsidies in Scotland; to improve criminal procedure and reform the criminal justice system in Scotland; and to extend the powers of Scottish local authorities in relation to their direct labour organisations. 

Further progress will be made with My Governments programme of law reform. 

Other measures will be laid before you. 

## My Lords And Members Of The House Of Commons,

I pray that the blessing of Almighty God may rest upon your counsels. 

31 October 1977 
M  
Y LORDS AND MEMBERS OF THE HOUSE OF COMMONS, My husband and I look back with delight and gratitude on the events which marked My Silver Jubilee at home and overseas, and the visits which we made to many parts of the United Kingdom and the Commonwealth. 

I look forward to paying a State Visit to the Federal Republic of Germany next May and to opening the Commonwealth Games in Edmonton in August. 

In pursuit of peace and collective security, the United Kingdom remains committed to the aims of detente, disarmament 

and the prevention 
                    of 
                       the spread of 
                                       nuclear weapons. 
                                                          My Government reaffirm their policies in international relations and defence, and will contribute fully to the work of the United Nations, the Commonwealth and the North Atlantic Alliance. 

While working for policies which fully reflect the interests 

of the United Kingdom, My Government will play a full and 

co-operative 
              part 
                    in the activities, the development 
                                                              and 
                                                                   the 

enlargement of the European Economic Community. 

They will continue to contribute modern and effective 

forces to the North Atlantic Treaty Organisation, and to play their 

full part in the current Alliance studies of East/West relations and 

of the Alliance's defence programmes. 
                                        They are participating 

constructively in the important meeting in Belgrade which is being 

held as part of the follow-up to the Final Act of the Conference 

on Security and Co-operation in Europe; they will abide by the 

provisions of the Final Act, and continue to seek fulfilment of all its provisions by other signatories. 
                                      They remain committed to the pursuit of detente in their relations with the Soviet Union and the countries of Eastern Europe. 

My Government will continue to take part in international 

efforts to combat recession and promote a more stable world economic order, and a fairer distribution, within an expanding world economy, of the world's wealth between rich and poor 

nations; they will maintain their special efforts to help the poorest 

countries and the poorest people. 

They will work for a just and lasting peace in the Middle 

East, and the further 
                       improvement 
                                    of 
                                        relations 
                                                 between 
                                                          the 

United Kingdom and all the countries in the area. 
                                                   They will continue to co-operate with all concerned in the search for a lasting 

settlement in Cyprus, where they welcome the resumption 
                                                         of intercommunal talks. 

Efforts will be maintained to achieve a negotiated settlement 

in Rhodesia, on the basis of My Governments proposals published in September this year, which are designed to provide a secure 

future for people of all races. 
                                 My Government will be ready during 
        the current 
                      session to introduce 
                                               legislation 
                                                           to 
                                                               enable 

Rhodesia to proceed to independence on this basis. 

## Members Of The House Of Commons,

Estimates for the public service will be laid before you. 

## M Y Lords And Members Of The House Of Commons,

The 
     strengthening 
                   of 
                       the country's 
                                      financial 
                                                position 

and balance of payments opens the prospect for a continuing improvement in the economy and the maintenance of 
                                                   financial 

stability. 
              My 
                    Governments main objectives are the speediest 

possible return to full employment and a sustained growth of output. 

In order to achieve these objectives they will give the highest 

priority to further reductions in the rate of inflation. 

        My Government will continue to take action to reduce 
high unemployment through manpower measures and to promote 
industrial training. 

         They will ensure that the benefits of North Sea oil are used 
to achieve a lasting improvement in our industrial performance 
and therefore to provide more jobs, higher real incomes and 
improved public services. 

My Ministers will continue to work in close co-operation 

with the Trades Union Congress and the Confederation of British 

Industry. 

Internationally M y Government will continue to urge that 

the stronger economies should take the lead in promoting a sustained growth in the world and that adequate official finance should be made available on appropriate terms to countries with 

continuing deficits in the balance of payments. 

M y Government remain firmly committed to establishing 

directly elected Assemblies for Scotland and Wales. 
                                                     Separate Bills 

will be introduced for this purpose. 

In Northern Ireland My Government will maintain their aims of establishing a devolved Government acceptable to both 

parts 
       of 
            the 
                  community; 
                                 and 
                                        eradicating 
                                                      terrorism 
                                                                  by 
                                                                        the prosecution through the courts of those responsible for violence 

and by continuing to develop the effectiveness of the Royal Ulster Constabulary, supported by My Armed Forces. 
                                             My Government attach special importance to co-operation on matters of security 

with the Government of the Republic of Ireland. 
                                                  They 
                                                       will 

continue to seek measures to strengthen the economy of Northern 

Ireland and improve its social environment. 

Legislation providing for the election of United Kingdom 

members of the European Assembly will be re-introduced. 

Further consultations will be held on industrial democracy, 

with a view to producing proposals which should command general support, and My Ministers will continue directly to encourage the development of industrial democracy in the nationalised industries. 

There will be a review of the legislation and institutions governing competition policy, to see that this makes its maximum contribution to improving industrial efficiency. 

My Ministers are considering further measures to assist small firms. 

They 
      will 
           also hold 
                       consultations 
                                     about 
                                            encouraging 

profit-sharing through the tax system. 

Legislation will be brought forward to amend company 

law. 

A Bill will be introduced to provide public funds to finance 

payments to redundant shipbuilding workers in the public sector. 

Legislation will be introduced providing for changes in 

the structure of the electricity industry and other matters affecting 

the industry. 

Continued encouragement will be given to the efficient 

production, processing and distribution of food with the aim of 

meeting a greater proportion of our national needs from United 

Kingdom agriculture. 
                      My Ministers will seek improvements in the 

operation of the Common Agricultural Policy. 

My Government will continue to seek major reform of the 

Common Fisheries Policy. 
                          They will aim to secure conditions 

which will meet the needs of the British fishing industry, conserve 

fishing stocks, and ensure adequate supplies to the consumer. 

A Bill will be laid before you to increase the borrowing 

powers of the Civil Aviation Authority and British Airways, to 

provide for a levy to finance aviation security and to amend the 

civil aviation Acts. 

Legislation will be introduced for the further development 

of transport policy to meet economic and social needs, including those of rural areas. 

Legislation will be brought before you to provide assistance 

for first-time home buyers. 

A Bill will be introduced to renew and revive the inner 

urban areas. 

Legislation will be introduced on the composition and 

certain functions of the General Medical Council. 

In addition 
             to My 
                      Government^ full 
                                         programme 
                                                      of 

constitutional and other reforms for the present session, they 

remain committed to bringing forward at the earliest opportunity 

a number of further highly desirable measures of reform. 
                                                          These 

measures include improvements in safety and discipline at sea and other aspects of merchant shipping, and the right of Post Office 

staff to take industrial action. 

Legislative proposals will be brought forward for 
                                                   the 

reform of section 
                 2 of the Official Secrets Act 1911. 

Following the Report of the Committee on the Future of 

Broadcasting, My Government will bring forward proposals on the 

constitution, structure and organisation of broadcasting in the 

United Kingdom. 

An increase in the limit on public funds for the National 

Film Finance Corporation will be proposed before the present 

limit expires. 

        Measures will be brought before you to reform public 
sector housing subsidies in Scotland; to improve criminal procedure 
and reform the criminal justice system in Scotland; and to extend 
the powers of Scottish local authorities in relation to their direct 
labour organisations. 

       Further progress will be made with My 
                                               Governments 
programme of law reform. 

Other measures will be laid before you. 

## M Y Lords And Members Of The House Of Commons,

I pray that the blessing of Almighty God may rest upon your counsels. 

## D O C U M E N T Is T H E P R O P E R T Y Of H E R B R I T A N N I C M A J E S T Y ' S G O V E R N M E N T

CP(77) 101 
C O P Y NO 
4 N o v e m b e r 1977 
C A B I N E T 
C R O W N A G E N T S : 
F A Y R E P O R T 

## Note By The Secretary Of The Cabinet

I, 
               The Cabinet will shortly consider a draft White P a p e r to be 
published at the same time as the publication of the Report by the 
Committee of Inquiry under Judge Fay appointed in A p r i l 1975 "to inquir 
into the circumstances which led to the Crown Agents requiring financial 
assistance f r o m the Government". 
                                                                         It is proposed to publish the Report 
of the A d v i s o r y Committee of Enquiry into the Crown Agents appointed in 
1971 (the Stevenson R.eport) at the same time. 
                                                                                                The publication date is at 
present expected to be 18 N o v e m b e r . 

2. 
         I attach for the information of the Cabinet Chapter X X V (Summary 
and Conclusions) of the Fay Report (Annex A ) and Chapter 2 (Summary, 
Conclusions and Recommendations) of the Stevenson Report (Annex B ) . 

3. 
         Copies of the complete version of both Reports are available f r o m 
the Cabinet Office for any Ministers who would like to read either o r both 
in full. 

Signed 
         JOHN H U N T 

Cabinet Office 

4 November 1977 

## Xxv Summary And Conclusion Extract From The Report Of The Fay Committee

388 
we have now detailed the "circumstances" which our terms of reference required us to inquire into, and we can look back and summarise What has happened. 

Our inquiry has been twofold, firstly into what the Crown Agents did (or did not do), and secondly into the efforts, largely unsuccessful, of different organs of government to detect and check the Crown Agents' activities. 

239
        outline we can say that the losses have been due to incompetence 
     I
      n

rather than to misconduct. 
                            The causes have been the actions (and inaction) 

of individuals, coupled with a defective system. 
                                                  The system was defective 

^ (a) lack of accountability, (b) absence of expert procedures, CO absent 

of managerial supervision, (d) bad accounting. 
                                                Outside agencies contribute 

to the failure to prevent the losses. 

390 
                 What the Crown Agents did was between 1967 and 1974 inclusive to 

oonduct on their own account a substantial secondary banking activity 

in the course of conducting it to engage in investment and lending 

*hich was unwise both in character and in degree. 
                                                   They embarked upon 

th-is course without seeking independent advice and we find that they 

Assessed neither the skills nor the organisation necessary for such an 

enterprise. 
             Accountability was lacking. 
                                             It was unfortunate that the O r a t i o n developed at a time when it was believed that those deploying 

f u*ds could hardly avoid making money, and there was thus engendered in 

t h e officials concerned an undeserved degree of self-confidence. 
                                                                                                                                                                                                                    When 

C risis came they were totally unprepared, their lack of real banking 

^Perience was exposed and they allowed themselves to be locked into 

S ltuations engendering further losses. 

fur­

3
  9
     1 
                 We have no reason to doubt the genuineness of the desire to secure 

* reserve which was the main reason advanced for the origin of the own­

a coount activities. 
                                                                               But there was another factor in this origin, the 

f a c t o r of realisation of the facts that the Crown Agents had large funds 

t
  o deploy and that there were money-making opportunities open to those 

nth 
   large funds at their command. 
                             They had had for many years an 

e ^ r y o "bank" in the shape of the principals deposits taken by the Joint 

C ^ o l i  
 Fund and the Joint Miscellaneous Fund, which they deployed 
d
a
t
e
d
1 1 1 safe investments. 
Once the eyes of those concerned were opened to 
t
h
e opportunities presented by the management of these and other funds, 
they embraced the prospect with enthusiasm. 

One of the remarkable features of the story is the speed with which the enterprises developed. 

They started in the first quarter of 1967 and by 30 September 1968, when Sir Stephen Luke retired, the Finvest operation had reached the order of £50m, and investment in equities, secondary banks and property companies had started, together with investment in subsidiary companies and in Australian property development. 

Some of the wilder enterprises, such as unsuccessful speculation in silver and in mining shares, had already been carried out. 

Thereafter we have the impression that the mainspring of the own-account activities was not the securing of a reserve but the satisfaction of money-making for its own sake. 392 
There was thus a substantial secondary banking enterprise in being at the time when Sir Claude Hayes succeeded to the Chairmanship of the Crown Agents. 

Mr Challis, who had played an important part in its inception, had been chosen to head the Finance Directorate. 

After Sir 
1s departure Mr Challis was virtually supreme in his field. 

He Stephen had a newcomer as Chairman, and Boards which he could dominate - the Crown Agents' Board because none of his colleagues possessed the ability to challenge him, and the Four Millbank Investments' Board because its Majority were his subordinates. 

Sir Claude told us that he had been assured by his predecessor "that the one thing I need not worry about w a s finance. 

I was told that it was in perfectly good hands and that I 
could concentrate on other things". 

At Crown Agents' Board meetings, he said, two of the members, Mr Morris and the Managing Director of Millbank Technical Services Ltd, Mr Roe, would argue with Mr Challis, "but nonetheless his mind was so powerful that he won the arguments". 

Mr Newman, the Crown Agents' Managing Director, told us, "we were not welcome if we raised questions". 

Mr Challis would consult his Chairman insofar as he thought it necessary or desirable ancf, not surprisingly, was successful i ji eliciting his support. 

Mr Newman said this of the FMI Board meetings: 
"It was quite clear at those meetings that a lot went on between Mr Hayes and Mr Challis - discussions outside the meetings - and we were merely being informed ... what was going on." 
"^hus the responsibility for the way in which the own-account activities developed rests fairly and squarely on Mr Challis because he conducted chem, and on Sir Claude Hayes because he knew, or ought to have known, what was going on. 

## Mr Challis

393 
Mr Challis with his subordinates - and indeed with his equals and with all the Crown Agents' personnel save the Chairman - imposed his authority and brooked no interference, as witness his treatment of Mr Nowers (para 121) and Mr Blundell (para 273) and his contemptuous minute repelling Mr Morris's criticisms (para 161). Mr Challis would have us believe that he did not influence the courses taken by the money market managers, and said to us more than once that he had not ever 

ordered that a loan be granted. 
                                 \'le 
                                    do not believe him. 
                                                          It may well be 

that he did not direct the day to day operations of the managers; there 

was no reason why he should. 
                              But we have no doubt that the major decisions were his and that, for example, the loans to Stern and the GCA Capital Corporation were made at his behest. 
                                      It was upon Mr Challis that the 

lack of accountability worked its effects. 
                                            His subordinates were accountable 

to him, but he was in practice accountable to no-one. 
                                                       In theory he was 

accountable to the Chairman, but the Chairman exerted no effective 

control over him, and joined forces with him to repel any accountability 

to external bodies. 
                     Lack of discipline undermines morale, and we are 

sure that the absence of constraints upon Mr Challis played a part in 

Producing and perpetuating the characteristics we discuss below. 

3 s 4 
                Much of the own-account activity was satisfactory and calls for &c 

comment. 
          But alongside the run-of-the-mill deposit operations there 

wore transacted the schemes we have dealt with. 
                                                 And throughout we find 

that the characteristics of the Finance Directorate under Mr Challis 

included (i) unjustified risk-taking; (ii) a lack of regulation and control and an aversion from taking advice; (iii) secretiveness; (iv) a 

*ow standard of commercial ethics; (v) a haphazard choice of associates. 

## Risks Taken

3 9 5 
Mr Challis has been described to us as adventurous. 

The risks he r & n stemmed from two causes; the nature of the investment and the extent o f the involvement in them. 

We have been reminded by witnesses of the fact that the Crown Agents were not alone in suffering misfortune in 
1974; the crisis of confidence of that year caused the collapse of many fringe banks, and the over-extended property companies inflicted losses uPon the most cautious of the clearing banks as well as upon the Crown Agents. 

It is true that the Crown Agents were not alone in that time in Imprudent financing, and probably many of the fringe banks that collapsed Will be found to have suffered from features similar to these exhibited by the Crown Agents. 

But the prudent banks, though they lent to the M * Sterns of the time, did so with a proper regard to security and in such proportions as to ensure that losses could be accepted without affecting their own solvency. 

With the Crown Agents on the contrary it was  case of too many eggs in too few baskets - particularly the baskets a iabelled English and Continental, Australia and Stern. 

3 9 (5 
We were also pressed with the argument that some of the risks incurred were taken in order to enhance the service afforded to principals T o a limited extent this is true. 

A number of the associated companies kad among their objects the improvement of the facilities on offer to overseas governments. 

Thus we accept the evidence that the investment 
^ Mr Abrahams's Television Recordings (para 31) included this motivation. 

But when this argument is used to explain investments such as that in overseas merchant banks it begins to lose credibility and indeed becomes 
0Jie of the armoury of propaganda weapons so often used by the Crown Agents in their dealings with Whitehall. 

An extension of this argument 
3­s the assertion that all the financial operations were designed to secure expertise to offer to principals. 

Other propaganda weapons were tlie representation that the joint funds belonged to the principals 
(Para 126) and the use made of the existence of the Equity Investment Advisor 

panel (para
                                 
                                       )
                                        . 
                                            1.4-). 

## Lack Of Management Procedures

3
  9
     7 
                 One can understand the own-account operations starting in a small 

*ay and needing little by way of rules and regulations at the outset. 

B
u t a time must come when a properly conducted business grapples with t h e problem of management and control. 

In relation to the Crown Agents' 
^siness this would involve the monitoring of performance, the accurate r ePorting of events, and the setting up of a regulatory framework. 

When M
r Challis became Director of Finance and when Sir Claude came fresh to th-e organisation, an opportunity was afforded for either or both to take S t o c k , to identify the problem and to take appropriate measures. 

The 
0PPortunity was not taken. 

Mr Challis was not good at detail. Mr P Matthews h i s colleague for a year at First National Finance Corporation, found is methods disappointing: 
"He had a tremendous gift for dealing with a problem. 

I thought he had no gift at all for following it through and tying up the loose ends." 
This seems to be the reason why there was such a lack of sound management Procedures within the Finance Directorate. 

There were the monthly Sports to the Director showing the state of the money.book, and monthly sports of a general nature to the Board but there were no banking rules - certainly no written banking rules; there were supposed to be 
^written rules, eg about the percentage of security which could be l***at,** but they were vague and often honoured in the breach. 

Above all there was no systematic management accounting. 

Thus it was that the Crown Agents fell into such errors as borrowing short and lending long, a*d lending on insufficient security and the like. The dislike of management procedures probably explains the fading away of the office of Stroller (para 91) when **it was** set up in response to Urwick Orr's Wvice. 

And even when the Credit Committee was set up with such formality after the Vehicle h General losses, its scope was limited **and** its decisions 
*ere frequently disregarded (paras 247, 356). 

## Secretiveness

3 e & 
The secrecy in which the Finance Directorate conducted its affairs w & s  manifestation of the ingrown spirit found within the Crown Agents a a t the time in question. 

It was a closed-in body, training up its Personnel from youth and rarely recruiting from outside. 

We have commented UPon the strange results of this policy at paras 42 and 43 above, 
^ongst other things it resulted in the ludicrous situation of this C oaplex trading organisation having only one qualified accountant on its s taff until November 1970. The uncertainty in the I960'a over the Continued existence of the office intensified this inward-looking attitude, a s did the "you are on your own" theory^Cpara 1 2 ) . Under Sir Claude H*ye E communication at other than top level with the Ministry was discouraged 
(Par a G 7 ) . In the Finance Directorate the **prevailing atmosphere** of 
3
8 e c r e c  
y had the result that no one but Mr Challis could comprehend the S t a t e of affairs as a whole, and he at no time shared the complete P l c t u r e with the Chairman. 

With secrecy went a **rooted disinclination** to t a k e advice unless forced to. The Urwick Orr report, commissioned by 8 l * Stephen Luke, was an exception, but after his time no **advice** was t f t ken upon management, banking cr investment, and Price Waterhouse were b*
QUght in to advise only when the accounting system was breaking down. 

## Low Ethical Standards

Though they may have been uncertain of their exact status, the staff of the Crown Agents had no doubt that they were Crown servants. 

As such, one would expect their conduct to conform with the high standards consistent with their positions in the public service, as indeed Sir Claude pointed out (para 174). But, as we have seen, there were fallings­
off from these high standards. 

Some were personal, such as the taking of the Gramco shares (para 198) and of the gifts bestowed by Mr Stern 
(Para 262). Others were commercial, such as the secret underwriting commission (para 73), the support buying of shares (para 139), the elaborate device employed in window-dressing a balance sheet (para 140), the attitude to Exchange Control (para 127) and the Nation Life affair 
(Para 249). In a class of its own, in our view, stands the bargain between I
!

r Challis and Mr Walker to avoid the payment of UK taxation both by the Crown Agents and by Mr Walker and Mr Greene (para 233). 

M * Nowers spoke no less than the truth when he said (para 168) that the office had lost its sense of direction in the spiritual sense. 

## Haphazard Associates

4 Q 0 
A feature emerging from the history we have explored is how fortuitous 
*as the Finance Directorate's choice of associates. 

Mr Abrahams meets M
r Wheatley by chance, and becomes the Crown Agents' estate agent; he introduces Mr Walker, who becomes their property consultant, and his firm becomes their property solicitors; Mr Walker introduces Mr Caplan, 
*ho becomes their valuer. 

No doubt the Crown Agents did not have to go Qut to look for business opportunities; when the news got around that th-ey had large funds for investment they did not lack for applicants eager to do business with them especially as they became known in the C i t y , according to evidence given to us, as "an easy touch" 
But it is a strange organisation which allows a junior official, as Mr Wheatley v'
a s at the time, to recruit its professional advisors, and to recruit them not from nationally known firms but from young men making their careers. 

Let us say at once that we have no reason to suppose that in the main the Crown Agents got other than proper advice from the gentlemen e
*  have named. 

Mr Walker in particular, who bulks large in this story, 
, l Qt only gave sound advice, as to Australia and otherwise, but also saved the Crown Agents from losses upon their uninstructed plunge into 

the r
    e
     a
       
      ]  p r 0 p c r t y world (para 51). But the solicitors, Davies, Arnold 

a n d Cooper, were responsible for losing some security in the Stern case 

by not registering charges in time (para 342) and should not have borrowed 

from the Crown Agents without the latter being separately advised (para 275). 

## The Losses

40l The losses which we have listed above at paragraph 373 may be classified as due to (i) unsecured lending to borrowers now unable to repay fully or at all; (ii) secured lending where the security has proved insufficient or defective; (iii) support lending in coses where rescue failed; (iv) equity investments in associated companies which have failed; (v) participation in property development and dealing. 

The eQuity investments form a small proportion of the whole because the Crown Agents injected money into their associates by way of loans rather than by shareholding. 

The lending is both in sterling and in other currencies. 

Sterling lending was the province of the Sterling Money Market Manager, the late Mr Wheatley, whom we did not see for the reasons mentioned in para 3. 

Mr Wheatley seems often to have made advances upon what has proved to be insufficient security; some of the Property valuations relied upon were unduly optimistic and is some cases a r i unduly high proportion of the valuation was advanced. 

The non­
sterling lending was the province of Mr Blundell, and it is satisfactory to be able to note that despite his unpromising background as a banker 
(para 43) Mr Blundell succeeded in avoiding major investment errors. 

The large non-sterling loans to Wilstar (Stern), GCA Capital Corporation, and Tulone were cases where he was required to lend against his better Judgement (paras 246, 273, 350), and he can hRrdly be blamed for the 
!srael British Bank loss (para 359). Within his personal responsibility come the losses on Galico Investments, Great South West Corporation and R ePublic Corporation. 

The first named was a syndicate loan, within a indicate led by the Crown Agents' banking partners, Continental Illinois, a n d the other two were small losses incurred early on in his time in 

c
  h a r
             g
                
               e of the section (para 160). Mr Blundell comes well out of our 

investigation. 

## Property Speculation

   0 2
*
       
                 As to financing property, a bank or finance house has broadly two 

0Ptions, one to lend at proper rates on ample security, the other to l f ind with less security and less, or delayed, return on the loan, but aa a quid pro quo to take "a slice of the action" by holding a stake in the equity The former is a banking operation, the latter an entrepreneurial operation. 

The former has little risk, the latter produces high profits in boom time and large losses xn slumps The "adventurous" Mr Challis 
-hose the latter course for major investments. 

It produced a 
£17m Profit on the first English and Continental operation and other lesser suras elsewhere, and now has produced enormous losses 
4 Q 3 
The sharing and the amount of the E&C profits reaped by Mr Walker and Mr Greene has been criticised by Sir Matthew Stevenson and others 
(Para 216). But if an undertaking is predominantly financed by loans from one lender that lender becomes locked in to the situation and in adverse conditions may have to find more money in the hope of preserving his investment, and in such conditions it is no more than a recognition o f the **facts** to give him a stake in the equity. 

Moreover if it is one l ender's money that enables a concern to make profits it is sensible for U l e lender to have a share in these profits What that share should be n u s t be a matter for negotiation and bargaining Partnerships between C aPitai and expertise are not unknown in the property world, and we are satisfied that it is not uncommon for the partnership to be on a 50-50 
b asis in E&C Mr Walker and Mr Greene contributed their expertise not only to policy decision making but also to the running of the companies. 

0 r t the other hand at the outset their experience was limited and they 

l
!
-
  a
    c
      i 
           yet to make their reputation 
                                                                                                                In the case of the other major partnership 

V e O t u
                   , both Mr Fenstcn and Capital & Counties were well-known and were 
               r e

e*Pected to enhance the enterprise by their reputation 
                                                                                                                                                                                        It has been 

R e s t e d that the bargain with the Fens 
                                                            ton syndicate was disadvantageous 

to 
    T-he Crown Agents in that the syndicate did little except set the 

"Nation up. We are not disposed to find fault with the 50% share in 

e i t h e r case. 

What, **in our** opinion was jyong with these transactions was t h e going into them in the first place, not the proportions of the 

SP!it- 
In the **Australian venture** there was the added fault, as we see 
U ' of t
 crown Agents binding themselves to provide finance far into 
h e
t
h
e future. 
A body like the Crown Agents, it may be thought, should 
a v Q i d speculative ventures; it is one thing to be involved in property 
a
s an **income producing** asset or to lend a proportion of a property 
C o n'-Pany s needs against valid security, but it is **another** sort of transaction 
t o g e t h e r to buy **Bush House** not for its revenue but to re-sell at a 
P r Qfit. **or to** bind oneself by contract to **furnish great** sums for re­
a e v e **l o p i n g urban** sites in **Australia** for years ahead. 
404 
sir Claude Hayes inherited the own-account dealings situation. 

He could not be expected to oversee in detail the operations of the Finance Directorate, and that directorate was one among many in the organisation he headed. 

But he had asserted at the outset that Finance was his Personal concern (para 91 above), he had the opportunity through presiding at the Crown Agents and Four Millbank Investments Board meetings of anassing information about the Directorate^ activities, and moreover as time went on warnings started coming in (paras 161-164) 
. His minutes of February and May 1971 (paras 172-174) show his awareness of some of the Directorate^ failings, and by August 1972 he was mentioning one of Mr Challis's major shortcomings to the Permanent Secretary - his readiness to do business inconsistent with the standing of the Crown Agents (para 317). 

Sir Claude would have known more if he had been more approachable to his subordinates, none of whom among our witnesses, save Mr Challis, found him other than forbidding. 

In particular if Mr Nowers had had a Chairman to whom he felt able to voice his apprehensions and who would have been able to asses the weight of the complaints, this history would have been V e r y different (para 170). This attitude of his was one of the reasons why internal warnings decreased a3 time went on; other reasons were the apparent success of the Finance Directorate^ operations and the apparent aPproval given by the Stevenson Committee to those operations Sir Claude's u^approachability was also partly responsible for the remarkable delay in grappling with the Stern crisis (para 340). 

4 Q 5 
An equally important feature of Sir Claude's outlook was his 
^termination to assert and maintain a position of independence for himself, the Crowv Agent, and for the Crown Agents' organisation in his chargc. 

This led to a running battlfr*with the Ministry from the time in l 9 Q 9 when they discovered Finvest down to the day in September 1974 when h e departed. 

As against government Mr Challis's actions were supported and justified and the attempts of the Ministry to obtain information or to impose some constraints were treated as sinister attacks on the independence of the Crown Agents' office. 

In a minute written on his last day in office and'addressed to his successor, Sir Claude said: 
"By 1S68 the Crown Agents were still alive and' 
kicking and beginning to be profitable. 

Treasury and CDM officials suddenly realised this and started a long process of getting direct control over the Crown Agents, including their operations, their assets, their reserves and their property." 
Sir Claude s partisanship blinded him to the Ministry's real motives in making their inquiries and led him into activly misinforming them upon such matters as the Crown Agents' involvement in the second E&C set-up 
(para 302) 
His antagonism, coupled with his vigour and ingenuity in fcigument, played its part in protracting discussion and prolonging the status quo - and with it the own-account operations in their risky form. 

406 
One special feature of Sir Claude's conduct was his failure to replace Mr Challis when he left (para 324), This was because he thought it premature in view of the impending changes in structure. 

It was a serious error It led to the Crown Agents being wholly unprepared for the change in the financial climate and wholly unequipped to deal with it Had a new mind come to the direction of the Crown Agents' finances in November 1973 a great deal of money would have been saved. 

And had the out-of-depth Mr Hewins felt able to approach his Chairman at the start of the troubles, many further millions also could have been saved. 

## Corruption

407 
We have had evidence that rumours of corruption in the Finance Directorate have persisted in the City for many years. 

This is not surprising, because the manner of the Crown Agents doing business was often such as to invite suspicion. 

We have referred in paras 382-386 
above to the various allegations made at different times against the late Mr Wheatley, the Sterling Money Market Manager. 

At the date of his death he was awaiting trial on criminal charges of corruption in regard 
'
-
o matters with which we cannot deal in a published report for the reasons mentioned in para 3. 

It is not for us to speculate whether Mr Wheatley entered into some of the loss-making transactions of his section for improper reasons. 

We caW only report: that, apart from the subject-matter of the criminal charges, we have found no evidence of corruption, nor has any witness come forward with any specific allegation: 
4 Q 8 
We have however found, in the case of Mr Stern's Christmas gifts fpara 262) instances of the Crown Agents staff accepting favours which might be thought to place them under an obligation to a person with whom they had to deal in their official capacity. 

These gifts were in our View unfortunate The Crown Agents' staff handbook does not deal clearly with the topic, but it hardly needs a rule to expound the unwisdom of a Crown servant accepting gifts or favours from persons with whom he i
.

s doing business- 
The recent Report of the Royal Commission on Standards of Conduct in Public Life (Cmnri 
6524) recognised that minor gifts and hospitality are part of the normal courtesies of life but regarded them as "always potentially dangerous". 

The Royal Commission approved the D 
o E rules forbidding inter alia the acceptance of gifts other than simple tokens bearing the name of the organisation that gave them (Report. 

Cmnd 6524 paras 214, 217). Mr Challis is especially blameworthy in the case of the Stern gifts in that he should have set an example to his staff. 

There is a conflict of evidence between him and Mr Hewins over whether he knew of the gift to the latter; we accept Mr Hewin's account and think that when consulted Mr Challis should have ordered the immediate return of the gift to Mr Stern, as well as returning his own. 

## External Control

409 
Turning to the second strand of our Inquiry - the question of external checks - it is satisfactory to note that at the outset the alarm mechanisms worked efficiently. 

The inception of own-account dealing was recognised by the Exchequer and Audit Department la 
1969 as a departure which should be brought to the Treasury's attention 
(para 92); in February 1970 the other auditor, the Director General of Overseas Audit Service, reported to the Ministry his misgivings over operation of the JCF (para 102); and in May 1970 the Bank o
.

C England, having picked up items causing them concern, expressed that concern to the Treasury (para 107). The Treasury was the correct department to be approached by the Bank and the E&AD, but it was the Ministry of Overseas development which would have to come to grips with the situation. 

The Ministry was at once informed of the E&AD's report, but unfortunately rtid not learn of the Bank's concern (para 109). The Treasury did or.v JUT 
thsi r own interest and lent impetus to an investigation of the siti 
4 1 0 
An investigation rather than action was the keynote of the ensuing transactions. 

What clearly bedevilled the matter was the uncertainty over the Crown Agents' status. 

The Crown Agents had outlived their original function, and no one knew quite how the transformed organisation fitted into the constitutional framework. 

If control of the Crown Agents was called for, it was logical to ask whether the power to control 

e x i
          and to what it extended. 
                                                 This was initially a legal and constitut. 
     s t e d

Question, and, if answered favourably to control, a second question 

opened out, namely how far it was prudent or politic to exert control. 

Avi examination of the problem at once threw up these questions, and unfortunately they were allowed to dominate thinking and obscured the initial practical problem, ie what to do about the own-account activities. 

With hindsight it can readily be seen that there was sn urgent need to ascertain accurately what the Crown Agents were doing, to assess the validity of the reason given (the creation of the reserve), to evaluate the risks being run, and to restrain some if not all of the own-account operations, Without hindsight two officials at the Ministry perceived this; we have quoted sufficient of Mr Smith's and Mr Burr's minutes to illustrate the accuracy of their appreciation of the situation (eg paras 
84-96, 104, 106, 298). Unfortunately the Permanent Secretary disagreed: 
h e saw no reason to interfere, although he sanctioned inquiries into the Crown Agents' status (para 98). Thus there was lost the first and best opportunity of controlling or stopping the own-account actvities. By early 1970 both the Ministry and the Treasury were thinking in terms of investigation of what the Crown Agents were and what they were doing generally, and when in April 1970 events prodded the Ministry into further action, it was towards inquiry that the officials' minds turned 
(para 104). 

4 
U 
Once an inquiry was contemplated (1970) or decided upon (January l 9 7 l ) action was postponed; it was further postponed until the Stevenson Committee reported (March 1972) and thereafter while its report was b e i n g considered. 

The more time passed, the more firmly established became the own-account operations and the more difficult it became to control them. 

These difficulties were enhanced by the approval conferred b.v the Stevenson report; the fact that this approval was conditional on 
^-structuring the Crown Agents so as to diminish the risks (para 210) 
;
las  its urgency under Sir Claude's reassurances (para 303). Not until 
'
August 1973 was action taken in the shape of the statement of principles 
^ e n imposed (para 304). But even then nothing happened. 

No doubt the Ministry expected the Crown Agents to take action at once to observe the Principles in the conduct of their affairs, eg imparting of information, 
*eforn of the quality of investment business. 

In fact Sir Claude Hayes d i d little about them. 

They were left to be put into practice by the n*w companies mentioned in the principles, and the process of setting up those companies had hardly started when the government changed in March 
1 9 ? 4 and further time became needed for the formulation of a new policy. 

412 
Once the decision had been taken to investigate first and act afterwards - a logical enough sequence - it is difficult to see how any chain of events other than those which took place could have been brought about. 

What however is plain is that the process could have been accelerated. 

We have the feeling that the setting up of investigative machinery and the consideration of the constitutional status of the Crown Agents were subjects more congenial to Government than the taking of financial control decisions. 

But while condemning the delay from October 1969, when the Ministry was first alerted, to August 1973, when the principles were laid down, and to October 1974, when management changed, we recognise that the Stevenson findings were bound to set matters back, that Sir Claude Hayes's vigorous and disingenuous defensive campaign was bound to Protract matters, and that the Ministry were never able to obtain a full picture of the own-account scene, owing to the delay in the accounts and the way in which the Crown Agents furnished information which was sparse a n d sometimes misleading. 

In particular it is plain that a reason for 
1s failure to act on financial control at a critical point the Ministry
*0 time (end 1972) was their belief that the need for outside control had passed with Sir Claude Hayes declaration that the Crown Agents intended to close down on further venture investment after collecting the P0SSFUND profit (para 303) 
. It was open to Sir Claude to use his authority to impose this new investment policy on his finance directorate. 

he had done so many of the losses that we have recorded would not have been incurred. 

As our narrative has shown he did not do so and risk investment went ahead but was not disclosed to the Ministry. 

^-3 
In spite of repeated experiences of misinformation, or action promised and not taken, the Ministry maintained, almost to the end of his tenure of office, their belief that Sir Claude Hayes was to be ci*usted to carry out his undertakings to the Ministry. 

Although exasperated his intransigence, the Ministry treated Sir Claude remarkably gently, a s witness their anxiety to secure his agreement to the form of inquiry 
(para 190), their handling of the natter of the Gramco shares (para 183), their prolonging hia term of office to secure his pension rights (para 365), and their patience with his opposition generally. 

414 
      v
      /
       e think attention should be drawn to the handling of the crisis 

Q f 1974, 
                               The Crown Agents' optimistic statements (paras 338, 345) had 

f o r long concealed the parlous state of their finances, but at last on 

*3 May 1974 Mr Hewins's rough balance sheet was disclosed and it became 

apparent to the Ministry, the Treasury and the Bank of England that the Crown Agents were insolvent; yet the only action taken was the preparation of the statement of government guarantee, to be released if there was a 
"run on the bank" (para 346) . The organisation which had brought about this lamentable state of affairs was allowed to run on under the same management until Sir Claude retired. 

His retiring date had just been extended from 30 June 1974 to 30 
September 1974. 

What could and should have been done has been discussed at para 364. 

In the end the own­
account activities v/ere not examined and disciplined until the expiry of the Chairman's term of office. 

## The Role Of The Auditors

415 
The Crown Agents' accounts, as audited and reported on by the Exchequer and Audit Department, ought to have served, inter alia (a) as an annual public record of the own-account activities; (b) as a management tool for the use of the Crown Agents in the performance of those activities and (c) as a means of providing the Treasury, the Ministry and the Bank of England with information and the opportunity to take any appropriate measures of control or otherwise. 

For various reasons the accounts failed to perform those functions. 

416 
In October 1969 when the E & AD identified the size and nature of the Finvest operation, and reported thereon to the Treasury and the Ministry, they passed to the proper quarter the question of what authority the Crown Agents had for own-account operations. 

We note that it might huve been possible for the E & AD to make this report a year earlier when first told about Finvest (para 92) but we doubt whether this would have materially altered the course of events. 417 
When in October 1971 the Treasury directed that the accounts should be so prepared "as to conform to the standards of disclosure required by the Companies Acts where these are appropriate" (para 117) , they v/ere recognising that the accounts were those of a large and complex trading organisation. 

We think that in some respects the accounts, as audited by the E & AD fell short of those standards. 

The principal shortcoming was as regards delay. 

We have mentioned the inordinate delays at paras 280-291, The statutory requirement that the E & AD 
8nould make their examination "with as little delay as possible" was l o s t sight of, and it was plain to us that no one in the Crown Agents, and few outcide, felt a need for the accounts or an obligation to furnish them In good shape and in good time (paras 281-285). 

When at length each year's accounts came out they were next to useless as an informatory record because GO seriously out of date. 

Some of the delay may have been due to inadequate audit staff allocated to the Crown Agents (para 
283) . More important in our view was the apparent. Lack of concern over the delay on the part of the E & AD higher directing staff, and the failure to report it as a departure from the accounting standards prescribed b y the Treasury. 

4 1 S 
As to other audit shortcomings, our narrative has shown situations where the audit process might have, but did not, expose imprudence, irregularity, or even deception on the part of the Finance Directorate in the conduct of the own-account business. 

Examples are the absence of Provision for losses, actual or potential (para 290) and the concealment of massive contingent liabilities incurred by the issue of comfort letters (paras 148-149). 

But the most significant impression that we gained of the part played by the E & AD in the rise and fall of the Crown Agents as bankers and investors was that they never recaptured the spirit of alertness and perceptive inquiry so clearly shown in Mr Long's report on Finvcst to the Treasury in October 1969. 

We were told that the Treasury valued the E & AD audit especially because of the detailed Private report mr.de when needed. 

One of the great might-have-beens of our inquiry is the remedial action on the part of the government that would surely have followed if the Treasury had asked for, and the E & AD 
Rad used their audit scrutiny to supply, further information on the Quantity and quality of own-account operations as these developed after 
19G9. 

4
l 9 
Finally, we must notice the apparent indifference of the E & AD to t 5 le failures of the Crown Agents' internal accounting system. 

The Published accounts may have lost their relevance through delay, but at l e a s t they were eventually completed and certified. 

It is not too much to say that internal accounts for effective management purposes were 
^on-existent. 

Conditions may have been different in other branches of the Crown Agents which we have not examined: our scrutiny of the Finance Directorate has shown that in this field, higher management, from the Senior Crown Agent down, felt no need of such accounts, indeed preferred to be without thorn. The Crown Agent and his Finance Directorate must answer for the consequences in terms of failure to control the financial Ues in the apparent omission by the E & AD to perform for the Crown 
1s function of advising management of Agents the recognised auditor defects and weaknesses of financial system, a matter they might also have included in their reports to the Treasury. 

## Tke Role Of The Treasury

420 
we have drawn attention above to opportunities that were missed by the Treasury to use their responsibility for the Crown Agents' accounts to inform themselves and the Ministry about the state of the Crown Agents' own-account finances We appreciate that the Treasury took the view that it was for the Ministry, as the Department of State responsible for the Crown Agents, to deal with the latter over the organisation of their affairs Nevertheless we think that the Treasury, as custodian of the public purse, might have been expected to press harder for government action to control the Crown Agents, including action to reform their internal management, and to have been less acquiescent in the policy of confi ni ng action to the revision of the Crcwn Agents' constitution It i s ironical to observe that while the Ministry were to the end labouring U nder misapprehensions over the nature and extent of the own-account baling, government did not utilise its auditing arm to secure accurate information Not until Mr Cuckney commissioned Coopers & Lybrand in October 1974 was any accountancy investigation carried out 

## Fiie Role Of The Bank Of England '

4 2 1 
The Bank of England is the national central bank- 
Although not a government department it is publicly owned It possesses the practical s ! ;iils and contacts enabling it to detect flaws in the financial world ad to provide assistance in remedying them, These attributes are 
*
Poking in a government department such as the Ministry 01, indeed, the 
^easury We appreciate that the Bank is independent of government, but l t is government s major contact with the City, and we think it would n o t have been unreasonable for the Bank to have played a greater part in t f tis affair than it did. 

It was astute to detect signs of trouble and 

l
  t
    s initial warnings were correctly passed to the Treasury 
                                                                                                                                                                                                   But after 

t f l a t it plaved a minor role 
                                                                                             It would have preferred a different type 

0
  f inquiry from the one mounted (para 189) and in consequence played 

littl e part on the Stevenson Comtnittee's deliberations, whereas fuller 

information from it might well have modified that Committee' 
                                                            s views 

(paras 218-9). 
                 Thereafter the Dank, although frequently consulted 

(paras 342, 346, 363) remained on the sidelines (para 310). It is 

unfortunate that it was not invited to take a larger part in the post-

Stevenson deliberations. 
                          The Banks inquiries by direct contact with the 

Crown Agents was limited to the pre-Stevenson period.­
information from it might well have modified that Committee's views 
(paras 218-9). 

Thereafter the Bank, although frequently consulted 
(paras 342, 346, *363)* remained on the sidelines (para 310). It is unfortunate that it was not invited to take a larger part in the post Stevenson deliberations. 

The Banks inquiries by direct contact with Crown Agents was limited to the pre-Stevenson period.­
422 
The sums granted out of public funds to the Crown Agents will either be lost to the taxpayer, or if repaid out of the future profits of the Crown Agents will be a clog on their competitive position These unfortunate results flow from (i) an unwise decision to operate as financiers on own-account, (io) the folly and euphoria with which some of the operations were conducted, compounded by lack of expertise and neglect, of accounting systems and professional safeguard controls and 
(iii) the failure of government to inform itself of the developments, to appreciate the risks and to grasp the need for quick action Against this sombre finding it is satisfactory to be able to note that no criticism has been made to us of the Finance Directorate^ handling of principals' 
Portfolios and that, judging by their continued success in their traditional Procurement role ; the Crown Agents orthodox activities have not suffered from the publicity accorded to the subject matter of our inquiry. 

4 S 3 
in conclusion we wish to reiterate that we have received complete 
^-operation from the present staff of the Crown Agents and from the Various government departments with which we have dealt, Our research h*s been conducted with great competence by a team of accountants put at our disposal by Whinney Murray & Co and led by Mr Michael Taylor-Jones A Q A and Mr George Elwes ACA 
Mr Taylor-Jones has also been our painstaking 
6 a t* efficient Secretary and has earned our especial gratitude by his industry and skill 
, E S FAY 
EDMUND C0MPT0N 
P GODFREY 
TAYLOR-JONES 
secretary 
10 August 1977 
Extract, from the report of the Stevenson Committee 

## .

2
.
 1 
    The Crown Agents carry on a large and multifarious business including 

procurement, advisory and personnel cervices, 
                                             fund management, 
                                                               baiiking and ' 

ancillary investment (3.1 to 3.3)- They employ over 1 
                                                     ,700 
                                                          people, assets cf over 

£
i
 j
 O
  O
   m 
    and they manage principals' investments of over £300m (3-2, 3  
                                                              - 1 h )  
                                                                  . Their 

gross 
     earnings (mostly overseas) 
                                  amount to about £5m in a year (3.2). The overall 

result over the four or five years to 1970/71 is that profits on financial 

activities have been used to offset losses on other activities (3.2).
                                                                     
                                                                                    \
                                                                                    " 
                                                                                    I 

2
.
 2 
    The Crown Agents confine their services almost entirely to overseas 
                                                                             * 

governments and public bodies. Over 90% 
                                       of their non-financial business and 70$ of 
                                                                                  ! 

their 
     financial business derives from independent countries. The Crown Agents carry 

on 
  business as agents for their principals overseas; and acting themselves as 

principals they provide services for overseas clients. An important new clement 

o
v
 e
  r 
   recent years is the growth of activities otherwise than as agents, 
                                                                   particularly!

Ml m o n e y markets, banking and ancillary investment (3 
.1; 3 - 3 ) -
2.3 
The Crown Agents office is not a Government Department and the officials are j Crown, and not Civil, Servants, although their terms of employment are linked to those of the home Civil Service (3-6, 3-1b). The Crown Agents have no formal constitution nor are they incorporated. They are individuals appointed by the Secretary of State (3.7). They are responsible to each principal for that principals business: 
but there is no collectivity of principals to whom they answer; 

f
o
 r 
   the totality of their business including business done otherwise than on an 

agency 
      basis (3 
               .11).
                     
                                                        .
                                                         j 
                                                                                           I 

2
.
 1
 ; When the Crown Agents acted mainly on 
                                             behalf of Dependencies the Secretary of 

State 
     for the Colonies exercised close supervision over them. Such supervision 

stemmed from his appointment of the Crown Agents and his responsibility for the Colonies. Such supervision and direction withered away as the Crown Agents services, 
"ere increasingly provided to independent countries ( 3 . 8 ) . 

j 
2.5 
By virtue of his appointment of the Crown Agents, the Minister has certain P
o w e r s of direction over them. These have not been exercised in modern times. 

They are not properly applicable anyway to matters within the Crown Agents tanking and agency relationships with independent governments. There are Arrangements for informal consultation between the Crown Agents and the Minister, 
^ reCard to natters which the Crown Agents consider likely to be of public or Political concern and thus involve the Minister. Those informal arrangements­
arc not wholly satisfactory, and in practice the accountability of the Crown Agent: 
to the Minister is vague and the Minister's responsibility to Parliament for t he Crown Agents affairs is similarly indefinite ( 3 - 9 to 3 - 1 2 ) . 

2-6 
The usual apparatus of governance raid accountability which is found in the Public - 
and to a lesser extent in the private-sector i s missing. The Crown ACents are unincorporated;- 
they have no terms of reference such as are prescribed b y statutes or other instruments of incorporation; and they have no prescribed limits for activities or borrowing; they have neither shareholders nor the usual kind of board of directors. The Minister (and his Department) are not by themselves well placed to make good these deficiencies ( 3 . 1 3 ) . 

2-? 

By reason of their status the Crown Agents at present enjoy Crown immunity f rom taxation, although they pay SET and the limited companies in which they are 
^tcrested are liable to corporation taxes etc in the usual way. The Crown Connection improves their standing with clients overseas and in the UK. A 
disadvantage is that in the last resort HMG would probably be liable at least in respect of liabilities arising out of the Crown Agents activities otherwise than R s agents, in so far as these could not be met out of the Crown Agents funds. Ko s uch call on Exchequer funds has ever arisen; its avoidance depends on the Continuing viability of the Crown Agents and the adequacy of their reserves ( 3 . 1 5 ' 
3 . 1 9 ) . 

. 

. 

## ^Rocuremeit And Allied Services : Chapter U

2'8 
In 1970 procurement orders placed by Crown Agents amounted to over £90m. 

^ e volume of this business has grown 
                                                    moderately over the. 
                                                                                past decade; 
                                                                                                   but not as 

rapidly as UK exports generally, and the proportion of non-UK procurement has riser 

s l e n i f i c a n t l y with increasing international competition and the pressure of 

Principals for purchases in the best market. Even so the Crown Agents provide 

^eilities for about \% of UK exports (U.2 to U  
                                             . 6 ) . 

-

^ 
     Overseas earnings of the Crown Agents procurement business (including stamps j 

a t l ti currency business) 
                                                                                                 amount to between £2m 
                                                                                                                                                                                                 and £3m a year - a useful contribution' 

t o UK invisible income. But these activities incurred a net loss of £h8U, 000 
                                                                                                                                                                                                               j 

(general £ 3 7 h , 0 0 0 , stamps and currency £ 1 1 0 , 0 0 0 ) in 1970, following similar losses * 

i
  n 1960 and 
                                     1969 (U.7, 
                                                                        U  
                                                                             . 2 6 ) . 
                                                                                                ­

2.10 The Crown Agents have a standard list of agency charges for orders of varying 

sizes. The scale of charges is revised at infrequent intervals. The last review 

was in 1?68 and another is taking place in 197?. 
                                                        Infrequency of review of charges 

in 
  periods when the Grown Agents own costs rise exceptionally fact is a source of 

difficulty (h.0 to h.10). 

2.11 The Crown Agents ricks as agent3 in procurement and allied services are 

limited to claims for gross negligence, against which they have normal insurance 

cover (h.39). 
                                                                  \ 

                  f
2.12 V
                .
                  e conclude that the Crown Agents arc providing through their agency procure­

went 
    work an efficient and valuable service to their principals: they are also 

helpful to UK suppliers and they make a useful contribution to .UK visible and 

invisible exports: without them some of the benefits would be jeopardised (J4J1O). 

2.13 In order to prevent uneconomic expansion of activities and complaints of 
                                                                                                              1 

unfair trading, we recommend that: these procurement activities should be required 
                                                                                   j 
fully to pay their way, including appropriate contributions to overheads, reserves \ 

i 

and UK taxes. The management may have to make more frequent or more substantial. 

j 

increases in charges, revise charging policy to bring about a closer relationship 

j 

between full costs and charges for individual orders, or secure further economies 

in 
  operation - eg through the contraction of the geographical area of their 

procurement (U.Jj1, lj.li2). 

I 

## Bnginee Rin G In S Pen Hi On And En %In£Gring -Advisory Services

2.1b The Crown Agents provide both in the UK and overseas inspection services tor ; 
goods whether or not they have procured them. They provide engineering advisory j services sometimes in collaboration and sometimes in competition with the private sector *(h.lh* 
to *h.2$).* 
j 
2.15 The gross earnings from these services is growing (over £700,000 in 1970) and! 

they are clearly valued by principals - especially the inspection services. But they are quite small in relation to the gross overseas earnings of British consultants generally - £30:n to £35m a year. The services have been run at a net loss (although we understand that the loss in 1971 will be small). The risks here 
&re similar to those in the procurement business generally and the Crown Agents 

have 
    normal insurance cover (
                               i
                               i
                                .
                                 . 1li to l\.2$)* 

V
'
 c conclude that- 
                 there is no sufficient ground for curtailing these services j 

'
'
 '
 h
  i
   c
   h 
     though small are important to overseas principals especially the smaller 
D
 e
  p
   e
    n
     d
      e
       n
        c
         i
         e
          s
           . As in the case of procurement activities w
                                                          e 
                                                            recommend that: these 

cervices should be require;', 
                             fully to pay their way: and in order to preserve the 

appearance as well a
                     :
                     ; 
                       the fact of impartiality, they should be formally separated 

fron 
    purchasing activities, eg in a separate United company 
                                                                      ( [ 4 .  
                                                                          2 5 ) . 

## Hillhnnk Technical Services Ltd (Mts)

2.17 This 100£ 
subsidiary of the Crown Agents was formed in 1967 
with a capital of C1m (£800,000 uncalled) and is in operational and staff terms closely co-ordinal with the Crown Agents. It is a mere banting concern - placing orders as a principal with suppliers and organising complete packages, which it sells as a principal to i customers under a contract designed to earn an overall profit. The package.'; 
so organised are mainly defence equipment but they also include civilian items like agricultural machinery (u-30 
to h . 3 U ) . 

2.16 Turnover which fluctuates greatly from year to year was over £10m in 1 969 and ­

£
l
 i
 m 
   in 1970; 
            it seems likely to grow significantly over the years ahead. It made 
                                                                                      j a*modest profit (£30,000) in 1970 (JU.31, U.3U). 

2.19 j
      f
       c conclude that: this company is filling a gap in UK arrangements for 

certain exports: the relationship between the Crown Agents on 
                                                               ' 
                                                                 the Ministry of 

Defence is useful to both: MTS 
                                  is substantially protected against risks through 

insurance with the Export Credits Guarantee Department, through cover from MOD in 
                                                                                         I 

respect of that Departmcnt'3 element in any package," 
                                                           and through provisions in 

contracts viith suppliers and customers: the Crown Agents are alive to the 

Undcsirability of shouldering risks in large contracts beyond the cover which they j 

can obtain. Subject to this point we have no comment on the Crown Agents asscssmcn 

that the reserve backing against risks 
                                           should 
                                                   be of the order of £1m 
                                                                              (U.35j Ji.36). 

## Marine Insurance

" 
\. 

:! 

2.20 This business, which makes a small profit, is carried on by the Crown Agents partly as agents and partly otherwise than as agents. Crown Agents insure only 
1 
Goods they procure. They re-insure *1$%* 
of the risks and hold a special reserve against excess claims (U.37, U.30). 

## Personnel Services : Chapter $ ' *

2.21 These include recruitment and engagement of expatriates on behalf of overseas governments and public bodies, the arrangement of passages, and the making of certain payments such as pensions 
( 5 . 1 ) . 

2.22 
This is a substantial business in terms of numbers recruited and of transactions. 

Gross earnings amount, to rather less than £700,000 a year; but r 

aggregate losses, after charging a-due proportion of overheads, have been 
incurred over recent years (£.2). 
                                                                  . 
                                                                                   .i 

V
f
o conclude that: in this field the Crown Agents are pcrforning a necessary 

a
n
 d valuable function for which they are well fitted and to which there is no 

obvious satisfactory alternative: there would be advantages in concentrating as rauc: 

of this work as practicable in a single organisation like the Crown Agents
                                                                          
                                                                                  \
                                                                                   ­

(arrangements have already been made for certain transfers of work from 0DA to the f 

C
r
 o
 w
  n Agents and other'transfers are under consideration): these Crown Agents 

activities could be usefully increased and this should make for economy, efficiency. 1 

a
n
 d better financial results. 
                             As in the case of procurement activities we recommon that personnel services should be required fully to pay their way (5-3 to 5-7* 
                                                                                   , 

5.11). 

## Financial A N D Divestment Activities : Chapter 6

2.2lt In terms of capital employed, and of profits earned, but not of numbers cf staff, these are the largest activities of the Crown Agents. 

Managed funds 
(including £200m in banldng deposits) amount to over C1,000n. 

The banking business: 
deploys assets of over £liOOm. The operational links between the financial activities and the procurement activities are not very close although there is a i wide area of overlap between clients for both. 

These financial activities earn substantial profits which are used to offset losses incurred on most other Crown Agents activities (6.1, 6 . 2 ) . 

## F U N D Management

i 
2.25 
The aggregate managed funds of about £1,000m consist of over 1,000 separate ' 
funds of varying sizes. 

Over *10%* of the managed funds come from independent countries and the bulk of the balance comes from Hong Kong. 

The funds consist of j currency reserves, general reserves, and special funds (eg pension funds),- of overseas principals. 

Over *10%* of the invested funds are in British Government securities ( 6 . 3 to 6 . 6 )  
. ­
2.26 
The funds are managed in accordance with the particular or general instructions of the principals, who receive regular reports and copies of the Crovm Agents1 Annual Fteport and Accounts. 

The Crown Agents maintain the usual internal apparatus for fund management including research unit, investment 

managers etc. 
                There is also on advisory panel of outsiders but i  
                                                                      t has very 
                                                                                          j 

restricted terms of reference (6.7 to 6 . 9 ) . 
                                                                                          ) 

?
'
 2
 7 
   The 
      Crown Agents charges for 
                           fund management arc 
                                            very low, 
                                                     and profits 

correspondingly nodest. The 
                             risks involved are 
                                                  limited to 
                                                               those of professional 

n
e
 g
  l
  i
   g
    e
    n
     c
      e 
        against which Crown Agents have normal insurance covor. The 
                                                                 Crown 

A
g
 e
 n
  t
   s 
    consider that a general reserve of 
                                     £1m should be adequate to cover claims . 

b
e
 y
 o
  n
   d 
    this. We accept that this is 
                                reasonable (6.10 
                                                to 6.13). 

^ We 
    concludi; 
             that this is 
                         on economical service, 
                                               which gives general 

s
a
 t
  i
  s
   f
    a
     c
     t
      i
       o
        n to 
            the 
                principals, 
                           but 
                               the 
                                   performance of 
                                                 the 
                                                     funds might be improved 

*
f 
  C
  r
   o
    w
     n 
      Agents were able through suitable salaries- 
                                              to 
                                                 recruit and 
                                                            retain more 

e
x
 p
  e
  r
   i
    e
     n
     c
      e
       d investment managers (6.12). 

| g   | j   | k   | i   | n   | g   |     | ­   |
|-----|-----|-----|-----|-----|-----|-----|----|

'-29 Banking funds of about i
                                         J
                                          j
                                           O
                                             O
                                              m consist broadly of 
                                                                              £200m on current accounts, 

^
1
 0
 0
  m 
   on 
      deposit accounts and 
                          £100in 
                               which Crown Agents got 
                                                     from the 
                                                             money market, 

inking 
      - 
         including income and 
                                 proceeds from invested banking funds - 
                                                                               makes the 

r
;
 3Jor 
           contribution to the profits of financial activities as a 
                                                                                                                                                                   whole (6.15). ^30 The 
        Crown Agents banking services are rendered mostly to 
                                                                persons who 
                                                                             are 

P
r
 i
  n
  c
   i
    p
     a
     l
      s 
        on 
           the 
              procurement side of the Crown Agents business. On 
                                                               the 
                                                                  banking 

the legal relationship is that of 
                                     bank to 
                                              depositor; and 
                                                               the 
                                                                   profits or 

l
o
 s
 s
  e
   s on 
       banking (and 
                   ancillary investment) 
                                        are 
                                            on the 
                                                  Crown Agents account. This 

wsition 
       is 
           not 
                altered by 
                            the 
                                 existence of 
                                                the 
                                                     Joint Consolidated Fund and the 

Mnt 
   Miscellaneous Fund which ore 
                             administrative and 
                                              not 
                                                 iegal entities (6.16, 

## . . ' I

2
.
 3
 1 The 
       Crown Agents employ their banking funds mainly in 
                                                      the 
                                                          money market; they j 

^ " 0 invest in marketable securities and in advances to 
                                                                                                                     companies and 
                                                                                                                                                   overseas 

They maintain a 
                liquidity ratio of 2%% of current accounts and 
                                                                they 

"^ch 
    appropriately 70"' 
                       of 
                          other maturing liabilities. The 
                                                              liquidity ratio of 

% is 
    higher than that prescribed for 
                                banking institutions in 
                                                     the 
                                                         UK 
                                                           but 
                                                               reflects 

^special nature of the 
                      Crown Agents banking business. V
                                                     7
                                                     o 
                                                       conclude that 
                                                                    the 

wown 
    Agents liquidity ratios and 
                                  matching arrangements are 
                                                              reasonably prudential 

(6-19, 6.20). 

## 2  - T

Reserves and risks. Crown Agents judge that a suitable reserve against losser; 

V o ul(i be 
                         about £Urn, being about 
                                                                                                        20% 
                                                                                                                      of their unsecured lending in 
                                                                                                                                                                                                                               the 
                                                                                                                                                                                                                                             money market, j 

^ ^0 not 
       question this specific judgement 
                                      but we 
                                             look at the reserve position as a ' 

v h r jle in Chapter 8 (
                                                                              6
                                                                                  .
                                                                                     2
                                                                                         1 to 
                                                                                                                6.23). 

2-33 Sterling balances jvtk[ 
                                   foroirn currency n^rosiis, Over the 
                                                                                   years 1962 
                                                                                                  to .1971 

t
h
 e 
  Crown Agents have held 23% 
                           to 2B% 
                                  of the total sterling reserves of overseas 

countries and organisations. At 31 December 70 
                                               the amount so held - in the banking 

a
n
 d 
  managed funds - was £71Om. They also accept foreign deposits for overseas 

c
l
 i
  e
  n
   t
    s (6.2)4 to 6.26). 

2
.
 3
 h We conclude that: the Crown Agents offer very competitive rates of 
                                                                   interest­

o
n 
 deposits by clients: their ability to do so derives in part from the aggregation 

o
f 
 funds 
       which they utilise profitably and it owes something also to freedom from 

taxation: 
         with increasingly competitive conditions in the banking world the Crown 

A
g
 e
  n
  t
   s 
     may have to increase their efforts if they arc to maintain the volume of 

profitable business (6.27, 6.20). 

## Ancillary Investment ­

2.35 The Crown Agents total investment experience in 1970 was unfortunate. On investments of some £3^'m, depreciation and losses amounted to about £)4.6m. It 

w
o
 r
  l
  d 
    be wrong to attribute tco much weight to results at one particular date; and 

t
h
 e
  r
  e 
    has been a substantial recovery in 1971. V
                                            .
                                            '
                                             e 
                                              conclude that the investment 

performance has not been outstandingly good but that over the years the Crown 

%'nts' management has on the whole been competent and conscientious although 
                                                                              l
                                                                               i
                                                                               e 

n
a
 v
  e 
   come specific criticisms (6.29, 6.1jlj, 6.U5). 

2.36 The Crown Agents invest a fraction of banking funds in "hard-core

1 investment:f 

W
h
 i
  c
  h 
    are not readily realizable. They have a working rule to limit such investment; 

t
o 20% 
     of their deposits and money market borrowing, other than those in JCF and 

J
H
 F 
  ie the current account business. This seems to us a sensible enough rule; but j 

o
n 
 occasions they have been operating at or above their self-imposed limit (6.31 to I 

6.33). 
                       . 
                                              ' ; 
                                                                     ! 

207 In July 1971 the Crotm Agents had invested a total of over £him in English 

and Continental Property Co Ltd (a Crovai 
                                                                                              Agents sub-subsidiary) and the First 

National 
        Finance Corporation"Ltd. A more conservative management might have Warded such concentration as excessive even although most of the investments were 

short-term and secured. This position was somewhat corrected by 31 December 71. 

^

ven so 
               we conclude that there was some risk here (6.3k). 

2 08 English and Continental Property Co Ltd. The biggest single item- 
                                                                                                                                                                              among the 

frovn 
     Agents investments (shares and loans) 
                                         has been the investment in their sub­

"^sidiary English and Continental Property Co Ltd. At 31 December 71 E & 0 

i
n
 d
  e
  b
   t
    e
     d
     ;
      j
       e
        s
        s had increased to f
                           i
                            i
                             o
                             m of which Crown Agents were creditors for 
                                                                       £
                                                                        1
                                                                        3
                                                                         n 

s
e
 c
  u
  r
   e
    d 
     by a floating charge; there were other loans secured by fixed charges 
                                                                        (f,1Qi)j 

a
n
 d 
  other borrowings unsecured of £23n. At the peak the Crown Agents lendings to 

t
h
 e
  i
  r 
    sub-subsidiary amounted to £23M (6.36). 

2
.
3
 9 V
   i
   C 
     commissioned
             -
              3 R I C E 1,'atcrhouse and Company to report on the history and 
development of E & C and the Crown Agents involvement in it. Their report will be f 
                                                        I 

FORWARDED to the Minister but we do not think it necessary to delay our Report
                                                                                            
                                                                                                   i
                                                                                                   . 

o
n 
 that 
      account (6.37). 
                         . 
                                                                             \ 

2
.
1
 (
 0 Our conclusions are as follows. This Crown Agents venture grew more quickly 

s
a
 d substantially than originally envisaged. We do not think that the process of­

informal 
        consultation enabled the 
                                     Minister to be fully seized of this. We think t
                                                                                            l
                                                                                             i
                                                                                             a 

t
h
 e 
  Crown Agents took rather too great a share of the risks in relation to the 

rewards; 
        and that at the peak this investment involved an excessive proportion of 

C
r
 o
  w
  n 
    Agents resources in a single concern. The size of the Crown Agents stake in 

E&C has now been substantially reduced. Although Crown Agents advances were s
e
 c
  u
  r
   e
    d 
      by a floating charge on the assets (professionally valued) they might in 

t
h
 e 
  event of misfortune have found themselves under pressure not to exercise such 

l
i
 g
  h
  t
   s 
     in front of unsecured lenders to their own subsidiary company (6.30). 

2
.
1
 (
 1 Assogjatrd companies. The Crown Agents have also invested in and made advance 
                                                                                              , 

t
o a 
   number of associated companies - some of which have but a slight connection witjj 

services to Cro:;n 
                  Agents clients. In one or two cases their associates were perhaps',j 

HOT 
    of 
       a quality and standing which matched that of the Crown Agents. Moreover the F
                                                                                                                    J 

proliferation of trading and dominant investments tends to create management 

problems and there are in them greater ricks as well as the prospect of greater 

r
e
 w
  a
  r
   d
    s ( 6 J 4 I to6.U3). 

2
.
 h
 2 Wc conclude that:, 
                     too great a burden for investment policy and major 

investment decisions has to be shouldered by the Finance Director under present Arrangements: 
             and that a normal 
                                 board, consisting largely of suitable independent 

(
i
 e 
  non-executive) 
                directors could be of assistance in minimising lapses and 

l
o
 s
  s
  e
   s (6.I16). 

## Concluding Commentary

Onr general conclusion is that; subject to the withdrawal of taxation Privileges and to appropriate organisational and status changes, the Crown Agents financial activities as a whole should continue: they offer an economical and advantageous service to overseas clients: they play a responsible part in the Bonoy market, the gilt-edged market, and in the handling of large sterling balances and sterling investments: disruption could cause damage and loss to the 

C
r
 o
 v
  .
  -
   n 
    Agents and their clients as veil as to the UK (6.2J7 to 6 . 5 3 ) . 

## T H E Dependencies : **Chapter** 7 ' / -

The Dependencies
1 share of the Crown Agents total business is now small ­

a
b
 o
  u
   t 8,* 
        of non-financial and ?$-30% of financial business, 
                                                        the bulk of which is 

f
o
 r Hong Kong. The Dependencies (other than Hong Kong) 
                                                    can Vie 
                                                           only a minor factor 

i
n 
  determining the future shape and functions of the Crown Agents as a whole 
                                                                        ( 7 - 6 ) . 

The Crown Agents business is essential to many Dependencies and especially 

t
h
 e 
  smaller ones. This is true of all the services provided by the Crown Agents 

V
i
 t
  h 
   the possible exception of financial business which could be provided, if not 

s
o 
  cheaply, 
          by other institutions in the City ( 7 . 7 to 7 . 1 1 ) . 

                T
2.^6 V
              .
                e 
                    have not had a comprehensive view of the importance the Dependencies 

attach to the Crown connection. ' 
                                 We are told that the smaller Dependencies would 

Prefer the continuance of the present relationship but we have heard some 

                                                           r
dissentient 
                            voices.
                                                
                                                       V
                                                         ,
                                                           e 
                                                                believe the important thing in the minds of clients is 

t
h
 e 
  quality and price of the services and the ethos of the providing body ( 7 . 1 2 ) . 

2
.
J
 U
  7 We conclude that there should be a duty on any successor body - as on the 

frown 
     Agents ( 7 . 5 ) 
                  - to provide services to the Dependencies, subject to its 

Staining a reasonable proportion of the total business of the Dependency, and 

^hat'the continuance of the Crown connection would not be essential for the 

discharge of this duty ( 7 . 1 3 ) . 

## Miscellaneous J **Chapter** 8 I $£Serves

?
'
  J
    /
      8 Apart from minor specific reserves the 1970 balance sheet shows major 

^serves approximately as follows: 

 ­ specific 
 
£3-hm
Investment reserve:
 
£6.7m
­ specific 
Pensions etc reserve:
Reserve:
 
£Um
­ general 
(8.1 
to 8 . 3 ) 

2,\i9 The investment reserve of £3 Jim was created out of the excess arising on property revaluation **and** 
was to cover the difference between cost **end** 
market valuo 

a
t 
  that 
      date. With the recovery in the Stock Market in 1971 
                                                        some of this reserve 

h
a
 s 
  since become free ( 6 . 2 ) . 
                                                             ' . 

2.50 The general reserve at 31 December 70 
                                                         stood at about f
                                                                               i
                                                                               i
                                                                                m as compared with 

a
b
 o
  u
  t £1 
      Jim at 31 December 67. The increase over the intervening years was due 

m
a
 i
  n
  l
   y to substantial revaluation of property and similar adjustments. We are 

i
n
 f
  o
  r
   m
    e
     d that there were hidden reserves of £
                                        l
                                         i
                                          m - £^m at 31 December 70; these 

consisted, 
          of the excess at that date of the value of owned and occupied premises 

o
v
 e
  r 
   the then balance sheet figure. On this basis general reserves at 

3
1 
 December 70 
            amounted in total to £8m 
                                    - £9m (0,3 to 
                                                 8 . 7 ) . 

2
.
 ^
  1 In the context of our Enquiry Crown Agents estimate of the desirable minimum 

l
e
 v
  e
  l 
    of general reserves varied between £17m and £20m in all. The figure and its 

detailed 
        make-up is very much a 
                                   matter of judgement and we do not quarrel with 

t
h
 e
  s
  e 
    considered estimates which the Crown Agents have put to us (0.8 to 8 . 1 1 ) . -

V 
            V 
                                                                   . 
                                                                                                                                                                                                                                                                                                                     . 
                                                                                                                                                                                                                                                                                                                                                                         I 

2'^

2 V
       .
        '
         e 
             conclude that: in the years up to 1970 
                                                                                                                       and at 31 December 70 
                                                                                                                                                                                  the 
                                                                                                                                                                                                                        \ 

i 

g
e
 n
  e
  r
   a
    l 
      reserves were substantially below the desirable level: the Crown connection j 

a
n
 d 
  Crown status with its implied warranty have helped to offset the insufficiency ; 

o
f 
  reserve strength and have enabled the Crown Agents to enjoy a credit rating 

w
h
 i
  c
  h 
    they would not have enjoyed on the strength of their balance sheet position 

a
l
 o
  n
  e (8.12). 

/ 

P
e
n
s
i
o
n Scheme and Reserve 
' . 1 

1 
2.53 A separate account is kept for the pension scheme and its liabilities are revalued regularly by the Government Actuary. The assets earmarked to the scheme Qre managed by an office committee including staff representatives, chaired by 

t
h
 e 
  Crown Agents (8.114, 8.1 
                        $). 
                                                      . 
                                                                              \ 

2
.
5
 1
  * In 1960 the Crown Agents executed a Declaration of Trust whereby the Crown 

A
g
 e
  n
  t
   s 
     stand possessed of the Office Reserve Fund with discretion to crystallise t
h
 e 
  trust by alienating the necessary assets to secure the discharge of pension 

labilities. A note about the existence of the trust is included in the notes to N
t e 1970 Crown Agents accounts (8.16). 

2
.
 5
 5 V
     7
     e 
       conclude that: the present position is unsatisfactory in that the trust extends to the v:hole Office Reserve Fund and this extension might weaken the . 

confidence of clients in the Crown Agents financial strength: an awkward situation 

% h t arise if in tine of difficulty the Crown Agents were to crystallise the trus 

V alienating assets to the pension scheme thus putting them beyond the reach cf 

Other 
     claimants. "We recommend that the situation of the pension scheme be 

clarified (8.17). 

## Accounts

There has in **1970** been some consolidation of the Crown Agents accounts and 
* U y consolidated accounts are being produced for **1971-** 
We are impressed by the mjuoxity of the various company structures through which the Crown Agents conduc 
*o*e of their activities. Wo conclude that: it is desirable that there should be 
* 
Single auditor experienced in the commercial and banking sphere for all the main 
&own Agents activities: and that ^constitution on the lines we recommend would frovide an opportunity for further consolidation of audit and accounts (8.18 
to 

## $£Kgy Levels

The Crown Agents activities consist predominantly of business and not Ministration in the governmental sense and top officials an the Crown Agents *ttco bear greater personal.responsibility than counterparts in the Civil Service Present responsibilities of"the Director of Finance would in commercial circle 
***and a salary of perhaps twice as much as his present salary. We thin!: 
there i 
* 
significant degree'of underpayment in the Finance Directorate which extends down 
119 far as the investment managers, and this affects the Crcwn Agents ability to 
* * H U and retain suitable staff. There may be implications here for other top sts in the organisation (8.21 to 8.2U). 

^
The Inland Revenue has hitherto treated the Crown Agents in effect as the 
0
v
,*n and thus entitled to Crown immunity from taxation; although limited companie 
^ m - ­

"Qlch the Crown Agents have interests are liable to tax in the ordinary way. W 
received representations that the tax privileges allowed to the Crown Agents 
V e
^
 them an unfair advantage over their private sector competitors. This applies 
^icularly to the Crown Agents financial and banking activities which have grown 
rapidly over the last **few** years **and** arc the **main** cource of profits, ^r^opjr;^! 

on the ground**o of** taxation principalc and **fair** competition the Crov.n ir.munit; 
from taxation should bo eliminated: this could bo done through the various models 
-
discussed in Chapter 9 (G.25 to 0,27)­
£glationshi N 
botr-en Crown .V*onta
? CDC, and CD?C 

2.59 Relations 
"between the Crowd Agents and CDC (a 
nationalised body) and CD7C 
(a 
private sector body) have hitherto boon minimal. There are large geographical 
wid some functional overlaps. There nay be **possibilities** for 
0 0 : 2 0 rationalisation 
a&ong **these bodice** and **we suggest** that **some further examination of this** might 
0 0 
Justified (0.20). 

## Status. Constkutiolf Aid Objectives: Chaetst 9

2.60 Wo have **noted** the **following defects in** the **present situation:** 
j 
Arrangements for **accountability in respect of the totality of** the business 
and especially the business done otherwise then as **agents** are loos than 
adequate (9.?) 
5 
The **proocnt Crown** status is a **source of oobiguity, anomaly and rick** and of complaints of unfair trading. There is an implied Crown warranty behind Crown Agents and this is of particular significance in their activities otherwise than ao **agents** (9.3, 9-4); 
The nomol apparatus of governance is absent - ic incorporation with stated 
; 

objectives and linitcd powers, shareholders' no 
                                               et 
                                                 in 
                                                   go, a proper Board r
                                                                       a
                                                                        n
                                                                        d 
                                                                             j 

the discipline of the profit cotivo (9.6 to 9.0). 

2.61 Although we **cannot** say that any **significant damage** has been done we cannot 
*n 
view of these **defects** and **associated** risks **recommend** the continuance of the 
c*own **Agents** with **their present** status, **composition** and range of functions 

## S O L U T I O N **Through** Gnanre Of^Functions

2.62 xiQ have **examined** the **possibility of minimising** the **defects** and the risks by oontr. 

oting the field of **Crown Agents activities - eg by return to** the boundaries 
'
 
o  
f their **activities in** 1967, the reduction of money market activities, or by 
^fining them **to their traditional** role **of serving oily** the Dependencies. Y£ 
delude **that** these **courses are impracticable or undesirable.** Severe **contraction** j 
0*** liquidation would** be highly **disturbing and damaging** to the interests of oversea:, Entries and the T
J
X (9.10 to 9.15). 

2.63 W
e develop and examine some no-.: model structures, involving different 

degrees of H
           M
            G involvement. 
                             W
                               e do not doubt that under present arrangements the -
                                                                                         J 

Minister has certain powers of direction over Crown Agents, though they have, for practical reasons not,been exercised in modern times. 
                                                       In view of the indopendenco 
                                                                                      -
                                                                                      ; 

ofrcost of the clients, the necessity of observing the integrity of princlpal/agenfc j 

a
n
 d banking relationships, and the nature of the business,vwg conclude that 

arrangements which minimise -the involvement of IMG and Parliament would be the 

tooot appropriate (9.17). 
                                                                 ' 
                                                                                           j 

               T
2.6h V
              ,
               e examine in our report four models all of which would incorporate Crown ­

i' 
Agents activities, eliminate Crown immunity, and reduce all or some of the other 
J
! 

defects and risks in the present arrangements. 

In essence these models arc: 

Model 1 A Nationalized Corporation (9.19 to 9.2U) 
j 

i 

Model ?. A private sector body with minority governmental interest 
(9.25 to 9.3?) 
1 
Model 3 A limited company with H
M
G (or H
M
G and Dependencies) as a majority 
shareholder and independent countries as minority shareholders 
(9.36 to 9-)i3) 
Model h A limited company with shares owned by H
M
G (9.hh to 9 .$\). 
\-. 
2.6$ *\Jc* do not seek to summarise a l l the characteristics of these models but we 
1 
i 

ftoto these points. 
                     Model 1 would have the advantage of clarity but would make H
                                                                                         M
                                                                                          G ;. 

fully responsible for the business and would almost certainly be unacceptable to 

the independent countries (9.2U). 
                                   Model 2 would remedy a l l the defects in the 

present situation; but its feasibility would depend entirely on private participaticj 

which seems unlikely (9-3h, 9-35). 
                                     Both Models 2 and 3 envisage shareholding 

participation by overseas countries which we regard as important but may be 

difficult to realize (9.29, 9.30, 9-33). 
                                            Model I
                                                  4 would involve H
                                                                     M
                                                                      G more closely thai 

fiouj i t is in effect an informal version of a nationalized body; but i t could be use 

a
s a stage to Models 3 or 2 (9.£1). 

## Conclusions And Recommendations

2.66 Choice among the models would depend significantly on the results of 
-consultations with overseas clients of Cro;m Agents and their reactions. 

Our knpressicn is that the Crown connection in the Crown Agents activities is not of j P^ine importance ( 9 o h  
) but this needs to be tested in concrete discussions with I 
L 
I
I 
V C r scas clients. Another factor.is the need for legislation. As far as we can 

' 
 te 
   all 
       models - 
               with the possible exception of Model J
                                                   i 
                                                    - 
                                                      would require 

                                                    T
                                                                                                                                                                                        r
Relation (9.55)-
                                                V
                                                  .
                                                    e 
                                                        cannot evaluate these factors at this stage. - V
                                                                                                                                                                                      ,
                                                                                                                                                                                        e 
                                                                                                                                                                                             would 

0"

ard Model 1 at best as a solution of last resort (?.2lt). On intrinsic merits 

-£^ggcpinmond the other models in the following order: 

| Model 2    | /    |
|------------|------|
| Model 3    |      |
| Model      | h    |

CP(77) 102 
C O P Y NO 
81 
7 November 1977 
C A B I N E T 

## C R O W N A G E N T S : T H E F A Y R E P O R T Memorandum By The L O R D Chancellor

1. 
           The Committee under Judge E S Fay which was appointed in A p r i l 1975 
to enquire into the causes of the financial problems of Crown Agents has now 
reported. 
                  (A summary has been circulated with CP(77) 101). 
                                                                                                  A group of 
Ministers under m y chairmanship has considered the Government's reaction 
to the Report. 

2 . 
           The Fay Report i s a thorough and well-balanced study which r e v e a l s 
a deplorable state of affairs in the past. 
                                                              Their main criticism is directed 
at the investment operations undertaken on their own account by the Crown 
Agents but there a r e also criticisms of Government Departments, the 
Exchequer and Audit Department and the Bank of England. 

## P U B L I C A T I O N O F T H E F A Y R E P O R T A N D T H E G O V E R N M E N T S R E P L Y

3. 
         Publication of the Fay Report to which the Government a r e committed 
will attract much publicity and c r i t i c i s m of Government under both Labour 
and Conservative Administrations, although the main responsibility for 
inaction must rest with the latter. 
                                              We think it i s essential that a White 
Paper giving the Government's comments on the Fay Report should be 
published at the same time as the Report itself. 
                                                               A draft is annexed. 
                                                                                           It 
states unequivocally that the Government accept the conclusions of the Fay 
Committee (paragraph 1) and then deals with the steps which have already 
been taken to reorganise the Crown Agents (paragraphs 5 to 10 and 21) to 
define clearly their relationship with the Minister (paragraphs 16 to 19 and 
22) and to disengage them from their property and secondary banking 
activities (paragraphs 20, 23, 25 and 26). 

## S T E V E N S O N R E P O R T

4. 
          It i s proposed to publish as an Annex to the White Paper the Report 
in A p r i l 1972 of a Committee under Sir Matthew Stevenson which examined 
the status, functions and financial operations of the Crown A g e n t s . 
                                                                                                (A 
summary has been circulated with CP(77) 101). 
                                                                    The then Minister 

(Mr Richard Wood) told the House of Commons on 8 November 1971 that 
it would not be appropriate to publish the Report of the Committee since 
most of the work of the Crown Agents was for independent Governments. 
It is possible that some witnesses may have had this statement in mind in 
giving their evidence. 
                       However with minor editing which has now been done 
the Report can be published without prejudice to the principals of the Crown 
Agents and without risk of breach of confidence. 
                                                The Fay Report quotes 
from it at length and comments that an edited version could have been 
published with beneficial results. 
                                  The Chairman and two of the three 
other m e m b e r s of the Stevenson Committee have said that Ihey think that 
the references to it in Fay make it desirable to publish the Stevenson 
Report. 
         Mr Richard Wood has been consulted and considers that it i s right 
in the circumstances to publish. 

## A C T I O N A G A I N S T C U L P A B L E I N D I V I D U A L S

5. 
           Criminal proceedings have been started against two of the people 
involved in the Crown Agents affair - Mr Bernard Wheatley, the f o r m e r 
sterling money market manager of Crown Agents who has since died and 
Mr Sidney Finley, a 
                                financier 
                                             whose companies had dealings with Crown 
Agents. 
               Civil proceedings for r e c o v e r y of moneys a r e being taken in 
three cases and the possibility of taking them in other cases i s under 
examination. 
                      In addition the Ministerial group thought that there should 
be an enquiry by an independent Committee with the terms of reference in 
paragraph 14 of the draft White Paper to establish the gravity of any neglect 
of duty by people in the public services and to assist those concerned in 
deciding whether disciplinary action should be taken. 
                                                                                 The Ministerial 
group thought that this enquiry should cover the Bank of England and the 
Exchequer and Audit Department as well as the Crown Agents and 
Government Departments: 
                                        for this it will be necessary to secure the 
co-operation of the Governor and before the enquiry i s announced it will 
also be advisable to consult the Chairman of the Public Accounts Committee 
and the Comptroller and Auditor General. 
                                                                This procedure would follow 
the precedents of Crichel Down in which Sir A n d r e w Clark's Inquiry 
(Cmnd 9176) was followed by the Woods Committee Report (Cmnd 9220, 
July 1954) and the Bossard case, in which the Security Commission's report 
was followed by the Wilson Smith Inquiry (Cmnd 2773, September 1965). 

It is quite likely that this enquiry will result in little or no disciplinary 
action becaune those who appear most culpable have left the public s e r v i c e 
and their pensions cannot be forfeited or abated unless they a r e convicted 
of a criminal offence in connection with their job. 
                                                        While a minority of us 
thought that in the circumstances the setting up of a disciplinary committee 
would be futile, the majority felt that public opinion would not be reassured 
if no further inquiry w e r e conducted. 

## L E G I S L A T I O N O N C R O W N A G E N T S

6. 
          A t their meeting on 11 October (CM('?7) 30th Conclusions, Minute 1) 
Cabinet asked the Ministerial group to consider the d e g r e e of urgency which 
should be attached to legislation to give the Crown Agents corporate legal 
status. 
             The group took the v i e w that with the action already taken to 
reorganise the Crown Agents and to define their relations with the 
Government, legislation was not essential immediately for constitutional 
or administrative reasons. 
                                           Parliament could probably be satisfied that 
the necessary remedial action had been taken and the Crown Agents' house 
already put in o r d e r . 
                                  Further consideration might however have to be 
given to the timing of legislation in the light of Parliamentary and public 
reaction to the Fay Report. 

## Conclusions

7. 
I invite the Cabinet ­
1. 
To a g r e e to ­
a. 
publication of the annexed White Paper at the same 
time as the Fay Report is published; 
b. 
publication of the Stevenson Report as an annex to 
the White Paper; 
c. 
the establishment of an external enquiry into the 
extent of neglect of duty on the part of individuals in the 
public s e r v i c e s . 

2. 
         To take note that the Ministerial group considered that 
immediate legislation to give the Crown Agents corporate legal 
status was not essential but that this question might have to be 
reconsidered in the light of Parliamentary and public reactions 
to the Fay Report. 

E-J 

L o r d Chancellor's Office 

7 November 1977 

## Introduction

1. 

The Report of the Committee of Inquiry on the Crown Agents i s being published today as I t i s published in f u l l . 

The Government and the Crown Agents accept the Report as a f a i r and searching investigation into the facts; 
and accept the Report's conclusion that there were serious shortcomings on the part of the Crown Agents and that Departments and other outside agencies contributed to the f a i l u r e to prevent l o s s e s . 

The Minister for Overseas Development, to whom the Report i s addressed, has conveyed her thanks to Judge E.S. Fay, Q.C., S i r Edmund Compton, G.C.B., K.B.E., and Mr. P. Godfrey, F.C.A., for t he i r thorough and exhaustive work on a most d i f f i c u l t and complex subject. 

2. 

The terms of reference of the Committee of Inquiry, which was appointed on 23 A p r i l '1975, w e r e : -
To enquire into the circumstances which led to the Crown Agents requesting f i n a n c i a l assistance from the Government. 

I t w i l l be r e c a l l e d that in December 1974 the Crown Agents received from the Government a recoverable grant of £85 m i l l i o n . 

However, the Committee was not s p e c i f i c a l l y asked to consider those aspects which bear d i r e c t l y upon the exercise of proper control over public bodies, although i t s Report touches upon some of these. 3. 

The Government therefore wishes to provide certain additional information, and believes i t w i l l be of assistance to Parliament to set out in sequence the Parliamentary consideration of these matters. 

This is done in Annex I which contains a l l the major Ministerial statements about the Crown Agents since November 1971. 

The Government also wishes to state i t s policy in r e l a t i o n to the Crown Agents, and to reaffirm i t s confidence in, and support for the present Board of the Crown Agents and for t he i r work. 

4. 

In view of the relevance of the report of the Stevenson Committee to the history of subsequent events, the Government has decided that i t also should now be published. 

I t i s printed in a separate volume (House of Commons return Number 000) as Annex V. 

## The Future Of The Crown Agents

5. 

Before making i t s comments on the c l e a r f a i l u r e s of the past, the Government wishes to place on record i t s view of the future of the Crown Agents. 

The Fay Report explores and elucidates a phase in the conduct of the Crown Agents' a f f a i r s which ended, and ended d e c i s i v e l y , three years ago. 

I t i s , in e f f e c t , an essential account of conduct and events which are now a question of h i s t o r i c a l concern rather than present anxieties, although their f i n a n c i a l consequences are s t i l l with us. 

6. 

The Crown Agents are now performing t he i r invaluable services on behalf of t he i r P r i n c i p a l s , who include 67 
Commonwealth Governments, Associated States and Dependencies 
152 Commonwealth public bodies; and 57 non-Commonwealth governments and agencies, in the secure confidence that the Government stands behind them during a period, which w i l l inevitably l a s t for some time, of gradual disengage­ ment from the i l l - a d v i s e d and disastrous speculative involvements of 1967 to 1974. 

Since December 1974, the Crown Agents have been undertaking an orderly and phased withdrawal from property and secondary banking. 

The Government's assurance means that the position of a l l depositors i s f u l l y safeguarded. 

7. 

The Government wishes to make clear beyond doubt i t s unequivocal and firm support for the Crown Agents. I t has created a service to developing countries which at the same time provides a channel for t r a d i t i o n a l and new supplies of goods and services to the wide and expanding market of the third world. 

I t s origins lay at the heart of nineteenth century colonialism, when i t s role (from 1833 onwards) was to procure goods from B r i t a i n for the colonies. 

In the l a s t 20 years, i t has b u i l t and transformed the past into a confident and greatl y appreciated relationship with the countries and public agencies of developing countries a l l over the world. The Crown Agents serve them; and in doing so, they are a crucial element in B r i t a i n ' s relationship with countries overseas. 

8. 

The Crown Agents functions w i l l be the t r a d i t i o n a l services of procurement, recruitment, technical advice and management. 

The exact pattern of such future develop­
ment cannot, of course, be predicted, for i t w i l l be determined by the degree of expansion of the Crown Agents' 
own relationship with their overseas P r i n c i p a l s , and by their response to new needs for goods and services as they emerge and are i d e n t i f i e d . 

The Government believes that a l l concerned can be confident that the Crown Agents have ahead of them a future of promise and achievement. 

9. 

The Government i s reinforced in this b e l i e f by i t s awareness of the c a p a b i l i t i e s of the present Chairman and his Board, The seriousness of the situation which we and they faced in the autumn of 1974 was not one which they could have expected, in the absence of up-to-date f i n a n c i a l information. 

That so much that was wrong has been and i s being put r i g h t , and that a c t i v i t y on behalf of overseas Principals has increased in the l a s t three years i s a tribute to them, and p a r t i c u l a r l y to the Chairman, Mr. John Cuckney. 

10. 

The Government w i l l introduce as soon as possible a B i l l to incorporate the Crown Agents: a commitment made to Parliament in October 1975. 

This w i l l not affect the Crown Agents' relationship with t he i r overseas P r i n c i p a l s . 

But i t w i l l c l e a r l y define the relationship between the Crown Agents and Ministers which was obscure after the rapid move to independence of the Colonial t e r r i t o r i e s in the early 1960s; and w i l l provide for the proper exercise of public accountability. 

Meanwhile the Government has taken the administrative action detailed below, designed to secure these objectives pending l e g i s l a t i o n . 

11. 

I t i s manifest from the Inquiries of the Committee that during the period from 1967 to 1974 the conduct of the a f f a i r s of the Crown Agents, and, in p a r t i c u l a r , the actions of certain of i t s staff, lacked competence and good judgment. 

As the Committee explain in paragraph 3 
of the Introduction, they have made a separate report on matters r e l a t i n g to the l a t e Mr. Bernard Wheatley, the Crown Agents' former s t e r l i n g money market manager, and Mr. Sidney Finley. 

That Supplementary Report i s not being published, because these matters are subjudice, but has been referred by the Minister of Overseas Development to the Director of Public Prosecutions. 

With the possible exception of matters covered in that Report, the Committee found no evidence of corruption among the Crown Agents' 
s t a f f . 

As regards exchange control, investigations by the proper authorities are proceeding. 

The Committee's report on the Crown Agents' acquisition of shares in the F i r s t National Finance Corporation Limited in 1969 to 1970 
(paragraph 73) was referred to the Director of Public Prosecutions, who found no grounds for proceedings against the individuals in question. 

However, i t i s clear that the own-account a c t i v i t i e s of the Crown Agents did not accord with the proper standards of "behaviour of public bodies. 

I t i s to be noted that the other a c t i v i t i e s were properly conducted. 

12. 

I t i s evident that during this period, there was a lack of c l a r i t y concerning the constitutional relationship between Ministers and the Crown Agents, and that the information made available to Ministers was incomplete. 

I t i s recognised by a l l concerned that for much of the period between 1967 and 1974 the growth of the Crown Agents' own-account business, and the pattern of i t s investments, as outlined in the Report, was inadequately monitored and scrutinised. 

The Government accepts that this represented a f a i l u r e to apply the normal principles of public accountability. 

1 3 . 

The Government believes that i t s e f f o r t s to explore the causes of t h i s f a i l u r e ; 
i t s decision to lay a l l the facts before Parliament; and i t s e f f o r t s and success in r e - e s t a b l i s h i n g the Crown Agents on a sound footing, w i l l be regarded as firm evidence of i t s determination that the conduct of public a f f a i r s shall be honourable, and s h a l l be seen to be do. 

14. 

The Government has decided to set up a Committee of Inquiry with the following terms of reference: 
"To examine the facts and assess the nature and gravity of any neglect of duty on the part of those employed in the Crown Agents, the Ministry of Overseas Development, the Treasury, the Bank of England and the Exchequer and Audit Department, so as to a s s i s t in deciding whether appropriate action i s required". 

This follows the precedent of the Committee which reported in July 1954 on persons involved in the Crichel Down inquiry (Cmnd. 9220) and the Board of Inquiry which reported in September 1965 following the report of the Security Commission on the Bossard and Allen cases (Cmnd. 

2 7 7 3 ) . 

15. 

At the same time, i t i s important to emphasise that the t r a d i t i o n a l a c t i v i t i e s of the Crown Agents in providing services to their overseas P r i n c i p a l s have continued, and are continuing successfully. 

As the Fay Committee has pointed out, what went wrong was a part only of the Crown Agents 1 financial a c t i v i t i e s , and those a c t i v i t i e s themselves formed only a part of the Crown Agents' t o t a l business. 

Judging by the continued success of t he i r t r a d i t i o n a l r o l e , the Crown Agents' 
orthodox a c t i v i t i e s have not suffered from the p u b l i c i t y accorded to t he i r own-account business, and in 1975 and 1976 the t r a d i t i o n a l agency services produced gross income of £11 
million and £17 million respectively. 

These services had for nearly 150 years past been the reason for the Crown Agents' existence; they w i l l now be the b a s i s for a continuing future. 

## The Constitutional Position

16. 

The Committee of Inquiry outlines the progress of e f f o r t s to establish the constitutional relationship between the Crown Agents and Governments from February 
1970 onwards. 

This was not an easy matter. 

The Crown Agents, from 1833 onwards, were an agency under the d i r e c t control of the Secretary of State for the Colonies. 

They supplied the goods and services required by the Colonies. 

Their r o l e was not questioned or examined u n t i l a Select Committee of the House of Commons investigated and reported i n 1909, following which i t appears that their r o l e continued as before, under the firm control of the Secretary of State for the Colonies. 

17. 

The constitutional relationship was well understood and worked s a t i s f a c t o r i l y u n t i l the process of decoloni­
sation occurred. 

The Crown Agents then began to undertake procurement of goods and services for independent governments and t he i r parastatal agencies. 

Their formal r e s p o n s i b i l i t y continued to be to the Secretary of State for the Colonies until 1961 when it passed to the Secretary for Technical Co-operation, and from him to the Minister of Overseas Development in 1964. It will be of interest to Parliament to note that during the 64 years from 1909 to 1973* only 
18 PQs touching upon aspects of the Crown Agents
1 work were tabled and answered. 

18. The enquiries into the constitutional relationship which were initiated in 1970 were necessary. The exercise of effective control, and public accountability, cannot be divorced from a clear definition of Ministerial responsibilities and powers. It is an important element in the history of the relationship that no such clear definition existed between about 
1960 and 1974. 

19. The Government's White Paper (Cmnd. 6445) on "The Future of the Crown Agents", promised in October 1975 
and published in April 1976, outlined proposals for legislation to give the Crown Agents a corporate legal status, to define their functions, and to define the powers of the Minister. The Government believes it to be essential that the constitutional relationship shall be clarified, defined, and given legal status. Legislation will ensure a continuing basis for the traditional role of the Crown Agents in providing procurement, recruitment, technical, advisory and financial management services to their overseas Principals. 

## The Present Financial Position

20. All new own-account investment of the kind described in the Committee's Report has ceased. Since December 1974 the Crown Agents have undertaken an orderly and phased withdrawal from property and secondary banking. 

In February 1975, the Minister of Overseas Development 
(Mrs. Hart), after consultation with the Board of the Gjrown Agents, set out in a directive the main principles 
\^hich were to govern that withdrawal and the Crown Agents' 
future investment and lending p o l i c y . 

This directive i s reproduced in Annex I I . 

Special accounting arrangements have been agreed to ensure that the Crown Agents account separately for those investments from which they are disengaging, and proper accounting provisions have been made against bad and doubtful investments on past own­
account a c t i v i t i e s . 

21. 

Since October 1974 the Crown Agents have had a proper Board structure including independent part-time members appointed by the Minister and d i r e c t l y responsible to her. 

A complete internal reporting system has been established, with c l e a r l y defined l e v e l s of authorisation and control. 

In this connection, the Crown Agents' 
management accounting and financial information system has been completely reorganised and p r o f e s s i o n a l l y q u a l i f i e d people have been appointed from outside the organisation to bring in the necessary expertise. 

The accounts are now published in accordance with M i n i s t e r i a l direction agreed with the Treasury governing their timing and t he i r form so as to give the f u l l e s t measure of d i s c l o s u r e . 

New l e g a l advisers and independent valuers have been engaged. 

In p a r t i c u l a r , the Crown Agents have sought independent professional advice on the management of t he i r disinvestment programme. 

A special London Advisory Committee has been set up to advise the Board on the Crown Agents' Australian i n t e r e s t s , and includes two property consultants and a representative of Morgan Grenfell and Co. Limited. 

22. 

Close working r e l a t i o n s have now been established between the Crown Agents and the. Ministry of Overseas Development. 

The Ministry and the Treasury have been kept f u l l y in touch with the Crown Agents' position and p o l i c i e s r e l a t i n g to f i n a n c i a l matters, and progress in r e a l i s i n g their own-account investments. 

The Bank of England has been consulted in appropriate cases. 

Arrangements have been agreed under which the Chairman makes regular reports to the Minister on matters of special i n t e r e s t , and the Ministry and Treasury receive comprehensive management accounts every quarter. 

These arrangements are recorded in a set of guidelines issued in July 1977, which are reproduced at Annex I I I . 

23. 

The withdrawal from property and secondary banking a c t i v i t i e s must necessarily take time. 

Much progress has been made, as i s shown in the account given of individual investments in Annex IV. 

But some of the concerns in which the Crown Agents have invested money have gone into l i q u i d a t i o n , and the Crown Agents have had to await settlement of their claims along with those of other c r e d i t o r s . 

In other cases, the problem has been to strike the r i g h t balance between disengaging quickly on the one hand, and recovering as much as possible of their investment, thus minimising the f i n a l loss to the taxpayer, on the other. 

This has been p a r t i c u l a r l y important in regard to the Crown Agents' 
Australian investments. 

A broad strategy for the management of the Australian operations has been agreed with the Minister. 

She i s also consulted about other major decisions on disengagement. 

24. 

The t r a d i t i o n a l relationship between the Crown Agents and t h e i r overseas Principals i s in no way brought into question by the own-account operations of the past. 

I t i s essential that the customary standards of conf i denti al i ty should continue to be s t r i c t l y observed in respect of transactions undertaken as agents on behalf of overseas P r i n c i p a l s . 

25. 

The Crown Agents now have complete control over their property investments in A u s t r a l i a , from which a lengthy period of disengagement appears to offer the best prospect of reducing any demand on public funds. 

They are no longer involved with t h e i r former partners in the English and Continental Group. 

They are in the process of disengaging from their merchant banking investments in the Caribbean. 

Following the bankruptcy of the Stern Group, they are participating in a Scheme of Arrangement approved by the Court with an independent Administrator, as the most effective way of recovering as much as possible of their investment. 

C i v i l proceedings have been instituted to recover some of the moneys l o s t and the p o s s i b i l i t y of further such action i s being considered. 

26. 

The Crown Agents 1 Accounts for 1976 show that as at 31 December 1976, the d e f i c i t on the own-account investments in property and secondary banking (the Realisation Account)- was in t o t a l some £212 m i l l i o n . 

The ­
ultimate loss w i l l not be known with certainty u n t i l the complete disengagement of the Crown Agents from the property and secondary banking a c t i v i t i e s of the past have been completed; this process may take some years. 

But i t i s already clear that the f i n a l d e f i c i t may w e l l be in excess of £200 m i l l i o n . 

Should the need a r i s e , the Government's undertaking that i t stands behind the Crown Agents w i l l be f u l f i l l e d by putting proposals to Parliament for further financial assistance. 

Given the experience of the recent past the Government believes i t wise to reassert i t s commitment to the Crown Agents, to give i t s present quantitative assessment of that commitment, and to undertake to inform Parliament i f the degree of that commitment requires r e v i s i o n . 

27. 

There has been a most severe f a i l u r e of public accountability. 

The causes of this are made clear by the Report of the Committee of Inquiry, and are supplemented by the additional information presented here. 

28. 

The Crown Agents are now on a d i f f e r e n t and better footing. 

Their constitutional position and their relationship with Ministers have already been c l a r i f i e d and w i l l be established by l e g i s l a t i o n . 

Accountability i s now established, and the d i s a s t e r s of t h e i r own-account a c t i v i t i e s of the past are being gradually remedied, at the cost of Government f i n a n c i a l support. 

The Crown Agents' senior s t a f f most c r i t i c i s e d by the Report are no longer v/ith the Organisation. 

2 9 . 

The Government places firmly on record i t s confidence in the Board of the Crown Agents and in i t s t r a d i t i o n a l a c t i v i t i e s now and in the future on behalf of i t s overseas P r i n c i p a l s . 

I t stands behind the Crown Agents. 

* question from Mrs 
                     Judith Hart, announced the 
                                                      appointment of 
                                                                        a Committee under 

Sir 
   Ifetthew Stevenson to consider the 
                                                 need for 
                                                             any changes in 
                                                                                 the status, functions 
                                                                                                               and 

financial operations of 
                        the Crown Agents. The full text is given below. 

' 
         Mr. Morris is a director in his official 

capacity of Sterling Industrial Securities, 

C R O W N A G E N T S " t 
                             ' " 
                                           in which the Crown 
                                                                      Agents 
                                                                                have a 

                                                     financial stake. 
                                                                        In the summer of 1970 
 The following Question stood upon the 
                                                     he told his chairman, Mr. Hayes, of his 
Order Paper: 
                                                     wish to purchase some shares in this 

56. Mrs. HAHT: To ask the Secretary of 
                                                             company 
                                                                           with the gratuity he would 

State for Foreign and Commonwealth 
                                                            receive on retirement in September, 1970. 

Affairs whether he lias considered the 
                                                    Meanwhile my Department, who had no 

position of the Crown Agents and their 
                                                            knowledge of the proposed share trans­
relationship with Her Majesty's Govem­
                                                            action, agiccd to the chairrnarfs request 

mcnt; and if he will make a statement 
                                                that Mr. Morris should remain in tem­

about personal dealings in shares by 
                                                porary employment as a Crown Agent tor 

Crown Agents. 
                                                 a period after his retirement from pen­
                                                 sionahlc service. 
                                                                     Mr. Morris acquired 
 The Minister for Overseas Dcvclop­
                                                  shares in the company in October, 1970. 
mcnt (Mr. Richard W o o d ) : With pcrmis­
sion, Mr. Speaker, I should now like to 
                                                    Last 
                                                          February 
                                                                     Mr. Morris 
                                                                                   became 

answer Question No. 56, and I apologise 
                                                  chairman of, and also purchased shares 

for the length of the answer. 
                                                                  in, a private company which includes 
                                                                  Sterling Industrial Securities among its 
  The right hon. Lady the Member for 
                                                                  bankers. 
Lanark (Mrs. Hart), when Minister of 
Overseas Development, asked for a dc-
                                                                     Looking back on this whole sequence 

partmental paper on the position of the 
                                                   of events, and taking account in parlicu-

Crown Agents. 
                Wiien I received it, I 
                                                lar of Mr. Morris\s retention as a Crown 

decided, with tho agreement cf rny right 
                                                       Agent for longer than was originally con­

lion. Friend the Foreign and Common-
                                                         templatcd, J consider that the Crown 

wealth Secretary, to appoint a Commit-
                                                      Agents should have recognised that these 

tcc to consider the need for any changes 
                                                             arrangements might not be wholly com­

in the status, functions and financial 
                                                            patiblc 
                                                                       with 
                                                                               Mr. Morris's 
                                                                                                  continuing 

operations of the Crown Agents. 
                                        The 
                                                        employment as a Crown Agent. 
                                                                                                I have 

Committee began work in the late surn-
                                             discussed this with Mr. Morris, who is 

mcr. 
      Its Chairman 
                       is Sir 
                                 Matthew 
                                                    coming to the end of a long and dcvoied 
                                                    career

Slf-venson. With permission, I will pub-
                                                         in public service, and, in rccogni­

lish in the OFFICIAL REPORT the names 
                                                                       tion of this difficult situation, he has 

of its members and its terms of reference. 
                                                     undertaken to dispose of the shares with-

It would not be appropriate l\o publish 
                                                     out profit to himself. 

a report, since most of the work of the 
                                                       Mrs. Hart: I thank the Minister for 
Crown Agents is now for independent 
                                                    that statement 
                                                                      and recognise 
                                                                                        that it 
Governments; but I will make a further 
                                                    needed to be as long as it has been. 
statement to the House after I have con­
sidered the Committee's advice. 
                                                       May I, first, say that we shall want to 

study this very carcfuliy, in particular 

I have also examined carefully ques­
                                             some of the implications of what he 
                                                                                 has 

tions which have been raised about the 
                                                said? 
                                                       Second, may I say that we are 

personal dealings in shares by the two 
                                                     glad that the question of Mr. Morris's 

Crown Agents, with the fullest co-opcra­
                                                shareholding has now been cleared up, 

tion of them both. 
                          Mr. Kayes was a 
                                                              but that this clearly indicates how ini­
director in his official 
                               capacity of a 
                                                              portant it is to get the constitutional 

merchant 
           bank, 
                   the 
                          directors 
                                     and 
                                                    relationship between Government and the 

managers of which were asked to pur-
                                                  Crown Agents right? 

chase a small number of shares of a 
                                        new 

                                    Why is he so determined not to pub­
issue sponsored by the bank. He did so 

                                                         Iish the report of the inquiry when it is 
after discussion with the then Permanent 

                                             complete? 
                                                         I must tell the right hon. 
Secretary of the Ministry of Overseas 

                                            Gentleman thai we shall press him on 
Development, while giving 
                         instructions 

                                                            this, 
                                                                    I should find it quite wrong if a 
that the disposal of the shares should be 

                                                  report on such an important constitu­
at no gain or loss to himself. I am satis­
                                                  tional matter were not to be made avail­
ned that this purchase was not incon­
                                                  able to Parliament. 
                                                                        Second, why has it 
listcnt with his office. 

taken so long to make this statement? 

As the right hon. Gcnticman said. I asked 
for the oflicial departmental look at this 
in (he spring of 1970, 
                  yet it is only now 
—in the summer-that he has set up 
                             the 
Committee. 

  Lastly, 
            will 
                  the Committee, 
                                       whose 
names he is about to publish, include 
representatives of Commonwealth Gov­
ernmcnts or of the Commonwealth Secre­
tariat, recognising the key role that the 
Crown Agents play in the economic rela­
tionship between trade in Britain and 
Commonwealth countries? 

 Mr. Wood: On the first of the right 
hon. Lady's points, on publication, I have 

- taken the view that the relationship be­
  tween the principals, most or many of 
  whom arc independent Governments, and 
  the Crown 
              Agents themselves on the 
  other side, is of immense importance, and 
  that it would therefore be unwise and 
 wrong to publish a report which could 
  possibly badly affect 
                       that relationship. 
 That is why I announced the decision 
 that I have. 

 As for delay, I suppose, that perhaps 
we have all been rather slow in getting 
round to this. 
             The Crown Agents have 
now existed since 1S33—therefore, for 
about 140 years. The Labour Party, the 
Conservative Parly and the Liberal Party 
perhaps could have acted a little earlier in 
considering what should be the proper 
relationship between the Crown Agents, 
in new circumstances, and the Govcrn­
ment. Bui in comparison with those 140 
years, the period between the right hon. 

, Lady*s initiation of this examination and 
the report of the Stevenson Committee 
Will probably be a liule less than two 
years, and therefore rather insignificant 
beside the **length** of life ot Ihe Crown 
Agents over the centuries. 
As for the members, I will publish their names, as I have said, in the Official Report. 

This is a small com­
mittec, which does not contain the mem­
*bership which the right hon. Lady sug­
gested, but it will, I hope, satisfy the House of Commons that these matters Will be very carefully looked into. 

Mr. Dalyell: For what reason did the Department not have knowledge of the lhare transactions? 

Mr. W o o d : 
Because they were not 
' reported to them. 

Mr. Arthur Lewis: Could the Minister tell us whether this arose as a result of the scandal which was revealed by the Sunday Times **and** *Private Eycl* 
If so, will the right lion. Gentleman pay a tribute **to the** *Sunday Times* **and** Private Eye for starting this scandal? 

After all. 

Private *Eye* is very rarely praised in this House, and it might make a change to do so. 

Mr. Wood : If the lion. Gentleman will show me the reports which appeared in the *Sunday Times* **and** Private *Eye,* 1 will sec whether they deserve a tribute. 

Mr. George Cunningham: 
Will the right hon. Gentleman bear in mind that, despite this regrettable incident, the Crown Agents have a very high rcputa­
tion throughout all aid donors in the world for providing facilities in dcvclop­
ing countries which no other donor can equal? 

Will the report, if it is not to be pub­
lishcd, at least be given to the overseas principals which use the Crown Agents so that they can be sure that things have now been put right inside the Agency? 

Mr. Wood : I am glad that the lion. 

Gentleman made the first point. I should like to have made it myself. 

I think that the confidence of the principals in the activities of the Crown Agents is shown by the amount of business that they place with the Crown Agents. 

As I explained to the right lion. Lady, I have taken the view that the report should not be published. As the report is about the desirable relationships for the future between the Crown Agents, on the one hand, and Her Majesty's Govcm­
1 mcnt, on the other hand, I have naturally kept the various principals fully in the picture so that they will know what is happening, and I am certain that the existence of the Committee will not im­ pair the relationship between the Crown Agents and their principals. 

. Mrs. Hart: May I press the right hon. 

Gentleman a shade further on the qucs-
: 
tion of publication. 

As he will appre- , ciate, my concern was that the constitu­
tional relationship in this case between a Minister and the Crown Agents whom he appointed but who had no other responsi­
bility whatever, either financial or other­
wise, to government seemed unsatisfac­
tory. 

To the extent that the inquiry is 
2 D 20 
directly concerned with tliis constitutional relationship, I believe thai this i
.

s a matter which it would be perfectly proper to make public knowledge. 

We do not have other constitutional relationships between Ministers and inside bodies or public bodies which arc not known fully to Parliament. 

Mr. Wood : The right hon. Lady will understand that the committee will have to consider in some detail the relationship between the Crown Agents and the prin­
cipals as well as the relationship between the Crown Agents and Her Majcsly's Government. 

That is why I promised to make a further statement to the House When I receive the Committee^ advice in the light of what the Committee thinks should be the future relationship between the Crown Agents and Her Majesly's Government. 

However, I do not think it right to publish the report. 

I do not think the report could be nearly as useful if I did not make that statement. 

Following is the information : 
T
h e Committees terms of reference are to consider whcihcr there is a need for any 

-changes in the status, functions and 
                                       financial 
operations of the Crown Agents, including pnr­
ticularly Ajicir relationship to Her 
                                      Majcsty*s 
Government, having regard to: 

 Developments which have taken place i
                                      n 
recent years in the nature of their functions 
a
n
 d 
    in the constitutional 
                         status of 
                                    their 
principals; 

  and to the United Kingdom's own interests 
including the needs of the remaining depen­
dencics ; 

a
n
 d to make recommendations on the nature of 
a
n
 y such change. The Chairman is Sir Matthew 
Stevenson, K.C.B., C.M.G., and other members 

S
i
 r
Mr.

 Glyn Jones. G.C.M.G.,
 M. J. Vcrey. 

S
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                 ' ' 

 M.B.E. 
            ' 

MRS. HART: T
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FRIENDS. 

## Agents' I N V E S T M E N T A T T H E P R E S E N T T I M E In P R O P E R T Y I S 1 P E R C E N T , And I H C R C - F O R C

MN CUNNINGHAM : HOW M
U
C
H MONEY? 

MR. WOOD : N
O
T V
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Y MUCH. AS I W
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SAYING, T
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THE R
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MR. WOOD : J H
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THE. 

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I AM S
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, B
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. 

MRS. HART: HOW I
S T
H
E R
I
G
H
T HON. 

G
E
N
T
L
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M
A
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S
W
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A
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HEM? 

MR. WOOD: I AM A
N
S
W
E
R
A
B
L
E T
O PURLIN-
MENT. T
H
A
T I
S O
B
V
I
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E MOMENT, W
H
E
N I AM BEING A
S
K
E
D S
O MANY, QUES-
T
I
O
N
S
. 

## Mr.. Cunningham: Thefirst T I M E In T H R E E Y E A R S .

MR. WOOD: I
T I
S N
O
T T
H
EFIRST 
T
I
M
E IN 
T
H
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E
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A
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. I H
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Q
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D
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P
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A
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. LADY W
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C
­
, MIND MC O
F H
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R O
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R Q
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T
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. I AM 
A
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M DOWN. 

^ 2
4 July 1972, the Minister for Overseas Development (Mr Richard Wood) gave the j loving reply to questions from Sir Bernard Braine and Mrs Judith Hart. 

He also a culated  written statement reporting on the advice given him by the Stevenson Committee. 

## Cfbwri Agents 1 (Slcvciison Report)

1 
36. Sir 
Bernard 
Braine 
asked 
the 
Secretary of State for Foreign and Com­
monwealtii Affairs if lie has received the 
report of the committee, under the chair­
manship of Sir Matthew Sievenson, which 
has been inquiring inio tlie status and 
functions of the Crown Agents ; and if 
he will make a statement. 
38. Mrs. Hurt asked the Secretary of 
. State for Foreign and Commonwealth 
Affairs if he has now received the Steven­
son Report on the Crown Agents ; and 
It he will reconsider his decision on its 
publication, in view of the public impor­
tance of the relationship between Her 
Majcsty*s Government and tho Crown 
Agents. 
Mr. Wood t I havo received the coni­
mittee's advice and with permission I 
will circulate a statement **in the O**FFICIAL 
RBPORT. 
Briefly, the committee found 
that the interests of the Crown Agents' 
principals and others concerned would best 
be served by the continuation of the i whole range of services which the Crown I Agents provide. 

1 welcome these find­
ings. which reinforce my confidence in 
: the Crown Agents' work for their over­
seas principals. 

I also accept the com­
, millce's recommendations that there should be a clearly defined status, slruc­
, lure and responsibility for the Crown Agents and that they should bear appro­
priate liability to taxation. 

I am con­
sidering how these conclusions can best be given effect and I will later make a further statement. 1 would like to record my gratitude to the committee for its advice. Since most of the Crown Agents' 
work is for independent Governments, it would not be right to publish the report. 

Sir Bernard Braine: Will my right hon. 

Friend assure the House that the changes he has in mind are in the best jnterests' 
of the overseas principals? 

Secondly, bearing in mind the very long and valu­
able service that the Crown Agents have 

.giveri 
their 
Commonwealth 
principals 
over very many years, will my right hon. 
Friend confirm the impression that a good 
many of us have had for a long time 
that the Crown Agents are continuing to 
serve 
their 
principals 
with 
skill and 
Jjlletfiily'/ 
Mr. Wood : I have every confidence in the integrity of the Crown Agents, and I agree with my lion. Friend about the value of the work they do for their over­
seas principals. 

In my opinion the value of that work will be enhanced by changes of the kind I have it in mind to make. 

Mrs. Harl : Is the right hon. Gentleman aware that when I spoke to him on the telephone last week and he told me I hat his reply might be too long to give orally, I had no idea that in addition to refusing to publish the report he would issue a statement of the results of the report only in a Written Answer? 

This is quite disgraceful and it astonishes mo. 

May I put this point to the right hon. Gentleman? 

Is he aware that in the light of recent discoveries about relationships between civil servants and Governments and between Ministers and Governments following the Poulsou in­ vestigations, it is irresponsible and in­ conccivablc that a full report should not be published, though not necessarily con­
taining the evidence given by other couu­
trics? One can understand that that would not be possible. 

But is it not irrcspon­
siblc on behalf of the Government not to publish the findings of this report since they relate to the relationship bc­
tween employees of the Government and the Government itself? 

Mr. Wood : Perhaps I might begin by setting the right lion. Lady's fears at rest about the longer statement that I mean to issue. 

I assure her that it will contain no surprises. 

I have summarised it adequately in my shorter answer. 

As for what she terms the irresponsibility of not publishing the report, 1 think it would be utterly irresponsible to publish a report which I undertook at the time that I set up the committee would not be published, for reasons that the right hon. Lady knows. 

What is more, know­
ing what the right lion. Lady does about the relationship between the Crown Agents and their principals, I am certain that if she were standing at this Dispatch Box she would take the same view. 

Docs the right hon. Gentleman intend to say nothing about the fact that Crown Agents' money has gone into the notorious property empire of John Chalk and Timothy Gwyn-Joncs? Will he recognise that there is a scandal which is waiting to blow? 

Unless we investigate the matter fully with sufficient openness but with confidentiality to reflect the circumstances, ' 
the traditional work of the Crown Agents, which is of enormous value throughout the world, will incvitably.be prejudiced. 

Mr. Wood : The purpose of the Crown Agents indulging in the activities to which 
1 
the hon. Gentleman refers is largely to build up the reserves of the Crown Agents, which are largely to the benefit ! 

. of the principals themselves, and the * 
principals have shown their con­
fidcncc in this policy. I understand that the hon. Gentleman has a Question to put to me next week about the appointment of Mr. Challis. but. having made this statement today, I should tell the hon. Gentleman that the Chairman of the Crown Agents, when the appointment was mooted, considered Mr..Challis in the way in which a civil servant would be considered. He consulted me, and I con­
sultcd others. 

I 
therefore share the . 

responsibility for it. I had no reason to object to this appointment because I 
believed that it was in lino with the rules that apply to the Civil Service. 

Mr. Ilordcrn: Is my right hon. Friend satisfied that lie has the consent and approval of the Crown Agents' principals to these proposals? Would he agree that nothing should be done that could impair the close confidence which die Crown Agents" principals of various' Common-
Wealth countries have in the operation of the Crown Agents' themselves? Would he also accept that Ihc Commonwealth countries arc perfectly capable of deciding who should look after their own affairs? 

I 
Mr. W o o d : I am entirely in agreement 
! with my hon. Friend. I believe that the assent of lhc: principals to these arrange­
. mcnls is of immense importance, and that is the reason why I look ihe opportunity to tell them what was happening. I believe that my statement will do nothing to damage the confidence that exists between the principals and the Crown Agents. 

Mr. Dalyell: In relation to the trustee analogy, may I confirm that the Minister 
"used the phrase " if the companies so decide"? Docs this mean that speculative investment can go on without his Department being told? 

' Mr. W o o d : It means purely that the trustee analogy will not he wholly rcsliic­
live, that Ihe Crown Agents can make investments, if they so choose, outside the trustee analogy,, and would be guided in doing so not only by the executives of the Crown Agents' stall themselves but by the non-cxcculivcs. who would be appointed after consultation will) me. 

Mr. Skinner: Would the right hon. 

Gentleman go even further and issue an instruction to the Crown Agents to stop any investment in these slum property speculations? 

Mr. Wood : No, Sir. 

Mr. Costain: 
Docs my right hon. 

Friend sec any different relationship 

i 
between the Crown Agents and Milibank Services? 

Mr. W o o d : 
No, Sir. 

There is no connection. 

Mr. Frccson: 
The Minister gave a scandalous answer to my hon. Friend the Member for Bolsovcr (Mr. Skinner), who asked whether any instruction would be given by the right lion. Gentleman to the Crown Agents to cease investments in slum property. 

Is the right hon. Gcntlc­
man aware that (here is critical concern about activities in this direction? 

Is he further aware that in such a matter there is a balance of responsibility and con­
fidence between the principals overseas and this House and this country? 

Surely any decision he lakes should reflect that as well? 

Will he think again about his answer lo my hon. Friend? 

Mr. Wood t J said, " No " lo tfutl ijiies­
tion because the Crown Agents have neither made nor contemplated making such investments. 

Mr. George Cunningham: 
Nonsense. 

Mr. Wood; 
I will elucidate. 

I think the hon. Member for Islington, Soulh-
Wcst (Mr. George Cunningham), wilh his great interest in this matter, has in mind certain investments made in the FiiM 
National Finance Corporation. 

This in a company in which die Crown Agents have a limited financial interest. 

The Crown Agents have not made investments in slum property. There were investments made by the First National Finance Cor­
poralion. .. I have no doubt, and never have had any doubt, about the inlcgriiy of the Crown Agents. 

We can all have our judgment of their judgment. 

The hon. Gentleman has his judgment about their judgment. The principals also have their judgment about the Crown Agents' 
judgment and have expressed their con­
fidcricc clearly. 

. Mrs. Hart: As one who initiated, this report towards the end of the period of the Labour Government, I must tell the right hon. Gentleman that I should ' 
:not take the view he is now taking. 

I 
accept that evidence given by other coun- Iries should remain confidential but I 
-do not see why that should preclude 
-publication of the conclusions of Sir Matthew Stevenson and his colleagues, and I do not see why the House'and " 
the public should be kept in the dark about the reasons why they have come to the conclusions they have. 

- Mr. W o o d : When the committee was set up, with the concurrence of my right . 

hon. Friend, so that the whole relation­
ship between Her Majcsty's Government 
.and the Crown Agents could be cx­
amined—which, incidentally, impinges on the Crown Agents' relationship with the principals-1 undertook that the rqrort 
... 

'-\ 
, 

C
. 
would not be published. 
It is on t h h t  
/ ^ K 
. .
 
* 
-tf 
* ' y * 

f* 
basis that the inquiry has taken place. 

-Therefore it would be utterly jnesponsi.^Ic.'; 
" i U  
^ t f V  
5 ^ -
' 
- - '"' 
AJf the report were-now to be published, 4" ' ' . ' 

r-. Following is the statement: 
1 told Parliament last November that I 
bad appointed a Comhiiiicc under the chpir­
jnanship of Sir Matthew Stevenson to con­
sider the need for any changes in the status, functions and financial operations of tho Crown Agents. 

1 now have the commiltcc's advice. . 

| It surveyed          |  all the                                |  Crown Agents" activities,    |
|----------------------|-----------------------------------------|-------------------------------|
| which                | include                                 |                               |
| a                    | very                                    | wide                          |
| -.                   |                                         |                               |
| on                   | behalf                                  | of                            |
| The                  | committee found that                    |                               |
| the                  | Crown Agents                            |                               |
| are providing        | competent                               |                               |
| and                  | economical                              | scr­                           |
| . vices,             | of                                      | great                         |
| scas,                | and                                     | lhat* their interests         |
| .                    | Her                                     | Majcsly                       |
| British              | dependencies,                           |                               |
| arc                  | best served                             | by the                        |
| continuation         | of                                      | this full                     |
| '1                   | welcome these findings, which reinforce | my                            |
| confidence           | in the                                  | Crown                         |
| ' overseas           | principals.                             |                               |
| The                  |                                         | committee, however, commented |
| on                   |                                         |                               |
| ;                    | the                                     | constitutional                |
| Agents,              |                                         |                               |
| and the              | Governments undefined                   | re­                            |
| tidual               | responsibility                          | for                           |
| tee                  | recommended                             | that                          |
|                      | be a                                    |                               |
| clearly              | defined status, structure               | and                           |
| . tibility           |                                         |                               |
| for the              | Crown Agents,                           | and                           |
| suggestions          |                                         |                               |
|                      | for                                     | consideration.                |
| Agents,              |                                         |                               |
| but not              | their subsidiary companies,             |                               |
| have                 | Crown exemption                         | from                          |
|                      | The                                     |                               |
| committee            | recommended that                        | they                          |
| an                   | appropriate liability                   |                               |
| to                   | it.                                     | 1                             |
| recommendations      |                                         |                               |
| and am               | considering                             | how                           |
| ; they               |                                         |                               |
| may                  | be                                      | given effect.                 |
| '                    |                                         |                               |
| a                    | further                                 | statement.                    |
| The                  | main overseas principals have been told |                               |
| '                    |                                         |                               |
| of                   | these                                   | conclusions,                  |
| ' thcr               | Mrengthcn                               | the                           |
| special relationship | of                                      | trust with overseas           |
| emments,             | built                                   | up by                         |
| .activities          |                                         |                               |
| on                   | behalf                                  | of all                        |
| .                    | 1 will get in                           | touch with                    |
| principals           | again                                   | as                            |
| .                    |                                         |                               |
|                      | I am                                    | extremely grateful            |
| Slevcn*on            |                                         |                               |
| and the              | members                                 | of his                        |
| for their            | thorough                                | work                          |
| and                  | wiso advice.                            | ­                              |
| i                    |                                         |                               |
|                      | Since most                              | of the                        |
| for                  | independent Governments,                | it                            |
| as                   | I                                       | made                          |
| "                    |                                         |                               |
| be                   | right                                   | to                            |

* 2
1 November 1973 tb* Minister for Overseas Development (Mr Richard Wood) made a 
^rther statement announcing the Governments agreement to the establishment of 
^sidiary companies to deal with financial services, and guidelines for investment Policy. 

^ 

## C R O W N Agents

The Minister for Overseas Devclop­
mcnl (Mr. Richard Wood): With your permission, Mr. Speaker, and that of the House. I would like to make a further statement on the Crown Agents. In my statement last year. I said that I wel­ comcd the findings of Sir Matthew Stcvcnson's Committee, that the interests of the Crown Agents' principals and others would best be served by the con­
tinualion of the whole range of services which the Crown Agents provide. I also accepted recommendations that the status, structure and rcsponsibilityfor the Crown Agents should be clearly defined, and that they should bear an appropriate liability to taxation. 

The Crown Agents originally came into Itcinp primarily In provide certain l l i u i i u inl m i l l I
*
i i
1
1 1  
1 n - , i  
n o v i i t v i in lliitnin fur countries which were then dependent. The range of their services, conducted on a non-profit making basis and contributing to the development of the countries concerned, has been pro­
grcssivcly made available to a large num­
bcr of countries, most of them now independent. The scope of their activities has also been extended to cover a wide range of technical and financial services. 

The Crown Agents have adapted their organisation and structure over the years in order to meet these widening require­
mcnts. and in particular have established certain of their services on the basis of fully-owned subsidiary companies staffed by Crown Agents' personnel. In the light of the Stevenson Report, I have agreed 
,that this process should be extended by the establishment of further wholly-owned subsidiary companies to deal with the specialised financial services of the Crown Agents. 

The boards of management of those companies will include non­
executive directors appointed after con­
4 K 30 
sullation with me, as well as executive directors drawn from the Crown Agents' 
staff. The Crown Agents intend that the investment policy pursued by these coin­
panics should be generally in accord with the trustee analogy and should be luiiy consistent with their name and standing. 

These subsidiary companies will be sub­
jectto taxation in the normal way. and arrangements are also being made to bring any profits which may be made by the headquarters' 
organisation itself within the scope of normal taxation. 

The Crown Agents will, as in the past, be appointed by the Secretary of State, or by myself acting on his bchaif, lor tho purpose of carrying out the various ser­ viccs on behalf of the overseas principals. 

Thrv will thus remain answerable tin illy 

I
n 
  M
  i
   n
    i
    .
     I
      c i
        n
        . 
          b
          i
           l
           l 
             i
             l 
               i
               '
               i 
                 l
                 l
                  t
                  '
                  i
                   l
                   l
                    i
                    r
                    -
                     1 
                       my iul' 
                             n 

lion 
      in
        i
         r my desire 
                            to disturb tin-, 

traditional 
              practice 
                         under 
                                  which the 

operations of the Crown Agents on behalf 
of their overseas principals have been dis­
charged on a basis of non-intervention by 
Ministers. 

In the future, as in the past, the scale 

and scope of the Crown Agents' opera­
tions will depend on the confidence which 
overseas 
         governments 
                      and authorities 

repose in the organisation. 
                             That confi­

dence is fully reflected in the present scale 
of operations, and I am particularly 
anxious that the arrangements I have 
mentioned, which arc 
                   designed to produce 

a more readily comprehensible structure 
and to define the various functions more 
clearly, should in 
                no way disturb that con­

ftdence. 
          I have made this clear to the 

main overseas principals when I told them 
the outline of the new arrangements. 

  Finally, I should once again like to 
take this opportunity of thanking Sir 
Matthew Stevenson and his Committee 
for its report, and of sincerely endorsing 
the tributes which it paid to the work of 
the Crown Agents. 

  Mrs. Hart: I thank the 
                      right hon. Gcn­
tlcman for his statement. As he knows, 
we have wailed for it for a long time. 
First. F endorse what he said about tho 
confidence 
          which 
                 principals may con­
linui' lo have in I lie work of the Crown 
AjynlN. 
        Il is important to say that that 
is endorsed by both sides of the Mouse. 

 The Opposition arc aware that the 
present financial operations of tiic Crown 
Agents involve them in at least £50 mil­
l
i
 o
  n worth 
         o
          f investment
                      i
                        n equities and 

## Ivlrs H A R T

tlial some of the equities had rather unfor­ (unatc results last year. It seems from his statement that he is proposing not lo change basically the relationship between himself and the Crown Agents. The right hon. Gentleman will continue to appoint but, as he knows, one of the great prob­
kins-this was my opinion when I was his predecessor in ollice—is that the power to appoint Crown Agents has no corresponding responsibility on the part of Ihe Crown Agents to report to Govcrn­ ment. 

Will there be any change in that respect? 

The right hon. Gentleman said that the Crown Agciits will remain answerable finally. In what way will they be answer­
able? 

Will they report to him? Will the report be published? 

Will it be available to hon: Members? Will it be subjected to parliamentary questioning? 

-The right hon. Gcnlleman says that in the new extended financial operations of the Crown Agenls there will be non­
executive directors appointed after con­
sultalion with him. 

What precisely will be their non-executive functions? lie says that the companies will have to act. will be expected to act or will be intended lo net in accord with Ihe trustee analogy. 

Will he loll us precisely what he means? Does he mean that lliey are not to have equity shares or equity shares of a specu­
lalive character? 

1 low docs he propose to prevent that happening? 

Will they no longer invest in property companies? 

Depending on the right hon. Gcntle­
man's answers, it may well be that we shall wish to explore the matter in greater depth. 

Mr. W o o d  
: The suggestion which I 
have made to the Chairman of the Crown Agents is that he should be willing-and he agrees—to discuss with me any im­ portant developments or changes in the policy of Crown Agents. 

The function of non-executive directors will be similar to the functions of such directors of oilier companies of all k i n d s  
­
namely, to give advice and to help in the faking of decisions by the companies with which they arc connected. 

The investment policy pursued by the companies should be carried out in accord 
-with the trustee analogy and should bo fully consistent with the Crown Agent's name and standing. That means that they will be guided largely by the trustee 1 
analogy but not prevented from making investment outside (hat analogy if tho companies so decide. 

Sir Bernard ISrainc : Is my right hon. 

Friend aware that his statement will be welcomed by all who recognise the im­
porlance of the Crown Agents' work, who have been concerned about critical comment which has recently appeared in the Press? 

So that we may get the mailer into perspective, will he confirm that the success of the Crown Agents' investment policy on behalf of the gov­
ernmcnts of many developed countries has contributed to those governments placing additional funds and additional orders with Great Britain? . 

Mr. Wood : I entirely agree with my hon. Friend. 

The confidence that is shown by the principals in the Crown Agents is unmistakcable. 

I believe that as a result of my statement the principals will take the view that the Crown Agenls arc strengthened to do the job for the principals which they have been doing and which they will continue to do. 

In- 
Mr. David Steel: While the right hon. 

Gcnl]cman's statement may strcngihen the Crown Agents, will he answer the qucs­
,,tion, posed by the right hon. Member for Lanark (Mrs. Hart) about parliamentary answeiability and (he link between the Crown Agents' work anil (he Ministers role? 

Mr. Wood: 
I do not think that it would be right for discussions between myself and the Crown Agents about the development of their, policy to be reported to parliament. 

I do not believe that that would be in the interests of the relationship between the Crown Agents and the principals. 

To an extent that must be a confidential relationship. 

It would be wrong for such mailers lo be. discussed in Parliament because this relationship between the Crown Agents and the principals would be gravely undermined. 

\ 
Mr. George Cunningham: 
Will the right hon. Gentleman acknowledge that nothing in his statement reflects the fact that apart from the operations which thi Crown Agents have undertaken on behalf of principals overseas, they have raised on llic market £34 million and invested 

- that as they pleased without being answer­
able to their own chief principals? 
Will 
the right hon. Gentleman acknowledge 
that there will be amazement in the P  
i c a 
and elsewhere that he has made his stale­
incut without mentioning (hat the (line, 
tor of finance of tin: Ciowii Aimnc, until 
n few weeks ago has Invu 
iippoiulitl 
I 
he deputy rhniimnii of In si 
Nniinital 
Ifinmuv l VupoiiilliMi, a company in which 
Ihe Ciown Agnus have mi HI per cent. 
ordinary share holding. 6 per cent, of il 
hnlni" 
held 
on 
behalf 
of 
overseas 
principals? 

to 
  3
   1 July 1974 tho Minister of Overseas Development (Mrs Judith Hart) announced her 
intention to appoint a Board of Crown Agents and to give them directions about the 
induct of their own-account business. 

## Crown Agents

Mr. George Cunningham asked the Minister of Overseas Development if she will make a statement on the future role 
! 

Sir Claude Hayes, who is now and has" 
' for some time been the sole Crown Agent, has carried an extremely heavy burden. 

He would normally have retired earlier this year and I am grateful to him for structure of the Crown Agents. 

Mrs. Hart: The House will recall that in 1970 I instituted inquiries into the constitutional relationship of the Crown j his willingness to continue in office for a Tittle while longer in order to ease the i transition to the new arrangements I now I propose. 

j Agents. 

The right hon. Member for I am appointing a Board of Crown jBridlington (Mr. Wood) took the matter Agents which will have a full-time chair- Ifurther and appointed the Stevenson Cbm­ man and will include up to seven part-
Imittee. 

In the light of my own further time members. 

I shall announce names study, I would like to tell the House what shortly. 

I now propose. 

Tne board will be required to transmit As background, I emphasise that the to me an annual report and accounts Crown Agents have a long history of effi­ which I propose to make available to Par­
cient and comprehensive services to coun- I liament. 

The board will be responsible tries overseas in the fields of procurement, ! 

to me for the organisation and general inspection, engineering, finance and a administration of the Crown Agents' busi­ variety of personnel services. During the ness and I reserve the right to give them nineteenth century and for most of this directives from time to time. 

one they acted essentially for the Colonies I shall of course continue the pracUce who were, of course, within the respon­ of non-intervention in the activities of the sibility of the Secretary of State. In the Crown Agenti cn behalf of their overseas last 15-20 years they have acted mainly principals. 

In such matters they will for independent countries, mostly mem­ continue to act strictly according to the bers of the Commonwealth, and also for instructions of their principals. 

the remaining dependent territories. 

For In their own account business I shall a historical perspective I recommend the direct that the board pays due regard 
1909 Report of the House of Commons at all times to the best stand?rds of bank-
Committee chaired by Colonel Secly, the ing prudence and dues not engage in 
^Parliamentary Under-Secretaiy of State transactions which might embarrass Her 
(Cd. 4473). 

M?.jesty's Government or conflict with The services they provide are excel- the interests of its ove-seas principals. It lent, and are very much appreciated by should not engage directly in the property their overseas principals. 

They have an market, other than in respect of property efficient *znA* dedicated staff. It is impor- for its own occupation, any extension in tant that their telationship of confidence the property field being subject to my with their overseas principals remains prior approval. 

Of course, I do not undisturbed, and that the customary intend that existing obligations should be 
?tpndard* of commercial confidentiality! 

called in question or interfered with. 

will continue 10 be observed in their' 
As the House will appreciate, this is transactions. 

This was the right hon. 

not an easy area in which to achieve the Gentleman's conclusion, and it is mine best balance between commercial activi­
also. 

ties, respon-bility to overseas principal, Procurement this year is running at the arid responsibility to the Minister who rate of about £160 million annually. De­ appoints the Crown Agents. But I believe posits from principals are about £300 mil­ that the new structure and guidelines I 
lion and funds managed on their behalf have outlined will allow the Crown are valued at about £850 million. These Agents to operate effectively on their figures give some indication of the scale own account with a full sense of social of the work of Crown Agents. In recent responsibility and without in any way dis­
years, as is, I think, well known, they turbing the confidence placed in them by have extended their financial operations on their own account with the objective countries merited.

of building up their reserves. 

Some of these, particularly those concerned with property, have become the subject of public comment. 

Given the ultimate' 
responsibility of the Crown Agents to Government, I have therefore decided to make changes in their structure which will not however affect their relationship I with overseas principals. 

 which is so well 
 
overseas,
 
^ 
£ 85 **mill"!** SUBJECT TO PARLIAMENTARY AUTHORITY, TO PROVIDE A RECOVERABLE GRANT OF 
"illion. 

## C R O W N A G E N T S

  The Minister of Overseas Development 
(Mrs. Judith Hart): With permission, I 
wish to make a statement about the finan­
cial position of the Crown Agents. 

  The House will recall that on 1st July 
I announced my arrangements for the re­
structuring of the Crown Agents. There is 
now a Board of Crown Agents, including 
up to seven part-time members with a 
full-time chairman. After discussion with 
the new chairman I agreed as an interim 
measure to appoint only three part-time 
Crown Agents in view of the immediate 
and pressing- problems facing him. While 
continuing the practice of non-inlcrvcn­
tion in the activities of the Crown Agents 
O
 n behalf of their overseas principals, 1 
reserve the right to give the board dircc­
tives, and indeed have already done so in 
relation to their own account business. 

  The 
       new 
             chairman 
                        of 
                            the 
                                 Crown 
Agents, John Cuckncy, who took up his 
appointment ON 1st October, appointed 
Coopers and Lybrand as consulting ac­
countants to review the present financial 
position and the future financial rcquirc­
ments of the Crown Agents and their sub­
sidiary companies. Morgan Grcnfcll and 
Company Limited have since been ap­
pointcd to advise on general 
                               banking 
matters. 

The chairman, supported by the three 

^members newly appointed to his board, 
has now reported to me that a decline in 
market value of some of the assets of the 
Crown Agents has led to an immediate 
problem of reserves and liquidity. He has 

made a formal request to the Government 
for financial assistance. 

  The requirement is related to the rcalis­
tic writing down of a
                       s
                        s
                         e
                          t
                           s values in the 
accounts, and to the need to ensure finan­
cial backing appropriate to operations in­
volving 
         some 
                £600 
                       million, 
                                 excluding 
funds of some £200 million managed for 
principals. 

 The Government have agreed to pro­
vide £85 million, subject to parliamentary 
authority, which will be recoverable, by 

"direction, from future earnings or apprc­
ciation of assets. Standby facilities have 
B
 E
  E
   N arranged by the Bank of England. 

  These arangements 
                     will 
                          demonstrate 
beyond all doubt that the Government 
stand behind the Crown Agents so that 
the position of all depositors is fully safe­
guarded ; that 
               the confidence 
                             of 
                                 their 
overseas principals is fully maintained ; 
and that the important services provided 
to the principals are continued. In the iijhl 
of the history of the relationship between 
Government and the Crown Agenis in 
the last four years, involving, as it has, my 
own initiations of inquiries in 197-:), Ail­
lowed by the Stevenson Report to my pre­
decessor, the right hon. Member for 
lington (Mr. Wood), which was
                                m 
                                    -
Ifshcd, and the inquiries made by a Select 
Committee of this Mouse, hon. Members 
will clearly want to know how the circum­
stanccs necessitating this financial support 
have arisen. I have asked the Chairman 
of the Crown Agents to send mc a fui! re­
port on this, and I shall keep the House 
informed. 
          Thereafter 
                     I 
                       shall 
                             consider 
whether any further action is necessary. 

  I have also asked to be informed ;.i 
detail of outstanding longer-term 
                                  cor.;­
mitments of the Crown Agents, including 
certain properly investments in Australia, 
and of any suggestions which the new 
board may have for the organisation and 
management of its financial business in 
the future. J have reserved the rr.!u 1
                                     0 
direct that monies now being advanced 
shall be repaid from Crown Agents' rc­
sources in the course of any reconstruction ­
of the business. 

  The House will, I know, appreciate that 
the present Chairman, John Cuckney. and 
the three members of his board, John 
Goble, John Gordon and Leslie Kirklcy, 
have had only a very short time to assess 
the position and report to the Govern­
mcnt. On taking office they were con­

fronted with most difficult circumstances, 
as the House will clearly understand. 

 This situation, which I am sorry 10 
report to the House, is one which we are 

i seeking to correct. I am immensely gnuc­
ful to them and would like to lake liiis 
opportunity to tell the House that 1 ha\e complete confidence in them. Their prime 
concern, as it is mine, and, I am sure, 
that of the House, too, will be thai 1I.0 
Crown Agenis, with their long history or" service and capability, arc able to con­
tinue to provide for their overseas princi­
pals the full range of their services. 
Mr. Rippon: 
I thank the right hon. 

Lady for making her statement at the earliest opportunity. 

May I also express a welcome for the Governments deter­
mination to maintain full confidence in the Crown Agents? 

As thc statement says that parliamentary authority will be required for the £85 million, docs the right lion. Lady expect a debate to lake place so that wc may have the opportunity of a fuller discussion? 

Can the right hon. Lady say a lilllo 1 
mofc about the terms and conditions on which the £85 million is to be provided? In particular, what is meant by the phrase " recoverable, by direction " ? 

It it to be a loan, or a grant, or what? 

Not only do I welcome what the right hon. Lady said about a full report being made.by die chairman in due course and further statement being made by herself, but I associate the Opposition with what 
8hc has said about the confidence which We should have in the new chairman. Ho has had great experience in public service and outside it, and we fully share the sentiments which the right hon. Lady has expressed about him. 

Mrs, Hart: I am grateful to thc right hon. and learned Gentleman. 

As to i whether it is a loan or a grant, the position is that the money will be advanced to the Crown Agents but, given thc rccon­
ttructton of the business Unit thcy^would i contemplate carrying out, there are clearly 
; possibilities that much of it can be I recoverable as their assets increase in value or as they make certain changes. 

Therefore, the position is a little flexible, but we hope that there will be the posst­ bility*of recovering some of the money. 

Nevertheless, it is not precisely a loan. 

but a grant which we hope will be r recoverable. 

[HON. MEMBERS: 
Oh."] 
Right hon. and hon. Gentlemen opposite must understand that a situation which has been in the making for at least four or five years is not so easily recoverable by a single stroke of the pen on one day. 

That is the arrangement wc have made, and I think that the right hon. and 

, learned Gentleman will agree that on the 
Whole it is thc best arrangement to bo 
arrived at. 
1
- 
Thc question whether there will be a 
debate is a matter lor the House. 
I 
shall be reporting furlltcr. and it will bo 
 necessary 
IO consider 
what 
kind 
ot 
inquiry should lake place. 
I hope that. 
the House will have a little patience about this because the overseas principals are 
involved and. they, tt*o, will need to bo 
consulted about the form it should lake. Tlicre Is no doubt that tho House will 
be more fully informed and will have a 
full opportunity to consider thc position 
which has arisen. 
Mr. George Cunningham: 
Will thc Minister agree that these enormous clifli­
cullies are exactly the difficulties which many of us have been predicting for a long time in thc light of thc odd con-
Stitulional relationship between the Crown Agents and the Government? 

This is characterised by at least one hon. Mem­ bcr on thc Opposition benches for attack as a phoney campaign. 

Will my right 
, hon. Friend say roughly how much of 
, thc loss sustained on thc investment side of thc Crown Agents' business is atli ibut­
ablc to the fall in the value of shares of 
1 First National Finance Corporation, one 
- of whose present deputy chairmen was, 
. immediately before he look up that position. Financial Director of the Crown 
, Agents? 

. 

Finally, will my right hon. Friend say 
, whcthcrtthc Government of thc day ever v gave to thc Crown Agents approval lo go 
. into this business of investment by com­
. parison with their traditional buying and selling,r6Ic, which 1 am sure continues to r have thc full support of everyone in the 
. House? 

Mrs. Hart: My hon. Friend and T. as 
' I know one or two other hon. Members appreciate, have had a continuing and 
' deep concern about the position of the Crown Agents and their involvement par­
' ticularly in the money market and thc property market. 

That may not be 
1 known to some hon. Members, but it is 
; so, and the Select Committee on Overseas i Development gave some consideration to 
, these matters. 

I cannot give my hon. Friend a precise answer as to the involvement of a par­
ticular company. 

I can tell him that one of thc factors involved, which is not un­
expected, is that the Crown Agents had considerableinvestments in property. The decline in properly values over thc last 

. year has intensified the problems that 
might concern any organisation that put 
a great deal of money into property, and 
this is a matter which is dealt with in 
thc report which I have had from the 
Chairman of the Crown Agents. 
Thc 
further report which I shall hope to make 
available lo the (louse, al least in sum­
ma 
ry, will show that clearly. 
As to thc member of the Stall of the 
Crown Agents lo whom my hon. Friend 
referred, that is a matter which is pcr­
haps belter not discussed in the House at 
thc moment, as my hon. Friend will 
i appreciate. If Ihere is an inquiry, what­
. ever form it takes, it might well be a 
proper subject for thc inquiry. 
Mr. Pardoc: Is the right hon. Lady Sir Bernard Braine : Docs the rig'H lion. 

aware that the House will be somewhat Lady accept that there arc some Opposi­
mystified, in that the Government appear tion Member.1;—I was, after all. Chairman to have agreed to provide £85 million but of the Select Committee that inquired 
1 have only now asked for a full report into this mailer—who were anxious about into the circumstances which make this the financial activities of the Crown financial support necessary? 

Docs not Agents precisely because they cut across the Minister think that it might have been a superb, unique record of service to the belter to have asked for the full report Crown Agents' principals in the Common­
. first and to have provided the finance wealth and to the British economy? 

I 
. thereafter? 

Very much welcome, although with some Although many will- welcome the fact sadness, the statement which the right that the Government stand behind the lion. Lady has made today. 

May I ask Crown Agculs, is the right hon. Lady whether al any stage any of the principals aware that if this kind of nonsense goes have been critical of the conduct of the Crown Agents inlthc carrying out of their I on the world wHr^wmil t to know who l stands behind the Government? 

normal business? 

' 
i Mrs. Ilarl: The answer to the last part 
' 
Mrs. HartiT am' afraid that the hon. 

of the question fe " No ". What emerges 
. Gentleman1 isV^pfciWrhelr short of his is that the matter is not as simple as own standarcKjhijre; 
He might be well advised to do a little research into the thc* right hon. Gentleman might suppose. 

reports of the proceedings of the House 
' The answer is " No ". 

The overseas in HANSARD over the hist four years. 

It principals still have every confidence in 
' is all there. 

the Crown Agents, and I should like to I was the first to express serious con-
' reinforce what the right hon. Gentleman 
. cern early in 1970 when I was Minister said. 

What we are talking about today 
, of Overseas Development That led to is the consequence of operations in I ho 

j my asking my Department for a paper on 
money market and the properly market 
I the constitutional relationship between the which left undisturbed the complete eilkrency and good faith of the operations i Crown Agents and the Government, which of the Crown Agents in procurement and j Was somewhat obscure. 

That, led my in service, which are the real bases ol I predecessor the right hon. Member for 

their operations. 
j Bridlington (Mr. Wood) to ask for the 
I Stevenson Inquiry which, reported, but 
that report despite pressure from the then 

. Opposition, was not published. 
That led 
j to the Select Committec's inquiries which, ' i as soon as I came back into Office in 
' March, led to my initiating changes in 
the structure which in turn led to the tevelation of wftat has been going on. 

' The hon. Member, for Cornwall, North 
(Mr. Pardoe) would do better to do some 

': research. 
! 
Sir G. dc Frcilas:. Will my right hon. 

! Friend recognise that many of us who 
, have followed lor some time the affairs of the Select Committee and the Crown Agents were highly critical in the past? 

However that may be, there arc many of 

' us now who give full support to the 
present Crown Agents and their chair­ man? 

Mrs. Hart: I am grateful to my right hon. Friend. 

I must be absolutely frank With the House. 

This is an unfortunate report- to have to make to the House. 

It follows a scries of events and a history of some years.- I think thai we arc now tfoirtg the right thing, and I am certain that the Governments duty is to give full backing to the Crown Agents because of their importance and value and because 

, 
the name of Britain is involvcftONFIDE 

O
a 
 23 
    April 1975 tk* Minister of Overseas Development (Mrs Judith Hart) made a further 

report 
      to the House about the Crown Agents

1 financial position, and announced her 

decision 
        to set up a Committee of Inquiry under Judge S S Fay QC 

-grant is there to cover prudent writing 
down of assets as necessary, and to pre­
vide a capital base. 
I would also like the House to know of 
the confidence I have in Mr. John Cuck­
ncy, the new Chairman of the Crown 
Agents, and in his board. 
In the most 
difficult circumstances, they are overcom­
ing the problems they faced on appoint-
I mcnt with considerable success. 
Since 
! December, 
overseas 
principals 
have 
' increased the scojx: and scale of their 
business with the Crown Agents. 
Con­
iidence has increased, and it is right that this should be so, for die steady and 
gradual withdiawal from property invest­
ments and secondary banking, according to my directive, is restoring a fundamental 
financial soundness in their operations. 
I have now made further appointments 
to the btord. I have appointed Mr. Harry 
Hoi!, Mr. James Jack and, with effect 
from 1st July, Mrs. Hester Boothroyd to 
join Mr. Leslie Kirkley and Mr. John 
Gordon as members of the board. 
I 
have also appointed Mr. John Goblc, at present a member of the board, as Deputy 
Chairman. 
' 
1 
1 promised to keep the House informed. 
I can now make an interim report-not 
yet a final one, for reasons I shall make clear. 
In doing so. I know the House 
will understand and appreciate that it 
concerns not the present but the past. 

## C R O W N A G E N T S

T
h e Minister o f Overseas Development 
(Mrs. Judith Hart): With permission, I 
*'sh to make a further statement about Crown Agents. 

. T
h e House will recall that just before 

The chairman has provided me with 
his board's views on the circumstances which led to the need for financial sup­
port, which have been assisted by the 
investigations carried out by Coopers and 
Lybrand, 
the 
consulting 
accountants. 
These are not yet complete. 
They have 
had to work on a very large number of transactions made over a long period of 
time. 

11 rose for the Christmas Recess I 
£plained the immediate problems of the 
"
t o w n Agents' 
reserves and liquidity whicli had been reported to me by tho Chairman and board, and announced S Governments agreement to provide ""ntcdjatc support of £85 million and the 
^cement of the Batik of England to P
r o v i d e standby facilities. 

S
o far the Crown" Agents have found j
!

The principal factors which the board considers to have contributed to the prob­
lems are: first, the operation of a sub­
stantial banking business without an ade­ quate capital base ; second, over-depen­
dence on the property and secondary banking sectors, and commitment of an unduly large proportion of the total banking resources to a small number of borrowers: 
third, inadequate controls and procedures for approving and moni­
toring loans to subsidiary and associated companies, for security for advances, and for the delegation of authority; fourth, 
0 n e e d to draw upon cither the £85 mil-
Nor the standby-facility at the Bank of 
"
J
j j S
l a n d to meet liquidity problems. We i^U all hope that this will continue to J
j j H
i e case. 

But the support of the Gov-
N
e n t stands firm and ready. 

The urn 
[Mrs. Harl.] 
- 
C  
O 
lack of outside commercial banking cx­
perience among senior stall". These delects of the past arc rapidly being remedied. 

The Government have reached two major conclusions in the matter. We bc- Jieve it important and necessary, and the board of the Crown Agents recommends to arrange for an independent inquiry into past events and the circumstances giving rise lo the need for Government support. Accordingly. I have decided lo set up a committee'of "inquiry with the following terms of reference: 
kW^PNTfiHir^ 0'' 0 0'- because he has I grcaT Knowledge of tins mailer, that I 
had asked for a study lo be made of the constitutional relationship between the Crown Agenis and Ihe Government in the last few months of 1970 when 1 was in my present post, in which the right hon. Gentleman succeeded me. He is right to say that I cliided him from time to time in the House, as did one or two of my hon. Friends. 

We then had the Stevenson Report, which the right lion. 

Gentleman refused, to publish. 

I think it is **fair** to s a y that this Government have done their best to come lo grips with a situation in which that was greatly needed. 

"To inquire into the circumstances which led 
"* , the Crown Agents requesting financial assistance from the Government." 
The inquiry will be conducted by Judge Fay, silting with Sir Edmund Compton 
*nd an accountant. There will, of course, be complete protection of the confidential interests of the overseas principals. 

I, We also propose to give further con­
aeration lo the relationship between the Crown Agents and the Government. 

I 
snail present a While Paper to the House As for the right hon. Genlleman*s second point, the inquiry will be con­
ducted by Judge Fay, Sir Edmund Complon and an accountant yet lo be named. 

1 am sorry that I cannot give the name of ihe accountant today. 

We have no reason lo suppose thai any information requested will not bo forth­
corning. 

I am certain, though this is a matter for the inquiry itself, that it will wish to have discussions with all those who have been involved in Crown Agents' 
matters over the past few years. 

a. 1 a later stage-1 hope during this Scs­ Bipn-with my detailed proposals, along 
*'th the necessary background informa­
tion about past custom and practice. 

Now that I have presented those two niajor conclusions,' 1 know that hon. 

Members will wish to join with me in expressing their confidence and support Jn the present chairman and his board, and in congratulating them on their very 
£feat success in the last few months. 

Mr. W o o d : Docs the right hon. Lady recall chiding me, in that gentle way she n a  s  
. with delay in these matters? 

Does fne recognise that she started these investigations in the 1960s and they n6w Mr. George Cunningham: 
Will my right hon. Friend accept congratulations on the speedy clean-up job she has done over the past 10 months or so? Will she answer these questions? 

First, while the inquiry is being conducted, and indeed from now on, can we be sure that the annual reports produced by the Crown Agents will give very full information about the holdings they have, whether directly or indirectly, and ihe companies wilh which they have commercial association? 

!

0ok like going into the late 1970s if. 

indeed, she is still responsible for con­ ducting them? 

T
Secondly, am I right in assuming that if the Crown Agents draw upon any part of the £85 million standby cover they will be answerable to the Public Accounts Committee but that Uiey will not be answerable to the Public Accounts Committee otherwise? 

 In the statement in which the right hon. 

f-ady has announced the selling up of the inquiry, lias she not to a large extent pre-
Judgcd the findings of the inquiry? 

finally, what powers is the committee of inquiry to have? 

Amongst other things, W ,  H Sir Claude Hayes and others closely 
^?ncerned have full freedom to state their 
* views in accordance with the recommen­
tohons of the Salmon Committee? 

Mrs. Hart: I Confirm that what'my hon. Friend said in the last part of his question is indeed so. I hope and believe that it will not prove necessary' to draw on the £85 million. 

Indeed, it is very' 
gratifying to be able to say that this has not needed to be drawn on up to 
' Mrs. Hart: I confess that I am a little 
^rprised at the right hon. Gcntleman's 
22 N 
4 
now. I hops thai that situation will con- j situation and to say whatever llicy want tiuuc. 

However, should there be drawv. 

ings, this would be a matter in which iffc accounting officer of my Department Would hold responsibility and it would be a matter for the Public Accounts Committee. 

On my hon. Fricnd's first point, he will know that as from now—I think I 
have given this information before, and certainly the Crown Agents have 
-the annual report of the Crown Agents is now, as distinct from past practice, to be submitted to me so that I may make it available to Parlia­
mcnt, and the accounts will similarly be made available to' Parliament. 

The audited accounts for the last possible year Mr. 

Skinner: 
Will my right hon. 

Friend agree that one of the important reasons why it has been her duty lo tell the House, not only on this occasion but on others, too, of the scandalous invest­
mcnts and so on within the area of the Crown Agents is that the Crown Agents wanted the highest rate of return, and that usually in this system of ours the' 
highest rate of return can involve invest' 
ments within the murky and seamy side of life ; and the net result was that, like a good many other people who got their fingers burned, they poured their money into property speculation and. indeed, into slum speculation? 

. 
—1972—arc already in the Library. 
1 
think my hon. Friend will find that they 
give the kind of 
information 
that is 
needed, but I am certain that if this proves not to be the case the Crown Agents or myself would be very rcspon­ sivc to any discussion about what fur-
Ihcr information they might include. 
Will my right hon. Friend in future insist that investments are of a kind which will not leave her as a Minister to have to come to the House, as the previous Minister did. in order to try lo explain away how these investments have been made? 

I Mr. 

llordern: 
May I 
echo the confidence in Mr. Cuckney and the efforts that he has so far Made:? 

With respect to the inquiry whiiih is about to take place, may we take it that the findings in the Coopers and Lybrand report arc temporary findings and arc liable to the fullest possible justification by the full judicial inquiry which is to take place later? 

Will my right hon. Friend also sec to it that the committee of inquiry will establish quite clearly how., much money has been lost as' a result of all these investments in these areas of secondary banking, with a particular reference to the amount of money that was lost as a result of the investment in the ill-fated Stonchouse venture? 

All these matters should be investigated by the committee of inquiry. 

On that point, will the right lion. Lady not only allow that inquiry to make the fullest inquiries into all the matters which have occurred in the past but allow Sir Claude Hayes, in giving his evidence, to see the findings which that judicial inquiry may make, unlike the practice in the past in Department of Trade investigations, and allow him to comment on any lincl­
ings that the inquiry makes before those findings are published? 

Mri. Winifred Ewiug: On a point of order, Mr. Speaker. 

Is it not the case that today at Question Time, when Soul­
tish Questions were answered, questions which were much shorter in duration than the one which we have just heard were interrupted by your good self as being too long? 

Can you explain why it is that the hon. Member who has just asked a supplementary question seems lo be allowed to ask as long a question as he likes? 

Mrs. Hart: 
Obviously, the detailed conduct of the inquiry must be a matter for Judge Fay, who will be leading it, and for the other members of the inquiry. 

Il never has been the practice in the past for a Government, having set up an inquiry, lo regulate the precise way in which the inquiry is to be conducted, but 
'1 am certain that the inquiry will wish to give every opportunity to all concerned fully to be acquainted with the whole Mr. Speaker: I will try to make the position clear. 

At Question Time the object is to get as many Questions answered as possible. 

Long supplemen­
tary questions cut out other Members' 
supplementary questions and Questions. 

After statements, the considerations are not quite the same. 

It is a mailer for 
[Mr. Speaker.] 
Jfydi^reiion. aULwugli I admit I do *r&ONFMBNFiOMZ* 
INSTRUMENTS 

## Ordered,

That the clrafTTVccrcation (Northern Ireland) 
wren liavc to complain of excessive orevjty on the part of the hon. Member Wr Bolsovcr (Mr. Skinner). 

Order 1975 be refefved to a Standing Com­
mittcc on Statutory instruments. 

Perhaps the right hon. Lady will now answer the hon. Gentleman^ question. 

Ordered, 
. Mrs. Hart: My hon. Friend is right m pointing to thc fact, which I outlined in niy earlier statement in December, that That thc **draft** trouble Taxation Relief 
(Taxes on Income) (Indonesia) **Order** 1975 be referred to a Standing Committee on Statutory Instruments. 

/ 
Ordered, I 

J  
  t Was the over-investment in property 
companies and secondary 
                                                                                                     banking, in 
which there had been a considerable 
decline in the value of assets, which led 

 That the Input Tax (Exceptions) (No. 1) 
Order 1975 (S.I/ 1975, No. 624) 
                              be refc 
                                    rred 
to a Standing Committee on Statutory In: 
                                   nstru­
mcnts.—[Mr. Ifdwurd 
                    Short] 

1  
  0 tlie immediate crisis of liquidity in 
me Crown Agents. I have given a posi­
hve directive that this is now to diminish. 

## 3.46 P.M.

Mr. Rolvcri IvilroYSilk (Ormskirk): I 
beg to move. 

That leave be given J
t o bring in a Hill to 
[make further provision for remedies and complaints against the police. 

The Bill will amend. Section 49 of the 

a " d the Crown Agents are now very 
sensibly withdrawing in a phased w a y  
                                                                                                                                        ­
because; it is correct to phase it—from 
both secondary banking and properties, 
pincc October over £59 million has been 
      ilhdrawn from property and secondary 
E
    anking by the Crown Agents. 
 L,On the second point about 
                                                                                                                  London 
Capital, I think I made it clear a month 
Qr two ago that this is a matter for 
                                                                                                                               the 
commercial 
                                             judgment 
                                                                                    of the 
                                                                                                                      Crown 

Police Act 1964 which deals with corn­
plaints against the/police. At the moment, 
as the House /will 
                       know, 
                                complaints 

against police officers are investigated by 
olfieers 
         from/another 
                           force. 
                                    This 
                                            I 

A8ents and that they are acting entirely 
in accordance with their best and most 
prudent judgment in this matter. 
                                                                             It is 

believe to be/totally unsatisfactory. 

n ot strictly a matter in which I would 
regard it as proper for me to intervene. 

  My Bill scqks to provide for the inlro­
duction of nnXJndcpendcnl clement into 

Mr. Sfanbrook: Does not the experience 

the procedure i W handling complaints 
against tiie police. \ I t is my view-and, 
indeed, it is a vicv\ supported by the 
present Home Secrelliry—that an ciiec­
livc and independent clement able to 

Q f Hie Crown Agents confirm the folly 
of any Government or quusi-GovcrmnciU 
I
 n
     s
       t
         i
          t
            u
               t
                 i
                  o
                     n using its assets to operate in 
fields in which it lias neither qualifica­
hoiis nor suitability? 

command the confidence of the public 
and the police mt/st be brought 
                            into 

Mrs. Hart: What emerges 
                             clearly­

a , 

operation while a complaint is being 
investigated. 
                /

   nd I hope we have now corrected 'th 3 
Situation-is that if we have a valuable 
Government institution, which the Crown 
Agents i s - i  
                              t has the most tremendous 
ramifications and involvement and an 
excellent reputation for its procurement 
policies and all its other activities on 
behalf 6f many overseas investments and 
overseas public corporations—it is of 
                                                                                               the 
greatest importance that we have people 
who are best able to make the right kind 
of. judgments in the operations in which 

  I would not/regard it as satisfactory 
to institute nicrely cx post facto investi­
gations, as many individuals and organisa­
tions have/advocated, able to act only 
after the event, in a sense as a form of 
inquest. 
        Wrrn4-4^4U£)pos£d. therefore, is 
the establishment ofiTsJcpendcnt stalu­
tory commissions in each police authority, 
with members appointed by the Lord 
Chancellor, who shall ^oe lull- or part­
lime depending upon / h  
                      e experience of 
thc volume o f work/in their area. 

t u  ey are involved. 
                                                                                      I think my own 
Appointments since July have created a 
board with the expertise and judgment 

  The procedure fc^r handling a com­
plaint is envisaged as^ follows. A com­
plaint made by a member of thc public 

t 0 enable these matters to be correctly 
administered from now on. 

V 
2 2 N 6 

## 1'Olige (Amendment)

 
1 

## C R O W N A G E N T S " I

concerned that thc future activities of the Crown Agenls, and their relations with Ministers, should be on a more closely The Minister for Overseas Development 
\'devinpil btt$*S Tlic Government have been. 

raucMbouuht to thc future status, 
(Mr. Reg Prentice): Witli permission. I 
Wish to make a further statement about the financial position of the Crown Agents find other matters relating to that organisation. 

. 

-

., -structure and functions of Ihc Crown ( 
j i Agents. 
W c have decided that the right 
solution will be to introduce legislation 
Which would confer independent legal 
My predecessor announced in Deccm­
bcr 1974 that the Government had n"l\v *j to provido a recoverable grant of t%6 

.,, personality on thc Crown Agents by in­
j , corporal ing them, define their functions 
j for the future and provide that specified 
. powers of direction should 
rest with; 
I' Ministers. 
! -. This would create a well understood 
j 
I i relationship of a kind which exists be-] i Iwccn a number of bodies i
n the public,1 
million to thc Crown Agents to cover thc Writing down of asset values in their 1974 ] 
accounts as then foreseen and to provide financial backing appropriate lo their operations, and that standby facilities had nlso been arranged with thc Bank of 
:l-nglnnd. 

1 ::sector and the Ministers responsible fort, 
i - them. 
It would clarify the rcsponsibili­
I 
have now received the audited 

; "tics of thc Government i
n exercising thc 
' - 
broad oversight over tho activities of the 
accounts for 1973 and 1974 and have placed conies in thc Libraries of both Houses, The balance sheet as at 31st December 1974 shows that thc Govern-
Went grant of £85 million was not enough HI the event to avoid a technical state of insolvency, with liabilities exceeding 
-jjsscts at that date by some £15 million. 

This was because a greater degree of Writing down of asset values and pro­
vision for losses were found necessary for the period covered by the accounts. 

- i ernmenfs thinking on these mailers. 
I 
j  
' shall not quite be able to meet thai target, 
j but I hope to publish a While Paper 
I shortly to s
e
t out our present view of thc 
I provisions which will or may be required 
,' in the legislation 
to incorporate 
t
h
e 
I' Crown Agents. 
1 should emphasise that the Crown Agents have no immediate liquidity Problems. They have still not needed to draw on the £85 million grant or on die standby facility. 

I am also reassured u 
"y the thorough and energetic action which has already been taken by Ihe new Board of thc Crown Agents, under its Chairman. Mr. Cuckncy. to clear up the 

i Problems of thc past end lay the ground-
Work of a more soundly based future for the organisation. 
1 should like to pay 
% own tribute to their efforts. 
Nevertheless, without Government hacking the Crown Agenls would at Present be in a difficult position, which . could affect the confidence of depositors a n  d others. 

1 have therefore thought it desirable formally to reaffirm the assur- \ 
^uee given by my predecessor in Decem­ ber 1974, that Her Majesty's Govern-
' 
^ent stand behind the Crown Agents. '. 

Hon. Members will find Ihe terms of my Assurance to thc Chairman in his cover­
, n5 report on thc 1974 accounts, and I 

I emphasise now to thc House that the 
t
\! Government wish lo see the Crown Agents 
continue in being fo* thc sake of tho Valuable services which they arc able to 
render both to their many overseas prin- j 
cjpals in the developing world a
n
d 
to 
Her 
Majcsty'8 
Government 
in 
their 
Nations with overseas countries. 
\ 
1 ,
-
h o l d i n g of loan repayments and i n t e r e s t I ,,(1110) a nil I
n other ways. 

Like my predecessor I am. however, 

Crown Agents that has been shown to! 
be desirable by all that has happened; 
While leaving it lo the Board t
o r
u
n their 
own day-to-day affairs. 
It would n
o
t dis­
^turb thc traditional relationship betweent I them and their principals. 
I'. 
! 
; 
My predecessor lold the House i
n April I 
that s
h
e hoped to publish a While Paper! 
I "during the present session giving the Gov- 1 
Meanwhile, I should inform thc House I 
of a further complication arising from the past activities of thc Crown Agents 

j -which will have to be dealt with separ­
j-ately and in advance of this legislation. 
I was informed in August by the Chair­
. man that certain loans made by the Crown Agents either directly or through a nominee, company might be challenged as unenforceable, on the grounds that 

, thc Crown Agents were neither licensed : moneylenders under the terms of the 
Moneylenders Acts nor a bank for the purposes of those Acts. 

The Crown 

: Agents are advised that if this matter :'werc 
brought before thc courts, they 
"Would have a good defence particularly 
on the basis (hut they and their si nil arc 

; "exempt from Ihe operation of these Aits ! as Crown servants. 
However, if lhere 
were a challenge in. the courts tho mailer 

"might lake a long time to resolve. Mean­
. while thc Crown Agents' financial position 
. /might be seriously worsened by the with­
This would increase the-potential call point is. " Yes ". 

I think the answer to 
.

o n the Exchequer for financial support for the Crown Agents t o a degree which We should find quite unacceptable in the circumstances. 

It would mean lhat the former point would also be, " Yes ". 

It will not have escaped the attention of the House lhat a great many private enterprise companies—if "enterprise" is the appropriate word-got their lingers pretty severely burned in the property market, and.-in secondary banking and activities of that kind. 

my right hon. Fricnd's statement, and particularly the policy that is to be pur­
'a heavy additional liability would fall on die public purse, and that oilier creditors of those property and other companies to which the Crown Agents had made loans would be in a position to benefit by taking advantage of an uncertainty in the application of legislation. 

I think it is essential to put this anomalous situation fight. 

The Government will thcrcforo introduce a Bill, for consideration as early 
-sued in terms of the future incorporation 
-of the Crown Agents. 

I am quite certain a s possible in the next Session, to put the matter beyond doubt. 

"that lhat is the right course to pursue. ­
-;. May I also say lhat 1 very much hope 
:lhat the Fay Committee of inquiry will Mr. Maudiing: These arc serious and disturbing figures, and no doubt at the appropriate lime wc shall wish lo dis­ cuss how the Crown Agents, with their fireat traditions, got into this situation, 
-go very deeply into the causes of the 
:misadvenlures, of lite past, which were, 
-as he said, largely concerned with adven­ Uur^s iivthq properly and secondary bank­
ing secior. 

D u  t I imagine that wc shall have to await the report of the Fay Committee, which w ' '  
l have all the facts before it. 

share his own confidence in the future 
.of the Crown Agents and in all the tre­
(mendous and very difficult work that 
:the new Board and the new chairman The Crown Agents arc a considerable asset to this country and provide very Valuable services lo their principals overseas. The Minister can therefore lake Jiave carried out since they were appointed a year ago. 

1 1 from me that we support him in his desire to give all the help he can to the new chairman and the new Board.-
Mr. Prentice: I am grateful to my f right hon. Friend for the way in which she has put those points. 

I think that, With regard l o the legislation, will ho jj*e note that wc shall look carefully at jjjo actual proposals, bearing in mind l l ,at the main need of legislation at this on relation to this whole rather tangled 
*story, a tribute should be paid lo her, first, for. the work she did from the s l nge is t o ensure the confidence of the overseas principals in the Crown Agents? 

Opposition Front Bench in probing into 
.V.**r..prcnlice: I thank the right hon. 

^ciyibcr for his statement. 

He has 
^minded the House that the events of 
*ccnt years, which have given rise to 

j
s
 r
  c
   a
    t concern, are being-considered by 

j .lclEo Fay and colleagues working with 
P ' 
           They will. I think, take a few 

these matters and persistently questioning 
the Government of the day, and secondly, 
for the prompt action she look on assum­
ing office, and particularly the directions 
she gave to the Crown Agcnls, which have 
provided a framework within which they 
arc now working, and which they are 
fully implementing.' 

"Ore months lo complete their work, but 
"viously then there will be an occasion 
or a wider discussion of what has hap­

part of the right hon. Gentleman's staic­
mcnt, will he give an assurance that the 

in the past 

- legislation, the introduction of which ho 

a
  r
      
     d
         t
             o
                                                           am

1 
  r
     c 8 

"Mad
               *he future. I
                                very 
II **-that the Opposition agree with us 

Vat

1  
        lu

C Crown Agents perform a very 

'' 
 uable service which should continue 

\d that we should give them the appro­

P r i a , e support 

:is contemplating, will not bo rclrospcc­
rtive to the.extent that it weakens Iho 
fprcseiit legal position of one of the parlies 
ito.the possible legal controversy to which 
-
h
 e referred? 

. 
     Mr. Prentice: The House will be glad 

Mr. David Steel: I, too, welcome tho 

t

  CP S that the Minister has mentioned 
J!s afternoon. 
                                 Will he confirm that, if 

u

     l s. N vcrc a private company, it would 
.y"solvent, a
                                                   n
                                                      d 
                                                                  will he give an under-
L . l n8 to the House that tho inquiry 
j£ln6 made 
                                                     into 
                                                                              its 
                                                                                              operations 
                                                                                                                                               and 
.Wncei will be made public and 
                                                                                                                                           pub­

M , c d ­ lo the House? 
                                                                                                ... 
                                                                                                             -

I "to know that we have in mind a very 
i short Bill which will clarify the position 
  about which there is some doubt. 
                                                                    It will 
i,not alter the law as most people under­
  stand the law but will simply clarify it, 
'-so as to avoid the situation which 1 lies­
i-cribcd in my original statement. 
                                                                  Jf that 
' were not done, there might be a period 
--of 
          uncertainty, which could 
                                                              be 
                                                                      most 
i damaging to the Crown Agents and con­

leoivaWy to public funds. 
                                            /OVI 

Mr. Prcnlicc: The answer to (he latter 

Mrs. Ilarl: May I welcome very much 

May I also say to him thai I totally 

Mr. Tapsell: Arising out of the last 

; Mr. George Cunningham: Will 
                               tho 

Minister accept that sonic of us have 
"almost exhausted our capacity for sur­
prise at the successive manifestations of 
incompetence which have been shown in 
Tunning the Crown Agents, and that this 
shows how unwise it was for the House 
.of Commons Select Committee on Ovcr­
jseas Development just over a year ago to., 
terminate its investigation of the Crown 
"Agents, which might have revealed this 
-latest exampje of 
                  incompetence a 
                                   bit 
isooncr than it has been rcvcalcd7 
                                  . ­
' Are we to understand that there will 

be two Bills, one the declaratory Bill on 
the point he has just mentioned and.the , 
"other on.the relationship of the. Crown , 
Agents to Government and Parliament? 
-If there are to be two Bills, will the 

second Bill be produced in the immcdi­
ately forthcoming session as -well as tho 
first? 

  Mr, Peter Rccs : The Minister has made 
it clear that the financial position of the 
Crown Agents depends to a certain extent 
on the delicate question whether they 
acted as bankers or as moneylenders in 
certain transactions. 
                      However, he was 
somewhat ambiguous in his reply to my 
hon. Friend the Member for Horncastlc 
(Mr. Tapsell). 
               May we have an explicit 
assurance that the legislation which the 
right hon. Gcr-tleman contemplates will 
not 
     retrospectively 
                     affect 
                            bodies 
                                     and 
individuals, persons and partnerships who 
have been involved in transactions with 
the Crown Agents and who may even 
currently be in litigation with them? Some 
of 
    those . involved 
                     are 
                          themselves 
                                      in 
financial difficulties. 
                      I understand that 
one company is in the hands of liquida­
tors. 
      It would be grossly unfair if these 
matters were clarified retrospectively in a 
sense unfavourable to those other parties. 

1 Secondly, may we be told what is Hie i 

state of play on the papers which were ' 
referred to the Director of Public Proseeu­
tions in respect of some of the, staff, and 
how many of the staff of tpc Crown i 
Agents have cither been..dismissed or are
                                       '
                                       . 

' 
    Mr. Prentice : I am sure that the House 
would consider it unfair if the Crown 
Agents were unable through a legal lech­
nicality to recover money owing to them. 
That is what wc seek lo clarify and to 

currently suspended ; pending finvestiga­
lions? ' 
                    . . . 

ensure by this short piece of legislation 
;which I propose to introduce. 

 Mr. Prentice r My 
                      hon. Friend also 
played an active part in helping to draw 
attention to all the things that had gone 

  Mr. Skinner i Is not the truth of this 
whole affair that a large sum of money 
was available for investment and was 

:wrong in the past, and I pay-tribute lo 
 him for that. 
                                                                  But I think he was wrong 
 in saying that I had revealed some further 
example of incompetence. 
                                                                                                                              1 have drawn 
attention to a legal doubt which has arisen 
and which might be damaging, unless it 
 Were corrected, to tho finances of tho 

I Crown Agents. 

- . ..: ; .. 

- I; think that the story of recent months has been a success story. 

The Crown Agents arc disengaging as fast as they 
; invested mainly in slum property empires, i just like the investments of many private 
';Companies, some of which have been 
! referred to already? 

The fact is that the iCrown Agents got their fingers burned 
-as a result of those investments because 
!of the escalation of property values and 
- the subsequent falling-olf in values. Arc 
,wc to take it that this liny group of people, Who have squandered someone clsc's money and subsequently have had to use large amounts of the British taxpayers' 
money to try to remain solvent, apparently 

1 prudently can from the wrong type of 
investment in which they were engaged 
in the past. 
Their current activities are 
succeeding.'and their overseas principals. 
i including 120 different governments and 
a number of other organisations, show 
continuing confidence in then'). 
:withoul success, will be dealt with in accordance with so-called British justice? 

Will my right hon. Friend assure us that if there are to be bankruptcy procccd­
ings against these people, as there ought 
:to be, they will be dealt with in the 
' same way as the 1
1 people at Clay Cross about whom my right hon. Friend knows 
'so much—having their cars and furniture 
[ taken away because they acted not in 

As 
to 
my 
hon. 
Friend's 
question 
i whether there will be two Bills, I envisage 
; a very short Bill on the narrow legal point 
that 1 mentioned. I also envisage a White 
Paper, very shortly, which will itself lead 
to, further legislation, though not quite 
.. as quickly—probably 
not in the next 
I
 
s
e
s
s
i
o
n
.
. 
' 
-
' 
accordance wilh wanting to line their pockets and someone else's but in accord­
;ance with, high moral principles? 

. With regard to his point about the Director of Public Prosecutions, I have nothing to add to the reply that my hon. 

, Friend the Parliamentary Secretary gave hi January. 

This mutter is still.with the Director of Public Prosecutions.. It is 

- taking a long-time. 
It is not a matter 
over which I have any control. ' 
' . 
. Mr. Prentice: There is a tremendous temptation to debate Clay Cross with 
, my hon. Friend but, unfortunately, that would be out of order. 

Perhaps wc might continue that argument somewhere else. 

. The events which we all deplore arc under "investigation by Judge Fay and two oilier 
-distinguished people. 

1 shall await their I report, and that report will be made "known to the House. Then wc can debate these matters. 

I do not think that ,-my t 
. I do not have a figure for the number or staff dismissed, but 1 will look into it and give my hou. Friend any information that J.,can.. 

.

 , 
. 

M 
of these proceedings arc helped by the 
, cheap smcers which are typical of 
. remarks by my hon. Friend the Member jiJW3u\l[SivM(Mr. Skinner). 

Mr. Michael Marshall: Although wc welcome in general the proposal about the future stale of lite Crown Agents in their incorporated form, subject to any study of the While Paper, may I ask the 1 
I Mr. Cosiain: Is the Minister awaro t h a t the Public Accounts Committee endeavoured to look into these matters in p a s t years but was prevented from doing s o because the accounts were not audited b y the Comptroller and Auditor-General? 

Will the new arrangements put the j accounts under the authority of the Comp­
j (roller and Auditor-General so that the i Public Accounts Committee may deal with these matters, or will they be matters' for the nationalised industries' accounts? 

I 
Mr. Prentice: The accounts which have 
(been placed in the Library today have a right hon. Gentleman to be more clear-­
cut about allowing freedom in day-to-day management and perhaps, in that context, stress what he omitted to say in his slale­
ment that, in addition to serving their ( 
overseas principals and the Government themselves, the Crown Agents arc serving ( 
as a form of direct and invisible exports, which arc of value to the country? 

I  
, hope that that side of their activities will be strengthened and encouraged in the future. 

commentary by the Comptroller arid Auditor-General. 

Therefore they could b e studied by the Public Accounts Com­
mittcc if it saw fit. 

Mr. Lcc: My right lion. Friend has 
! ninde a low-key statement, but is not this I n profoundly unsatisfactory slate of Mr. Prentice: The operations of tho Crown Agents are of great value to the country in many ways that we cannot measure, because their activities create opportunities which lead indirectly to further investment, exports and so on. 

The work which they do in training people overseas is of help and of indirect benefit to this country, too. 

affairs? 

Will he reconsider the points I made by my hon. Friend the Member for Islington, South and Fjjnsbuty 
(Mr. 

J Cunningham)? 

Docs not. this call for a i.public inquiry under the Public Tribunals i Act? 

Will my right hot).. Fripnd also 
; say how much additional- money will be i required in the interim, since the sub-, ; vention provided by his predecessor, as 
\ h e said, clearly proved inadequate? 

finally, may 1 congratulate my right hon. 

Friend on the fact that his strident aversion to nationalisation is n o t wholly j inflexible? 

\ 
As for the details of the division of powers bclween Hie Minister and tho Crown Agents when Ihcy arc incor­
poratcd. I ask the hon. Gentleman lo await the While Paper. 

We are still considering that. But wc envisage some­
thing broadly comparable with tho relationship which exists already between many Ministers and Ihe nationalised industries. 

I am sure that Ihe Houso would not want a Minister in this House to answer for day-to-day decisions. 

One difficulty at the moment is that the situa­ lion is so unclear in the constitutional sense nnd needs clarification by new arrangements of this kind. 

I Mr. Prentice: It is an unsatisfactory state of affairs, of course. My hon. Friend 
! described my statement as "low key", j The simple reason is that it is a. sequel ' t o two statements to the House by my, 
: predecessor which dealt with the matter i far more fundamentally. 

As to whether I there should be a study by a tribunal, i there is a study being carried out by Judge Fay helped by Sir Edmund Compton and an accountant, Mr. Peter 
; Godfrey 
\ 

1 
Mr. Lee: But it is not a public inquiry. 
Mr. Prentice: This is taking place in private. That was thought right, and it W
a s not challenged in the House when it W
a s first announced. But there will be a 

. public statement about it in due course. 
As for the amount of additional money that wilt be needed, the significant point 

: is that the £85 million of standby facili­
' tics at the bank has not been used. What 
W
c arc saying is that there will bo con­
tinued Government backing. 

Whether t h e money will be used and to what extent it, will be needed, we cannot fore­
tell. That depends on many imponder-' 
able factors in the future. 

Certainly I 
Mrs. Hart: I am grateful, Mr. Speaker, for being allowed to intervene a second time. Will my right hon. Friend c o n f i r m to a number of my hon. Friends, first, that the problem about holding a public inquiry, which was considered very care­ fully at Ihc lime, is that a great deal of the evidence which has to he given to the Fay Committee has to come from companies and banks, is highly confiden­
tial and would not have been forlhcom­
ing at a public inquiry? 

Will my right hon. Friend assure them also that those against whom it is possible that charges might be made arc under study by tho Director of Public Prosecutions? 

Will he assure them, further, that all hough a great deal of Government money linn been required to sustain confidence in the Crown Agents nnd to provido stand­
by credits, it has not been spent or needed lo be spent'/ 
. shall keep the House informed of any 
"ifinificant developments,.', 
.,,. 

Mr. IVmlliv i I think Hint I can givo an allirinalivo answer lo all three of my right hon. Friends questions. 

I made reference in my original statement cer­ tninly to her latter point about the money not having been drawn upon, nnd I am tlud that my right hon. Friend under­
fiitctl liiiih ... 

j *
 
2 9 November 1
9
7
6 tha Minister ffcP^&ftfe^ Wilopment (Mr Reg Prentice), in reply o a question froa Mr Frank B^oley, announced that token provision had been made in t] 
"

 
n
   t
     e
         
        r Supplementary BrtinatMi to cover the liability on Her Majesty

1 
  s CJovernment 

rising troti the technical insolvency of the Crown Agents. 

## Crown Agents

Mr. Hooley asked the Minister for 

## R

Overseas Development what provision he has made for the contingent liability of public funds arising out of his assurances of support for the Crown Agents ; and if he will make a statement Mr. Prentice: Token provision has been made in the Winter Supplementary Estimates to cover the liability on Her Majesty's Government arising from the technical insolvency of the Crown Agents. 

My predecessor made a statement in the House on 18th December 1974 announ­
cing the Governments support for the Crown Agents, and I reaffirmed this assur­
ance of support on 16th October 1975. 

The Crown Agents have not so far needed to seek additional financial support from Her Majesty's Government, and the Sup­
plementiry Estimates provision is neces­
sary now only as a formal indication of the continuing contingent liability. 

This overall liability takes account of certain contingent liabilities on the Crown Agents arising from contracts for the supply of British goods and services, including defence eamoment, undertaken by one of their wholly-owned subsidiaries, Millbank Technical Services Limited, to which I 
have given my specific agreement. 

## Overseas D E V E L O P M E N T Crown Agents

1 
Mr. Skinner asked the Minister of. 
Overseas Development if she will make 
a statement on the present position with 
; regard to the Crown Agents' investment I in Australian property. 

j 
Mrs. Hart : My predecessors and I have 
discussed with the Crown Agents how 
my directive in 1975 that ihey should 
carry out an orderly phased withdrawal from thc secondary banking and property 
fields should be applied to their mvest­ ments in the Abbey Capital 
Property 
: Group in Australia. It was clear that the 
Crown Agents could not be certain of 
implementing any strategy to this end as 
minority shareholders in the group, even 
though they had put up almost all the 
development finance. They were, there­
fore, authorised to negotiate with the 
other interests involved with a view to securing full control of the group. They 
have now succeeded in obtaining this 
at a reasonable cost. They have also 
been able to strengthen their manage­ ment arrangements for thc group, both 
ia Ausiraiia and in London. 
I have made it clear to the Crown 
Agents that I shall wish for continuing 
consultations about the ctrategy tc oe 
followed in conducting the affairs of the 
group, which must take account of trends in the Australian market. 
I intend to 
review with the Crown Agents their policy 
for the group at regular intervals in the 
light of market trends, and have asked 
the Crown Agents for six-monthly reports. 
Meanwhile, the Crown Agents have to 
meet or refinance certain existing obliga­
tions in Australia. 
For this purpose I 
have agreed that they should borrow up to US $220 million from a consortium of 
United Kingdom banks, of which 
US 
$210 million is to be used in Australia 
and US $10 million for commitments else­
where. An agreement to this end has been concluded with rry approval. 
I 
would stress that this does not mean an 
expansion of the Crown Agents' iii^rests 
in Australia, but is required solely to meet existing commitments. 

## Crown A G E N T S : I N V E S T M E N T A N D L E N D I N G P O L I C Y

References to the Crown Agents in this paper include their subsidiary companies. 

2 ­ 
The Crown Agents w i l l make any investment of resources belonging to or under the control of their o v e r s e a s Principals in respect of which they have explicit instructions from those P r i n c i p a l s , to whom they will be answerable for those investments. 

3 ­ 
Where they a r e investing resources belonging to o r under the control of their o v e r s e a s Principals but a r e exercising their own discretion as to the investments made, or where they are offering advice as to investments to be made under 2. above, the Crown Agents, with a view to protecting their own good name and the position of Ministers from whom they hold their appointment, will take care to avoid transactions which might be l i k e l y to e m b a r r a s s H M G . 

4 ­ 
In all their investment and lending operations in connection with their 
0 ^ n account funds the Crown Agents will be guided by the best standards of o&nking prudence and the normal requirements of the Bank of England and b y * s i m i l a r regard for their own good name and for the position of Ministers T
h e y wm equally conduct their operations so as to avoid conflict with, or damage to, the interests of their o v e r s e a s P r i n c i p a l s . 

5 ­ 
In general the financial and banking operations of the Crown Agents a r*e to be directed towards maintaining their r e s e r v e s at a l e v e l suitably r e k t e d to the o v e r a l l requirements of their business and to the adequate C aPitalisation cf their subsidiaries. 

6- 
When lending money to other institutions or persons the Crown Agents w i U do their best, insofar as possible, to acquaint themselves with the full activities of the b o r r o w e r s and the use to which such money is to be put and will seek to ensure that any loans which they make are employed in accordance with the general considerations in paragraph 4. of this paper. 

## 7 M

The Crown Agents will not on their own account take a controlling lnterest in companies, other than those established as wholly-owned 
8ubsidiaries to deal with existing business already being undertaken, without p r i o r discussion with the Minister. 

Any proposed investment of or m o r e in the equity of a quoted company will be subject to prior aPproval by the Minister. 

The Crown Agents shall not engage directly in the property market, 
0*her than in respect of property for their own occupation or on the e*plicit instructions of an o v e r s e a s P r i n c i p a l . 

Any extension of their own account activities into this field will be subject to p r i o r approval by the Minister. 

The Crown Agents will c a r r y out an o r d e r l y phased withdrawal from 
^ e 8 p h e r e of secondary banking activities. 

^' 
In all transactions, whether on their own account or for Principals, 
^ e Crown Agents will, of course, be subject where relevant to the 
*
c**hange** Control regulations of the Bank of England. 

Our reft ICA 206/203/07 
8 July 1977 
J 0 Cuckney Bsq c**own Agents for Oversea Governments end Administrations 
4 Millbenk London SW1 On the instructions of the Minister, I sm sending you the inclosed guidelines relating to consultation between the Crown Agents end this Ministry over the realisation of the Crown Agents
9 own-acoount investments. 

These should be read as supplementing the earlier Ministerial directive cf 3 February 1975. 

2. 

The guidelines have been discussed end agreed with your officials. 

While they reflect for the most part arrangemente which have evolved during the process of consultation over the last two and a -half years, they also provide a statement of the principles underlying current practice, and constitute 
* formal record of tfce arrangemente which the Minister wishes you to follow in future. 

3* 
The errangemente proposed in Sir Richard King's letter of 13 August 1975, and agreed in your reply of 15 August, would appropriately apply to communications made under these guidelines. 

(D J Kirkness) 
arc 

## O O I D E L X H B S O N C O H S O L S A I I O J C B S T W S E X C R O W A O K K T S A N D O D M O V E R R E A L I S A T I O N O F H F Y B S T M E R T S

1. 

Following the Minister's direct ire to the Crown Aganta in 
?tbru*ry 197$ that they should not engage directly in tho property strket and should conduct an orderly phased withdrawal from tho aphoro of secondary hanking activities, the asssts oovered by this dirsctiTS 
h a v e been transferred to a aeparate Real i eat ion Account. It will be the object of the Crown Agente, in eoneultation with their profeeelonal advieers, to diepoao of all theae aaaeta aa rapidly aa thty oan. However, in each case attention will have to be paid to the desirability of securing the marl n u n financial advantage fron euoh disposals, and alao to the need to minimiae the risk of further funds being lost, either through fresh o o m m i t m e n f e a or through unreasonable delay in recovering existing investments. 

2. 

it is reoogniaed that the deaiderata of early dieengegemeat and aaxjaua return m a y conflict and that a balance will need to be struck in individual oases between them. In aooordanoe with hi a general obligation to keep ta Mini star informed of the development of the C
r o w n Agents' buaineea, the Chairman will m a k e regular reports to the Minister about overall prograaa in realising the aaaeta in the H
e a l i eat ion Account 
% and ha will consult the Minister before taking a deoielon on the realisation of any major aaaat in the Realisation A
o c o u n t (for the purposes of this directive, major aaaeta m a y be defined aa those of which the original coat was more than £5 million) 
or in any oaaa where special considerations of the kind outlined b e l o w apply, irrespective of the value of the investment. 

In this connection the Minister will need to be informed of, and examine with special care, oases where 

i. 
the Crown Agents consider that the balance of advantage 
liea in rejecting a course of action which would appear 
to involve the least financial loaa to them on the 
particular investment in question; 
11 
* the Crown Agents are for any reason propoaing to increase 
their exposure on a particular investment i 
ill. 
the Crown Agents are proposing to refuse an offer for any 
investment which la broadly in line with recent valuations or an offer which h
a
m the support of their psfeaaional 
advisers, or proposing, for reaeone other than strictly commercial ones, to aooept an offer which la considerably 
lower than recent valuations 
i 
iv. 
the Crown Agents are proposing for any reason to m
a
k
e 
no active efforts for the time being to dispose of an 
asset; 
v. 
there are wider political considerations to be taken 
into account; 
T
h e management of assets in Australia owned by the Abbey 
^Pital Group will be in accordance with the overall pelicy of the 
^tralian property assets agreed *th the Ministry from time to time. 

4­ 
T
h e requirement to ctovAt the Minister in the cases defined 
*bov t  i t intended to rule out consultation in other oases where B 
n o  
*fc*re i, substantial uncertainty about the financial or other C
Qaeequences of a proposed course of action. 

MAJOR **ASSETS** I N THE R E A L I S A T I O N 
c'
!ff" 
Ittti **The order** *used* in llSSEflpHtMartt kaattjar follows thatt of the table **f paragraph 373 of the Pay Committee Report. 

## E N G L I S H And Continental Group

Ihe Crown Agents have bought out the interests of most of the shareholders, and now 

h
o
 l
 d 
   a 
     majority interest, giving them control of the Group. 
                                                                  They have been pursuing 

a 
 policy of disposing, to the best possible advantage, of the major remaining assets, 

' 
 policy directed towards producing the maximum possible recovery of Crown Agents' 

loans, and thereafter complete disengagement from the Group. 
                                                                                                         The Crown Agents have 

Uready recovered a total of £5.8m (most of which comes from the successful sale of 

'hj 
    English and Continental Homes site at Warmley, Avon). 
                                                                                                             Despite these recoveries, 

lovever, losses on this investment, when they are finally known, are bound to be 

dgh 
   - probably in the region of £35m. 

## S T E R N Group

to 13 August 1975 the Crown Agents entered into a Scheme of Arrangement with the other creditors of the Stern Group to enable them to recover as much as possible of their loans. Only two properties remain specifically charged to the Crown Agents, 
*ad these are expected to realise about £2m. 

In addition, claims h p v e been submitted 
^-er the guarantees given by Mr and Mrs Stern as the formal step necessary prior to 
^institution oi" legal proceedings for the recovery of their personal debts. 

The frown ngents expect to recover about £4m, out of total loans and investments of some 

## ^Sgtralian Property Investments (Abbey Capital Property Group)

0
 enable them to choose for themselves the most advantageous possible strategy I o ? their Australian property investments, the Crown Agents have secured control of 
^companies of the Group. 

They have strengthened the management, restructured the ard, undertaken a major reconstruction of the Group, and arranged a loan of up to m from a consortium of United Kingdom banks to enable them to meet existing 
^toents. As a result of these measures the Crown Agents are in a position to tttro1 
the strategy of disengagement from their investments in Australian property ichever manner is most advantageous to them, although as explained in **para** 23 
e White Paper such disengagement will take some considerable time. 

## ^ I S S J N D U S T R Ial Securities Tils C O

ompany and 
            its assets have now 
                                   been sold 
                                               for £2.36nu * 
                                                               Total loans and investments 

Agents in thia Coorpany amounted to £
                                    1 2.5m. 

6
  8
     8 is 
                   being made in bringing court action by the liquidator and 
                                                                                                                                                                                                                the Crown 

1

 (through the 
              Attorney General) against the individuals involved. 
                                                                        Total loans by 

C t 0 * n Agents amounted to £1.75m. 

## -Sssltrust International

^

a t u*, wholly owned by the 
                                                                                                       Crown Agents, has 
                                                                                                                                                                                     made substantial losses as 
                                                                                                                                                                                                                                                                                                          a result 

*

t rty loans. After making full provision of £0.62m against their equity 

e
  n
    t . the 
                           Crown Agents have now sold this bank to a subsidiary of Charterhouse 

^mited. The 
             basis of the 
                         transaction is that the 
                                                Crown Agents restore the 

3  Q f the 
                         Bank by taking over its 
                                                                                                       bad loans and investments. An associate of 

CI*aser will attempt to realise these bad loans and investments, but 
                                                                                                                                                                                                           the extent 

"

rown Agents' recovery from these is highly uncertain. The 
                                                                                                                                                                           provision already 

a t and 
                                          a further provision against restoring the solvency of the 
                                                                                                                                                                                                                                                                                                                                                                                                                       Bank amounting 

0 1

 has 
    been made and 
                 these provisions, at present rates of exchange, are expected 

u l l y adequate to 
                                               meet the 
                                                                         total exposure. 

## . ^^Ual^Orporation

has been in voluntary liquidation since 24 December 1975. Liquidation has 

S
u
 b 
  Itantially completed, although a number of legal questions remain outstanding. 

I
t 
 is 
    expected that the remaining claims by the liquidator will shortly be finalised, 

t
h
 u
  s 
   allowing the winding up of the Company^ 
                                                 Pull provision 

h
a
 s 
  been 
       made against the whole cost of this investment, and associated loans, 

amounting to £6.3m. 

## Wallace Brothers And Co (Holdings) Limited

Although a £2m loan outstanding on 31 December 1976 was received in full with interest on the due date, full provision has had to be made against the Crown Agents' 
"uity holding in this Company, at £3.3m. 

This holding was sold to the Standard and Chartered Bank for a
. 

nominal amount, but a deferred consideration may be payable in certain circumstances. 

## Caribbean Bank

toe Crown Agents continue to own half the shares of the Group and are working with 

t
h
 e
  i
  r 
    fellow shareholders in difficult trading conditions to safeguard their own 

;-ter?st and those of the Bank 
                                                                                         * 
                                                                                             s depositors. 

## Relays Hotels

inadequate nature of the charge originally taken on the security prevented Crown Agents from realising the full ongoing value of the properties. 

Consequently, 
^ the advice of their professional advisers the Crown Agents sold their debts for 
\ with the net result of a realised loss of £6.5m. 

/Triumph Investment Trust and G T Whyte & Co Limited 

## ^Vjnvestment Trust And G T Whyte Fc Co Limited

compani e  
                       s are 
                                          in liquidation and 
                                                                                                         a receiver is acting for 
                                                                                                                                                                                          the 
                                                                                                                                                                                                       debenture holder. 

e stimated that a total of £3.8m may 
                                                                                                                                                  be recovered, out 
                                                                                                                                                                                                                            of total loans of £10m. 

0
W
n Agents had lent £9m 
to this Group. 
Amounts continue to 
be received from the 
estminster Bank in respect of the 
Crown Agents' share of the 
proceeds of 
the 
a i P - 
£1.3m 
had been received by July 
1977. 

## ^£Hgge Development Corporation

A8ents had disposed of all their interests in this Corporation by May 1976, a total loss of £3.5m on an investment of £3.6m. 

equate nature of 
                                                the 
                                                           charge originally taken on 
                                                                                                                                         the 
                                                                                                                                                      security prevented the 
                                                                                                                                                                                                                       Crown 

o
  m realising the full ongoing value of the 
                                                                                                                                          properties. 
                                                                                                                                                                                    Consequently, on 
                                                                                                                                                                                                                                           the 

wieir professional advisers the 
                                Crown Agents sold their debts for 
                                                                  £2m, with 

resuit of 
                              a realised loss of 
                                                                                            £3m. 

## ^-Gjinsecurities Limited

Agents' security for their loan of £3m to this Company is a first charge on 

## 6 P * .

Pe*"ties and a second charge on 
                                                                                          one 
                                                                                                      other. Two 
                                                                                                                                         of the five properties have 
                                                                                                                                                                                                                          now 

At would appear from a valuation carried out 
                                                       in February 1977 
                                                                            that the 

## V Of

1 the debt, after provision of £2m to 31 December 1976, is exceeded by the 

## 0 J Th

Q
  e three remaining properties. 
                                                                                                       Judgement has 
                                                                                                                                                     now 
                                                                                                                                                                 been obtained against the 

              0
j
                or the loan, and 
                                                                  the 
                                                                             Chancery Registrar's department perfected judgment on 

^ 
      1.77. 

/G S Gill Hotels Limited 

## Is Suljfotels Limited

Agents lent £2m to this Company, and have already made provisions of some 
^ 
As  result of the sale of the underlying security for this debt, the Crown a
^ 
have become involved in litigation with one would-be purchaser of that S e C U r i t y , and this litigation has not yet been concluded. 

RETURN to an Order of the Honourable the House- of Commons dated 00 November 1977 
f o r Report by the A d v i s o r y Committee on the Crown Agents 
( t h e Stevenson Committee), 2k **March** 1 97k b e i n g Annex V 
to the Statement by Her M a j e s t y ' s Government on the Report by the Pay Committee of I n q u i r y on the Crown Agents (House of Commons Return number 000 
of 
00 November 
1977) 
Ordered by The House of Commons to be printed 
00 November 
1977 
LONDON 
HSR MAJSSTY'S STATIONERY OFFICE 
OOp net 

## Note

A number of passages in this Report are deleted in the published version. 

These deletions have been made to protect the confidentiality of the relationship between the Crown Agents and their principals; to safeguard commercial confidentiality; and in one case to avoid the publication of a reference to individuals which might be considered damaging. 

The places where deletions have been made are marked with three asterisks, thuas * * * 
Eland House, Stan Place, L O N D O N SWiF 5DH 
*ho Minister for Overseas Development I submit herewith the Report of the Committee. 

The Report has been prepared on the basis that i  
t is not for publication. 

If publication, or circulation outside UK Government circles wore proposed, the Report might need a l i t t l  
e editing. 

The Chairman of the Crown Agents has expressed concern t o mc about the security of. the document and the danger and damage of a leak. 

The Committee maintained strict security especially in the l a t e r stages and a l l papers have boon returned b y the members. 

In regard to the report there are only the original submitted to you and one copy video the Secretary of the Committee holds together with tho 
0thor papers of the Committee. 

A report from Messrs Frice Watorhcuse on English and Continental Property Co Ltd is awaited but tho Committee decided not to delay i t s Report on that account, 
^rangements have been made for the receipt of the Report. (Chapter 6.37) and the Committee can be reconvened, i f necessary, t o coraidor i t . 

I have agreed with this, chairman of tho Crown Agents that he should have a copy of the Trice Waterhouao Report. 

f
*  the Committee can be of any assistance on matters arising out of i t s Report the members w i l l , of course, be at your s e r v i c e . 

iMiiev Stevenson harch 1972 
CP(77) 103 
C O P Y NO 
81 
11 November 1977 
C A B I N E T 
D R A F T W H I T E P A P E R O N " T H E CONDUCT O F C O M P A N Y 
D I R E C T O R S " 

## Memorandum By The Secretary Of State For T R A D E

1. 
           I attach a draft White Paper on the Conduct of Company D i r e c t o r s . 
The White Paper contains proposals to make insider dealing a criminal 
offence, and deals with a number of weaknesses in the law which have been 
demonstrated in recent company investigations, particularly in connection 
with loans to directors and other cases where the private interests of 
directors may conflict with the interests of the company. 
                                                                                           A l s o included 
are a number of recommendations from the Bullock report relating to the 
responsibilities of directors, notably the requirement that they should have 
regard to the interests of employees. 

2. 
         The Ministerial Committee on Economic and Industrial P o l i c y ( E l ) 
have a g r e e d the content of the White Paper, and the Legislation Committee 
( L E ) have authorised the drafting of the clauses necessary to implement 
the proposals in the White Paper, although it has not been decided whether 
the Companies Bill to be introduced early next y e a r will contain any 
provisions other than those necessary to implement the European 
Economic Community Second Directive on company law and to increase 
the fees of the R e g i s t r y of Business N a m e s . 

3. 
         It i s widely known, from informal consultations and from an 
announcement I made in the House of 28 July, that I have t e e n preparing 
proposals on the subjects covered in the White P a p e r . 
                                                                       If these matters 
a r e to be included in the 1978 Companiee Bill, then it is necessary to allow 
reasonable time for public discussion of the detailed proposals before the 
Bill i s pubHshed. 
                         But if in the event it i s decided that p r e s s u r e of the 
Parliamentary timetable prevents the implementation of these proposals 
this Session, it wiU be better to have published f i r m and detailed proposals 
rather than to appear to have abandoned work in these important areas for 
company law r e f o r m . 

4. 
         It was agreed at El that early publication of the White Paper would 
create a v e r y strong expectation of early legislation. 
                                                                        I am prepared to 
make i t clear when the White Paper is published that there may be no time 
for legislation on its proposals this Session. 

5. 
          If m y colleagues agree, I propose to publish the White Paper at 
the end of N o v e m b e r . 

E D 

Department of T r a d e 

11 November 1977 

## The Conduct Op Company Directors

1 
The Government announced in a statement by the Secretary of State for Trade to the House of Commons on 28 July 1977 that it was preparing legislative proposals to make insider dealing in securities a criminal offence and to remedy weaknesses in the law which had been demonstrated by recent company investigations, notably in connection with loans to directors and the private interests of directors. 

This White Paper describes the action which the Government intends to take to improve and strengthen the law on these subjects. 

## Duties Of Directors

2 
Consideration of all the topics in this paper must begin with the legal responsibilities and duties of company directors. Directors are appointed to act in the interests of the company and an important area of their legal responsibilities derives from trust law - the fiduciary duty to act in the interests of the company. 

They are also under a duty to exercise care and skill in the discharge of their functions. 

These duties are part of common law and are not defined in statute. 

The Government believes that it is desirable to include a general statement of the duties of directors in statute law. 

3 
For the statutory definition of fiduciary duty the Government will introduce a provision requiring a director to observe the utmost good faith towards his company in all of his actions and to act honestly in the exercise of the powers and in the discharge of the duties of his office. 

It will also be provided that a director shall not make use of any money or property belonging to his company to benefit himself; 
nor of any information acquired by him or opportunity afforded to him by virtue of his position as a director of a company, if by doing so he gains an advantage for himself which may conflict with the interests of the company. 4 
The standard of skill and care which the law expects of a company director in the performance of his duties derives from case l a w . ^ ^ 
He is required to perform his duties with reasonable care, exercising that degree of skill which may reasonably be expected of a person of his knowledge and experience.' The law apnears to thufe/draw a distinction between the standard of skill and the s standard of care. For the standard of care, an objective test i set, namely that to be expected of a reasonable man; the standard of skill, on the other hand, is a subjective test under which the level required depends upon the knowledge and experience possessed by each director. 

The Government has decided that the present requirements of the law should be codified in legislation which will require a director to exercise that degree of care and diligence that a reasonably prudent person would exercise in comparable circumstances and the degree of skill which may reasonably be expected of a person of his knowledge and experienc e* 
5 
The Government also believes that employees should be given legal recognition by company law. 

The statutory definition of the duty of directors will require directors to take into account the interests of employees as well as of shareholders. They will also be required to send the annual report and accounts to all employees as well as to shareholders. This will be an additional financial and administrative burden to companies, but the Government believes that employees as well as 

( 1 ) 
Re City Equitable Fire Insurance Co Ltd */J925/"* Ch 407 
shareholders are entitled to the information in company reports and accounts and that these should be made available to both on an equal footing. 6 
The Bullock Committee also recommended that there should be "one place where a director, and particularly the new employee representative, can see a statement of the basic duties he owes to the company as a result of his membership of the 
(1 
)
board". 

The Government agrees that it would be useful to bring together in one place a comprehensive statement of the various legal responsibilities of directors, but this would seem more appropriate to a handbook than to the statute itself. 

The Government intends to consult with the CBI and the TUC about the preparation of such a handbook. 

7 
The Bullock report also drew attention to the case of 
(2) 
Parke v The Daily News Limited in 1962, where the family controlling the company which purchased The Daily News wished to distribute the whole of the purchase price among the employees who would become redundant. A shareholder of The Daily News contested this proposed action and the Court found that there was no lawful basis for it. 

It is not certain that the requirement which we propose to introduce that directors should take into account the interests of employees as well as of shareholders would be held to extend to the actions of directors in the course of winding up a company, or to former employees. 

The Government therefore, intends to make it lawful for directors to make provision for employees or former employees when closing down the whole or any part of the business. 

## Loans To Directors

8 
The definition of the fiduciary- duty of directors, proposed in paragraph 3, will broadly give statutory form to the existing common law that a director may not make use of his company's money to further his private interests, and loans by companies to their directors are prohibited, with certain important excep­
tions, by Section 190 of the Companies Act 1948. 

Nevertheless there have been a number of serious cases where directors have sought to circumvent the law in order to obtain large sums of money from their companies, and inspectors in recent company investigations have recommended that Section 190 should be strengthened. 

9 
The Government propose to reform the law relating to loans to directors in the following ways: 

- For public companies and private companies which belong to 
a group of which a public company is also a member a) to widen the scope of Section 190 to prohibit, subject 
to certain exceptions, loans to directors
1 families 
and to companies in which a director has an interest 
as well as loans to directors themselves; and to make 
breach of these provisions a criminal offence 
b) to introduce limitations on the scale and terms on which 
loans to directors to be made when they are permitted 
under the specific exemptions:­
- For all companies:­
a) to ensure that there is greater disclosure of loans to 
directors by amending Section 197 of the 1948 Act. 
The following paragraphs discuss these proposals in greater detail' 
10 
Section 190 provides that it shall not be lawful for a company to make a loan, or to enter into a guarantee or provide any security for a loan, to a person who is its director or a r ector of i t s holding company. 

In the case of public companies and x e companies that belong to a group of which a public company is I S
o a a member i t i s proposed to extend this prohibition to include a r ' s spouse, son or daughter, and to prohibit the making of a loan company which a director or his family controls or in which he or a O
f ^^"^y ha s major financial interest, defined as 20 per cent or more Of I
, of the classes of capital or of the company's long or medium term 
^ebts. 

Loans to trusts of which the director or any member of his lV is a trustee, other than a bare trustee, or a beneficiary, w i l l l I B ilarly be prohibited. 

e^e are at present three exceptions to the general prohibition on n ^ "to directors: a subsidiary company may make a loan to i t s holding 
^ahy where the l a t t e r i s i t s director: 
a company may provide, subject C ertain safeguards, funds to a director to meet expenses incurred a n e purposes of the company; and f i n a l l y there i s the "banking cion" which provides that, in the case of a company whose ordinary 
^ess includes the lending of money, a loan may be made to a director 
' such loan i s in the ordinary course of the company1s business. 

^ e (i abuses of the second and p a r t i c u l a r l y the third exemption have en r i s e to considerable concern. 

has been suggested that the meaning of "in the ordinary course of 
" should be defined more closely. 

I t i s however d i f f i c u l t to Slat e a definition which would be satisfactory in a l l circumstances. 

n e r e f o r e propose instead to require that such loans must be on normal v^Kiercia]- terms as to interest rate, repayment terms, security and other­
' xriey are to be subject to an over al l limit of £50,000 and are to be 
' 
clos e£ j ,   
accounts; and to make a breach of the new provision subject n

-
Or­
^ 
l m i n a l penalties. 
I t w i l l however be permissible for a director to 
a low interest loan for house purchase from his company provided that 
x s
.
 done under a scheme which i s available to employees of the company and 
1
a
e **same terms; the limit of** £50,000 w i l l nevertheless s t i l l apply and the 
ivJ must be disclosed. 
Lh order not to obstruct legitimate inter-company lending, there will be an exemption to the provisions in paragraphs 10 
to 12 above for loans by one company to another within the same group defined as a holding company and its subsidiaries. 

However where such loans would otherwise have been caught by the rules on prohibition, limitation or disclosure details of the loans must be disclosed separately in the accounts of the Lending Company. 

14 
The new disclosure provisions to replace those in Section 
197 will cover all loans made to directors, including those to their families and associated companies, and will require for each loan: 

- a statement of the identity of the borrower, and the 
name of the director concerned if he is not the borrower 
- a statement of the terms of the loan, including interest 
rate and security 
- a statement of the amount outstanding at the beginning 
and the end of the period, and the highest amount 
outstanding during the period if this is a higher amount 
- a statement as to whether any interest due has not been 
paid, and whether any provision had been made in the 
accounts for non-recovery of the loan. 
This information will be part of the accounts and will be subjec to audit. 15 
There are other ways, besides the receipt of a loan, by which a director may become indebted to his company, such as trade c r e d i t . 

I t i s considered that where such indebtedness i s significant i t i s a matter of legitimate concern to the shareholders, and i t i s intended that in future companies should b e required to show, separately from any loans, the amount .of other indebtedness of each director to the company, or his family or associated company, where such indebtedness exceeds £5,000. 

*t is also proposed to limit to £10,000 the advances which can be made by a company to i t s director to cover expenses. 

## Directors' Conflicts Of Interest

16 
The general fiduciary duty of a director to his company also needs to be strengthened by specific statutory provisions covering transactions, other than loans, in which the d i r e c t o r s duty to his company conflicts or may conflict with his private interests or those of his family. 

In general, i t i s not possible t o lay down in law what directors may or may not do in particular circumstances: 
the v a r i e t y of situations i s too great. 

There a r e , however, two specific types of contract where the Possibility of conflict i s so clear that the approval of the shareholders should be sought before the contract i s v a l i d : 
one concerns long-term contracts of service, the other significant Purchases by the company of assets from or sales to, a director 
0
r a company in which the director has an interest. The Stock 
^change l i s t i n g agreement already provides that, for l i s t e d C Qmpanies, certain of these contracts must be authorised by the shareholders. 

The Government propose that f o r a l l companies directors 1 service contracts for periods longer than 5 years shall not be v a l i d unless approved by the company in general f e t i n g , and intend to introduce a requirement that significant oontracts involving the transfer of assets between a company ahd a director, his family, or another company in which a Erector has an interest, s h a l l require the p r i o r approval of company in general meeting. 17 
For other transactions involving possible conflicts of interest it is proposed to provide for fuller disclosure of transactions in the annual accounts of companies, and to strengthen the rights of shareholders to take legal action where they consider that their interests have been harmed by the actions of the directors. 

The new disclosure provisions will be along similar lines to those already in operation for listed companies, which provide that details of contracts of significance, defined as contracts involving in aggregate more than 1 per cent of the company
1s purchases or receipts, shall he disclosed. 

It is considered that this information should be n provided in the form of a note to the accounts, rather than i the directors
1 report, and will therefore be subject to audit. 

18 
Hitherto, directors who have pursued their private interest at the expense of the company have had little to fear from the shareholders, even when the latter have the necessary informati o r l' 
 
o r i  
e In private companies in particular, this may be considered as aspect of the need to improve the position of minority share­ holders, and it is intended to introduce legislation to amend Section 210 of the 1948 Act to enable minority shareholders to take action more readily to protect their interests by providi^ 
3 
that they may petition the court on the grounds that the affai^
of the company are being conducted in a manner unfairly prejudicial to their interests. 

Such amendment will of course help to deal with a wider range of abuses than those involving contracts in which the directors have a personal interest. 

## Non-Executive Directors

19 
Non-executive directors can perform a useful function in a S
helping to resolve problems of conflicts of interest as well in other ways. 

In recent years there has been growing interest l n  ­ the role of non-executive directors on company boards. 

The r e  Port of the Company A f f a i r s Committee of the CBI "The Responsibilities of the B r i t i s h Public Company" published in 
^973 (the Watkinson Report) concluded that "the inclusion on the board of public companies of non-executive directors i s highly Q e s i r a b l e . . . . by virtue of the fact that unlike executive Erectors thay are not closely involved in the day-to-day a f f a i r s o f the company and they are in a better position to see the Company as a whole and to take a c r i t i c a l view of i t " . 

Despite 
^ i s , only 35$ **of companies in The Times** 1000 1975/76 had more 
^han two non-executive directors. 

Twenty five per cent had none. 

Non-executive directors can bring to the board a breadth of knowledge and experience which the company's own management may possess. 

Even more important, they can increase the element o f independence and objectivity in board decision-making. 

Not eing involved in day-to-day management they are able to take a detached look at the way in which the company i s being run and 
* its medium and long term p o l i c i e s . 

They should provide dependent supervision of the company1 s management. 

In order 
^ 0 do this effectively, however, the non-executive directors need 
^ r e e access to management information and there need to be e*iough of them. 

One or two non-executive directors on a board W f lich is 20 strong are unlikely to exercise r e a l influence. 

In the United States and Canada a practice has developed in t ecent years whereby the boards of public companies appoint 
1 1
 audit committee composed wholly or mainly of non-executive S e c t o r s , The duties of the audit committee are f l e x i b l e ePending on the needs of the company, but the core functions a j ? e to review the financial statements and to review the audit 
^angements and the company1s internal financial controls. 

The a u d i t committee works closely with the auditors who are normally V l t e d to attend i t s meetings. 

I t has been found in the United 
0-ces and Canada that audit committees play a useful r o l e in lengthening the influence of non-executive directors and the 
^ s i t i o n of the auditors. 

Public companies registered under the Canadian Business Corporations Act 1973 are required to have an audit committee and this will also be a requirement from 
1 July 1978 for companies listed on the New York Stock Exchange. 

l  
S 
The time may come when it will be appropriate to legislate in th field, but the Government believes initially at least it will be better for companies, investors and their representative bodies to work out schemes which can benefit from a degree of flexibility which the law could not provide. 

It has been found in North America that one of the conditions for the successful 
 
a operation of audit committees is that the board should contain sufficient number of strong and independent non-executive direct 
^ 
0
a to serve on them. 

This means that companies must be willing ^
members of their senior management or directors to serve as non­
executive directors on the boards of other companies, to the general advantage of industry. 

The Consultative Committee of Accountancy Bodies, in a memorandum to the Secretary of State for Trade, has supported experiments with audit committees hy UK companies. 

The Government welcomes this and also the consideration which is currently being given to them by the Confederation of British Industries and the Stock Exchange. 

5
? 

T 
J
-
i i s i d e r dealing is understood broadly to cover situations where a r s oh buys or sells securities when he, but not the other party to the saction, is in possession of confidential information which affects Va-lue to be placed on those securities. Furthermore the confidential Orrnation in question will generally be in his possession because of connection which he has with the company whose securities are to be a ^ in (eg he may be a director, employee or professional adviser of G 0mpany) or because someone in such a position has provided him. 

        UJ
,
          -y or indirectly, with the information. 
                                                                                                                                        By seeking to make a profit 

111 such information, or to avoid a loss, the individual in question 

        e
I
          held to be taking an unfair advantage of the person with whom he 

3 ^ l i n g . 

## I]

There are at present in this country no legal sanctions aimed 
,
 
xicaliy at discouraging insider dealing although, for example, the 1967 and the 1976 Companies Acts contain provisions requiring 
. 

"sure of dealings by directors and substantial shareholders. 

In A O n , the Stock Exchange regulations and the City Code on Take-overs 

                                                                               o
                                                                                 n
                                                                                    s
"

x 
  h

c o n ^

a ^ "  P 

n
          r
            o
               v i 

s i 
              against insider dealing and the Stock 

ahge has recently announced details of

 M a model code" which it 

   
       i C L s
^
              to introduce as part of its Listing Agreement; this lays down 

es to be observed by directors and employees wishing to deal in 

U 
 ^

 
  C
     o
       m P

a
  n y '

s securities. 
                                               The Government has looked carefully at the 

6
  s involved and has paid attention both to what is done in other 

s W
 an^ to the views expressed by various organisations in this coun­
t a/ ^ e question of what should be done about insider dealing has attrac­
^
 
0 nsiderable debate here and overseas and this has served to clarify 
. issues and to identify the conflicting considerations which have to be 

          C e f i .
^
                        
                                    That insider dealing is wrong is widely accepted and 

Government has concluded that this should be underlined by 

^tory provisions which would make insider dealing in certain 

,
) ^"stances a criminal offence. 
                                    It will not be possible to 

6 a perfect answer to the problem which will enable the 

immediate identification and conviction of every wrong doer but the Government intends to establish as soon as possible that insider dealing is an offence and to create penalties which will be sufficient in most cases to deter those who are tempted to use inside information for their own personal gain. 

If the pro­
visions proposed prove insufficient in the light of experience, the Government will not hesitate to modify and refine them. 

24 
The Government believes that market transactions in quoted securities should be treated differently from other transactions. 

In the former, with the jobbing system and market structure, it will not generally be practicable to identify a victim who has suffered as a result of insider dealing. 

It is this that rules out any adequate civil law remedy that would compensate the victim and it is for this reason that the only realistic deterrent is the creation of a criminal offence. 

In other cases there will be a direct contractual relationship between the parties and it is, therefore, possible to build on existing civil law remedies with some strengthening of the law on fraud and misrepresentation 
(see para 30). 

The Government is considering intowhich category the ARIEL system and the over-the-counter market should fall. 

25 
The Governments principal proposal is that it shall be a criminal offence for an insider to deal on the market in quoted securities in certain circumstances where he has inside information We intend, however, that this offence should not be one of absolute liability. 

The prosecution will need to show that the insider knew or had reasonable grounds to believe that the inform­
ation was not generally known and was price sensitive and that he dealt nevertheless. Also, it will be possible for a person to offer as a defence that his purpose in dealing was not to make a profit or avoid a loss by the use of his inside information. 

n taking these proposals the Government has recognised that the creation 

.
 
Itl5ider dealing as an offence must not be such as to inhibit dealings 
.
^
 
a r e not under criticism. 

It has particularly in mind that the directors 

f
ernPloyees of a company will not infrequently hold shares in the company 
u
c h they work. 
By the very nature of their employment they will 
.^ sy be in possession of confidential information and they could be 
ited from dealing perfectly innocently unless their special position 
^ 
"Snased. 
Thc difficulty is a real one, but the Government believes 
defence set out in the preceding paragraph will afford a suitable 
 
r e
^
 of protection in relation to innocent dealings by directors and 
.
 
0yees. While the Government welcomes the initiative taken by the Stock 
Cflah^e in producing the "model code" referred to in paragraph 23 above, 
-government does not consider that it would be practicable or desirable 
r o vide in legislation that compliance with the "model code" should of 
j 
^
1 be a defence to the proposed criminal offence. 
Furthermore, in 
B 
v
 
e
w
5
s
u
n r n o n "
t '
i 
, "t
h e wide variety of possible factors to be considered 
i t impossible to lay down, whether in legislation or in some statutory 

' more specific guidance about the circumstances in which, under the 
-^lons set out above, it would be lawful to deal. 

 
1 1
.
 defining an insider it would be possible either to list in the 
i^
ls^
a"tion specific classes of persons who together with defined 

s'b
C
l
a ^
e
 
s 
w o 1^ld be treated as insiders (principally directors, employees, 
t
 s^
antial shareholders and persons with a professional or business rela­

H
&
j 
wiih the company) or to adopt a wider approach, as in the United 
^
 
s* that an insider is anyone who has inside information. 

The principal 

h
a S
e of the wider approach is that it might avoid some of the anoma­

                                                     
                                                       w i l 0
                                                                        s n
                                                                              o
\  
                  ^
                                                                 ^
                                                                                 ^ within the defined category of insider. 

0  w-

1 1 0
        
        i
           s 
                 a
                    n ^

^

 
  V e r * it would be difficult toenforce in practice and could bring within 

bition on dealing a much wider range of individuals who would be 

 
   0 1 1 1 6

 doubt as to whether they were committing a criminal offence by 

$

to

Q S or not. 
                                     Since this would be unsatisfactory, we think it best to 

^he approach of listing specific classes of persons. However, we 

^ to adopt a wide definition of associate or "tippee". 

28 
As to tippee, the Government proposes that anyone who receives information which he knows to be price sensitive and not generally available and which he realises has come directly or indirectly from an insider should fall within this category. 

It is not pro­
posed to restrict the definition of tippeesto those who are in some defined relationship with the insider. 

The Government recog­
nises that this broad definition may inhibit some transactions but believes that its proposals for a defence against the criminal charge will provide an adequate protection for the innocent. 

If in a few cases a person is not clear whether he falls within the definition of an insider's tippee, the prudent course will be for him to refrain from dealing. 

The alternative of setting out in the legislation those who are in defined family or business relationships with the insider would necessarily introduce arbitrary distinctions and could on occasion exclude from the crime persons who were knowingly behaving in an improper manner. 

29 
It is not proposed that companies themselves should be capable of prosecution for insider dealing. 

The provisions required to bring companies within the scope of the offence would be very 
5 
complex and we do not think that by focussing solely on individual we should be likely to miss any culpable person who should be brought within the net. Also the main aim of the legislation will be to set out in the statute standards by which people can measure their behaviour. However, we would propose to make it an offence for an insider or a tippee to procure dealings by any other person and in this case companies would be included in the definition of person. This provision is necessary to prevent evasion of the legislation s by, for example, a person dealing through a company of which he i the major shareholder. 

30 
Where a market transaction is not involved and there are face to face dealings between vendor and buyer the insider would be put under an obligation, to be enforced by criminal sanctions, to revea^ 
his status to the other party involved in the transaction. 

Although the latter probably has already sufficient grounds for a civil action where this is not done, we intend to provide specifically that default would give grounds for action to rescind the contract in question and recover any loss caused by the failure to disclose. 

31 
Where insider dealing takes place in market transactions in quoted securities there are substantial problems in linking buyers and sellers which seem to rule out civil actions by those who claim to have made losses through buying or selling shares at a critical time. 

Indeed one of the main arguments for creating the criminal offence of insider dealing is precisely that there is usually no effective civil remedy. With the establishment of criminal sanctions criminal penalties will be the..natural way of making insiders pay for illicit gains. In addition there would be nothing in the statute which would prevent civil remedies being sought in any suitable case under the present law. 

The Courts have general power now under the Powers of the Criminal Courts Act 1973 to order a convicted person to pay compensation, and this would apply to convictions for insider dealing. 

However such an order has to be made in favour of an identified person, and in market transactions it will not normally be possible to identify such a person. 

There may be some scope for the use of these powers in the more straightforward cases, where the victim is identified and the extent of his loss is clear. 

It is often argued, however, that it would be wrong to allow the insider to retain the financial benefit of his actions and that the company itself should be allowed to sue for "disgorgement". 

There will be cases in which the company will already have a right to recover profits obtained from the misuse of information acquired by directors or employees by virtue of their position or which has been entrusted to persons in confidence. To extend the law so as to enable the company to sue for disgorgement where it has no right to do so at present would bring with it a windfall profit resulting from the criminal behaviour of one of its employees but would mean that the insider did not keep any illicit gains. The arguments for and against some provision to ensure that an insider is deprived of such gains are finely balanced and the Government has not yet reached a firm conclusion: 
further discussion of this subject would be welcome. 

32 
The preceding paragraphs set out the main principles on which the forthcoming l e g i s l a t i o n on insider dealing w i l l be based. 

This l e g i s l a t i o n w i l l also deal with a number of questions of a more detailed nature, such as the position of trustees and the arrangements within financial institutions for r e s t r i c t i n g access to the confidential information held by certain departments. 

These raise important and sometimes d i f f i c u l t issues, and w i l l be the subject of further consideration and consultation. 

     , 
           . 
                                                                                                          C O P Y NO 
CP(77) 104 

14 November 3-971 

C A B I N E T 

## 1978-79 National. I N S U R A N C E C O N T R I B U T I O N R A T E S I N R E S P E C T O F E M P L O Y E D E A R N E R S Memorandum By The Secretary Of State For Social Services And The Minister For Social Security

1- 
We have been unable to reach agreement with the Chief Secretary, Treasury on the Class 1 National Insurance contribution rate to be fixed for A p r i l 1978, vhen the New Pensions Scheme starts. 

Subject to agreement on this, the other changes in rates (including a reduction in the self­
employed rate as endorsed in principle by the Home and Social Affairs Committee) have been agreed with the T r e a s u r y and are given in the attached Annex. 

2. 
         The present Class 1 rate is 14-g- per cent (employer 8f per cent, 
employee 5f per cent). 
                               This is bound to go up next A p r i l with the start 
of the new Scheme, and the statutory maximum is l6f per cent (employer 
10 per cent, employee 6^ per cent). 
                                               W e think the increase shculd be 
limited to 16 per cent, so that the employee's contribution can be held at 
6 per cent. 

3. 
         T h e r e a r e strong national insurance reasons for a rate lower than 
the 16^ per cent maximum. 
                                     The Government Actuary advises that on 
given assumptions (an annual earnings increase of 10 per cent, 1, 470, 000 
wholly unemployed (1, 650, 000 in total) and 9 million contracted out) a 
16f per cent rate would produce o v e r a l l an income to the National Insurance 
Fund of £10,941 million. 
                                  Inevitably the nature of the assumptions makes 
this a v e r y speculative figure, which could be in e r r o r either way. 
                                                                                         Taking 
them as the basis of calculation, however, a 16^ per cent rate would 
produce a deficit of about £33* million; and 16 per cent would produce a 
deficit of £402* million. 
                                  It would be a departure from the practice of recent 
years to aim for anythong other than a l a r g e surplus. 
                                                                       But the National 
Insurance Fund will ha\ e a credit balance of about £3, 700 million by A p r i l 
next year, and it can well support a deficit of this o r d e r . 

*If, for the purposes of the Government Actuary's report on the Contributions 
Order, the assumed unemployment l e v e l i s stated to be l e s s than 1. 65 million, 
the size of the deficit would be reduced. 
                                          Conversely, a higher figure would 

increase it. 

4. 
          F o r five y e a r s the national insurance annual income has been m o r e 
than was required to pay benefit and administer the scheme: we had 
surpluses of £600 million and £928 million in the last two y e a r s , and 
expect another £600 million surplus this y e a r . 
                                                                    T h e s e surpluses have not 
gone unchallenged, and there have been demands that they be spent in 
improved benefits. 
                             -Last year there was in fact p r e s s u r e to reduce the rate 
because of the surplus: 
                                  we resisted this on the ground that we wanted to 
avoid too big an i n c r e a s e when the new scheme started. 
                                                                                 With an even higher 
surplus now we shall at least be expected to moderate the i n c r e a s e . 

5. 
          The Government Actuary estimates that after 1978-79 if 
unemployment fell to, and remained at, 4 per cent, a 16 per cent rate would 
suffice for over 10 y e a r s . 
                                         F o r many y e a r s we have worked on the principle 
that we should not look at the finances of the Fund in each year in isolation, 
but should take one year with another. 
                                                           The confidence of the general public 
that what they pay in contributions is to provide for benefics will be 
undermined if we a r e seen to work only in one way - towards growixig 
surplus. 
               W e ought to make use of a v e r y small proportion (£400 million) 
of the £3, 700 million balance in the Fund to tide us o v e r a temporary 
problem while unemployment remains high. 

6. 
          This is of particular importance for A p r i l 1978 because of the effect 
on take home pay at a time when the next stage of Child Benefit will also 
have an impact. 
                          The position is illustrated by the following figures for a 
man on average earnings with two children: 

| Weekly                | Additional to       |
|-----------------------|---------------------|
| Total Reduction in    |                     |
| Overall Gain in       |                     |
| Earnings              |                     |
| Employee's            |                     |
| Take Home Pay         |                     |
| F a m i l y Income    |                     |
| Contribution          | (talcing account of |
| (taking account       |                     |
| lost Child Tax        |                     |
| of increased          |                     |
| A l l o w a n c e s ) |                     |
| Child Benefit)        |                     |
| 161%                  |                     |
| 16%                   |                     |
| 161%                  |                     |
| 16%                   |                     |
| 161%                  |                     |
| 16%                   |                     |
| £                     |                     |
| £                     |                     |
| £                     |                     |
| £                     |                     |
| £                     |                     |
| £                     |                     |
| £                     |                     |
| 80                    | 0. 60               |
| 0.20                  |                     |
| 1. 69                 |                     |
| 1.29                  |                     |
| 4                     | - 0.41              |
| + 0.81                |                     |

T o hold the employee's contribution at 16 per cent reduces the impact on his pav by 40p, and increases the total family income, with child benefit, by the same amount. 

This will particularly help the low paid, who benefit m o r e from a l o w e r National Insurance contribution than f r o m tax cuts costing the 

same amount; and it could be announced before Christmas. 
                                                           The political 
advantage of the lower figure will help in our public relations task of selling 
the new scheme in the coming months. 

7. 
          This assumes that the whole benefit of holding the contribution to 
16 per cent should be given to the employee. 
                                                                  This would l e a v e the employer 
paying 10 per cent. 
                              We should no doubt be criticised for departing from the 
present relativity between the employer's and employee's contribution and 

loading it m o r e heavily on the employer (who is already carrying the 
2 per cent surcharge) which could be regarded as contrary to an assurance 
given by the Government spokesman during last Session's proceedings on 
the Miscellaneous Provisions Dill (Standing Committee A , second sitting, 
16 December 1976, Columns 78/9). 
                                      The Confederation of B r i t i s h Industry 
and other critics would understand the importance for income restraint of 
keeping the employee contribution as low as possible. 

8. 
          W e strongly recommend setting the Clas?: 1 contribution rate at 
16 per cont from Apr?l 1978, with the employee paying 6 per cent and the 
employer 10 per cent. 
                                 We seek the agreement of our colleagues. 

D E 
S O 

Department of Health and Social Security 

14 November 1977 

## Annex Other Contribution Changes

"
l
e 
The lower and upper earnings limits for Class 1 contributions to be 
£17.50 and £120 a week respectively. 
2 . 
The Class 2 rate to be £1.90 a week. 
3. 
The Class 4 rate to be 5 per cent of annual profits or gains which 
fall between £2,000 and £6,250. 
4. 
The Class 5 rate to be £1.80 a week. 
5. 
The small earnings exception to be £950 a year. 
6- 
The share fisherman's special Class 2 
rate to be £3.00 a week. 
CP(77) 105 
C O P Y NO 
14 N o v e m b e r 1977 
C A B I N E T 

## N A T I O N A L Insurance C O N T R I B U T I O N R E V I E W 1977 Memorandum By The Chief Secretary, T R E A S U R Y

1* 
          In their paper (CP(77) 104) the Secretary of State for Social Services 
and the Minister for Social Security propose that the Class 1 joint contribu­
tion rate to be paid f r o m next A p r i l by employers and employees contracted 
into the New Pensions scheme should be 16 per cent (6 p e r cent employees 
and 10 per cent employers) rather than the 16^ per cent ( 6 j per cent 
employees and 10 per cent e m p l o y e r s ) which is provided for in the legislation 
and generrlly expected to apply. 
                                                 The Government Actuary 1 s calculations 
show that a 16^ per cent rate would produce a deficit in the National 
Insurance Fund in 1978-79 of some £33 million; 
                                                                      whereas a 16 per cent rate 
would produce a l a r g e r deficit of some £402 million. 
                                                                               T h e r e would be a 
similar cost to the Public Sector Borrowing Requirement. 

2. 
         The Chancellor of the Exchequer and I think it would be imprudent to 
go for the l o w e r contribution rate for the following main reascns:­

i. 
          People are hoprixjg to see further tax reductions in the 1978 
Budget. 
                 In particular, the Trades Union Congress will be looking 
for either further 
                                                            thresholds, or a reduced rate 
band of tax. 
                        However, the scope for this will depend on how the 
economy develops between now axsd next £spring, and in partieul&r rrn 
the outcome on pay c 
                                      The position could well be tight. 
                                                                                                  A sum of 
over £400 million could be important to a politically viable Budget. 

i i . 
The choice is between helping to make r o o m for tax reductions 
in the next Budget, and announcing now a smaller increase in national 
insurance contributions next A p r i l than would otherwise have taken 
place. 
I have no doubt that the f o r m e r would have a greater 
p e r c e i v e d effect on take home pay. 
i i i . 
We shall be able to help more low income households through 
tax reductions than through l o w e r increases in national insurance 
contributions for those contracted into the new scheme. 
i v , 
We should clearly not undermine the basis of the National 
Insurance Fur.d P 
But a .163- p e r cent rate will involve a substantial 
turn round f r o m surpluses in previous y e a r s , including the large 
surplus expected this year, to a deficit in 1978-79. 
And there can 
be no certainty that it will be possible to reduce this rate in the near future,, 
It is wholly defensible, therefore, not to plan for a l a r g e 
deficit this year particularly cince the accumulated balance of the Fund will still fall in real value next year measured in t e r m s of the 
number of weeks of expenditure for which it provides cover, 
since 
benefits will be further increased next autumn,, 
The assumptions 
on which the Government Actuary's calculations are based could, of 
course, prove wrong. 
But this could go either way - giving a l o w e r 
or higher deficit on the FundL 
If, for example, earnings increased, 
by m o r e than ia assumed, so would unemployment, which would add 
to the deficits 

## Conclusion

3 0 
       A s explained in paragraph 2 i i 0 above, there i s a clear choice 
between a smaller increase, but still an increase, (a m a r r i e d man on 
average e irnings would pay 40p rather than 60p assuming an equal split 
between employees and e m p l o y e r s ) and having nearly £400 million 
available in the Spring Budget, 
                                 I believe the difference between these 
rates is too small to forgo the advantages of having so l a r g e a sum 
available for either income tax reliefs or the other options such a sum 
would p r o v i d e . 
                 The Chancellor of the Exchequer and I therefore recommend 
that the joint contribution rate to apply f r o m next A p r i l should be set at 
16-r per cent, divided as to 10 p e r cent for employers and h\ per cent for 
employees, as provided for in the present statute. 

JB 

T r e a s u r y Chambers 

14 November 1977 

CP(77) 106 
C O P Y NO 
24 November 1977 
C A B I N E T 

## P A Y P O L I C Y A N D Low P A Y Memorandum By The Chancellor Of The Exchequer

1. 
           Following discussion of the Secretary of State for Employment 1 s paper 
(CP(77) 98) I was invited CM(77) 33rd Conclusions, Minute 2) to submit a 
further paper setting out m y own v i e w s . 
                                                                 This supplements m y minute of 
7th October to the P r i m e Minister, which was circulated to Cabinet 
colleagues. 

2. 
         In its discussion, Cabinet concluded that the crucial question would 
be whether a concession for the lowest paid would help in securing an overall 
increase not exceeding 10 per cent. 
                                               F o r this purpose we took the "lowest 
paid" as meaning those not earning m o r e than £40 a week. 
                                                                            T h e r e seem to 
be two circumstances in which a concession would help: 

i. 
If the T r a d e s Union Congress ( T U C ) could be persuaded to 
underwrite the 10 p e r cent guideline in return, or 
i i . 
if the chief p r e s s u r e on the policy i s f r o m this group of 
w o r k e r s . 

3. 
         T h e r e i s no evidence that the T U C will be prepared to underwrite 
the 10 per cent guideline in any circumstances. 
                                                              The one faint possibility 
is that if we can maintain it until a majority of w o r k e r s have settled within 
it, the T U C can be persuaded to acquiesce grudgingly to it for the remainder 
of the round in the interests of equity. 
                                                   This stage will probably not be 
reached until, say, March next y e a r . 
                                                  M o r e o v e r , whatever time we choose 
for renewed talks with the T U C , whether about the remainder of this round 
or about the arrangements for pay after next July, I suspect that low pay will 
not play much p a r t given that the T U C has shown little interest in the subject 
for some t i m e . 

4. 
          A s regards the chief p r e s s u r e s on the policy, the a v e r a g e earnings 
of the groups of workers involved in the major challenges to the 10 per cent 
guideline so far a r e as follows: 

| L o r r y d r i v e r s          | £73.90                   |
|----------------------------------|--------------------------|
| British Oxygen                   | £83.20                   |
| A i r Traffic Control Assistants | £76.92                   |
| P o l i c e Constables           | £76. 33 (outside London) |
| F i r e m e n                    | £74.90                   |
| j                                |                          |
| Miners                           | £80*90                   |

A s will be seen, none of these groups falls into the "lowest paid" category. 

A special concession for those earning l e s s than £40 would therefore be of no general assistance in relieving p r e s s u r e on the policy. 

5. 
          The one area in which some conflict has arisen i s the limited one 
of Wages Councils. 
                               Wages Councils exist for those sectors of industry 
in which there a r e no effective bargaining arrangements. 
                                                                                     They a r e often 
esoteric, like Button Manufacturing or Ostrich Feather, Fancy Feather 
and A r t i f i c i a l F l o w e r making; 
                                            but some cover important groups like 
agricultural workers and Licensed Residential w o r k e r s . 
                                                                                    The Councils 
establish rhinimum rates for their industries. 
                                                                     A number of Wages Councils 
have recently made oit proposed awards which breach the 10 per cent 
guideline, and in each case we have made representations^ against their 
proposals. 

6. 
           Not all workers in Wages Council industries a r e actually paid at 
noinimum rates: for example, the Minister of Agriculture, F i s h e r i e s and 
Food recently estimated that over 90 per cent of workers covered by the 
Agricultural Wages Board a r e paid above the minimum. 
                                                                                    The danger in 
excessive settlements l i e s in the fact that the awarded percentage i n c r e a s e 
in minimum rates is normally c a r r i e d through into the higher rates that 
are actually paid. 
                             The only way to tackle this is to warn employers that 
they run the risk of discretionary powers being used against them if they 
do so. 
            The danger remains even if some low pay exception is made to 
regularise the excessive awards by Wages Councils, and arguably would 
be made w o r s e in such circumstances because i t would be harder to justify 
the use of discretionary powers when the awards w e r e reflected in increases 
for workers in the same industry earning m o r e than £40 a week. 

7. 
          The tendency to reflect increases at the bottom of the pay structure 
in higher rates i s in m y v i e w a strong argument against any exception for 
the low paid generally. 
                                   The main effect of such an exception i s to jack up 
the whole earnings structure, which we cannot afford. 
                                                                                It also establishes 
the low paid as a "special c a s e " , when we a r e doing all we can to avoid 
establishing any. 

8. 
          My conclusion i s therefore that an exception to the 10 p e r cent 
guideline in favour of the low paid would not help us to secure an o v e r a l l 
increase in earnings not exceeding 10 per cent, and indeed would probably 

prevent us from achieving that aim. 
                                      The only other argument in favour 
of such an exception would be that it would offer significant relief to family 
poverty. 
          That argument fails because of the v e r y small proportion of the 
low paid who a r e in fact family breadwinners, as shown in the Annex to 
CP(77) 98, and because fiscal action i s in any case a far better way of 
helping them. 
               I therefore recommend strongly against any exception for 
the low paid. 

D W H 

Treasury Chambers 

24 November 1977 
CP(77) 107 
C O P Y NO 
28 November 1977 
C A B I N E T 
N A T I O N A L I S E D I N D U S T R I A L BOARD M E M B E R S ' S A L A R I E S 

## Note By The L O R D P R I V Y Seal

1. 

I attach a memorandum by m y officials on this subject. 

2. 
         A s Minister responsible for these salaries I am in no doubt that the 
continued postponement of the increases recommended by the Top Salaries 
R e v i e w Body ( T S R B ) in their sixth report (TSRB 6) is causing great difficul­
ties for the efficient manning of our nationalised industries at board l e v e l . 
The constant pressure on me f r o m sponsor Ministers to bend or break the 
pay rules in seeking to recruit individuals of the requisite ability shows how 
far behind the market the current rates have fallen. 
                                                                    I hope that m y 
colleagues who are responsible for the nationalised industries will them­
selves expound the difficulties they are experiencing when this paper is 
considered. 

3. 
         At the same time, I fully accept that at the present crucial stage of 
the Round 3 pay policy there are v e r y strong arguments against any f o r m of 
special treatment for such comparatively highly-paid people whatever the 
justification. 
                   And it is unlikely that the situation will be any m o r e 
favourable later in the round. 

4. 
          But we must take our decisions on this problem in full awareness of 
what we are doing. 
                              If we decide that we can do nothing within option a. of 
the memorandum, then effectively we shall be burying the TSRB 6 which will 
be overtaken by a new report next A p r i l . 
                                                             This i s therefore our last 
opportunity of significantly closing the l a r g e gap between the current rates 
and the market rates by taking advantage of the fact that the TSRB 6 
recommendations can be regarded as a p r e - p o l i c y commitment which would 
not therefore run foul of the guidelines. 
                                                           If we do nothing the gap between 
current rates and those likely to e m e r g e f r o m the next TSRB report will be 
that much l a r g e r and there will be no prospect of bridging it in the f o r e ­
seeable future. 

5. 
           We also need to realise that the alternative options b. and c. in the 
memorandum are simply ways of giving the Nationalised Industrial Board 
M e m b e r s ' Salaries the guidelines increase which they are no doubt already 
counting upon. 
                         These options do not therefore really help with the problem 
of TSRB 6 and they will do little either to restore competitiveness or 
improve m o r a l e . 

Civil Service Department 

28 November 1977 

## Of Nationalised Industry Board Members (Nibms) Memorandum By Officials

l s paper considers possible courses of action to deal with the of nationalised industry chairmen and board members (NIBMs), 
^ 
of the other public sector posts which are linked to it. 

^ttex A describes the present position and how it came about. 

l s annex also includes a table showing the salary rates in 
^
ayment ( with the exception of those of Group C Board Members W lth which no meaningful general comparison can be made) with 
^
e"fcaii of the increase recommended by the Review Body. 

s

## I Nc0Mes Policy Considerations 2,

The increases for NIBMs recommended by the Top Salary Revie Boarrl (TSRB) with effect from 1.1.75 (TSRB 6) are large and even they were staged on the basis adopted for the other groups V ered by the Report, would involve additions to current salarie f o r the generality of under £1000 to about £12000; with an except 

l o^ali y
                                    i
                                                         a s e of £17,000 for the Chairman of the Post 
                       h
                           i
                              g
                                  h
                                               n c r e

0 f
   f
    i
      
     n 

A C e and actual reductions in some rates. 
                                                                                                                                   However, the TSRB 6 

commendations pre-date the three rounds of incomes policy which 

egan i  1975 and could therefore be treated as a pre-policy 
                 n

fitment, ie be implemented outside the current guidelines; and 

l e NIBMs have been told this officially. 
                                                                                                                                                Obviously however any 

1

 Payments, however they were justified, would be presentat­

0 l laiiy harmful to the success of pay policy either now or later 

u r Le round. 

## Problems Of Non-Implementation

3. 

The out-of-date salaries hinder recruitment of the able people necessary for the efficient running of these industries. 

Vacancies are hard to fill and standards cannot be sustained. 

It is increasingly necessary to resort to ' 
ad hoc
1 terms - for example to pay starting rates in the upper part of the pay range. 

This feeds the resentment of existing members and makes expensive problems for the future. 

4. 

None of the other groups covered by the TSRB have been totally denied their recommended 1.1.75 rates. Members resent their treatment by comparison with that given to these other groups 
 
1 1  
1 
which they regard as discrimination. 

Some NIBMs and many people the "consequential" groups earn less than the £13,000 which was allowed in full for other groups. 

In some cases board member r salaries have been overtaken by the first, and even the second tie of officials below them. 

5. 

If no action is taken Board members pensioned in or by analogy with staff schemes who retire during non-implementation will suffer the adverse effects on their pension levels until they die. 

It is possible to give pensions protection by promulgating increases based on TSRB 6 back to 1.1.75 while deferring actual 

payment to a current date. 
                            The promulgated rate then becomes "
                                                               t
                                                               h
                                                                e pensionable salary. 

6. 
      Special problems arise over the NHS consultants and British 

Nuclear Fuels Limited (BNFL) on which a separate paper is being 

circulated. 
             Although developments here are relevant they do not 

in practice materially affect the choice between the options on 

the general issue. 

## The Options 7

The three main possibilities are: 
a. 

The TSRB 6 recommendations could be treated as a commitment predating the 3 rounds of incomes policy since 
1975* On this basis part at least of these increases would be implemented at once without formal offence to pay policy. 

The remaining parts of the report, if any, would then be disregarded; 
the report would be super­
seded by the recommendations from the next review (TSRB 10) 
from 1.4.78. 

These new recommendations, would, if Ministers so decided, be implemented during the later part of the current round, up to a limit consistent with the current pay policy guidelines. 

There are several variants of this option, and these are described in Annex B. 

This option offers the opportunity of going further in easing problems of recruitment etc., than any of the others, depending on how close it gets to full implementation of the 1974 recommendations. 

It enables the pension position of retired board members to be improved. 

Provided the increases are not more generous than those given to the other TSRB groups as Stage 1 **of the TSRB** 6 recommendations, this option would not raise the question of Stage 2 for these others. 

b. 

Alternatively TSRB 6 could be partially implemented from any convenient date, probably 1 **January** 1978, within the current pay policy, ie only as far as the guidelines allow. 

Again several variants exist and some are listed in Annex C. Variant C is designed to pay increases exactly proportional to the salary structure designed by the TSRB, thus preserving the "shape" of their scheme. Although in cash terms the increases would fall substantially short in many cases of even the Stage I increase granted to other groups, option C of Annex C would enable 85$ of the TSRB 
recommended salaries to be paid. 

Because implementation would depend on the current guidelines, it is very unlikely that any action on TSRB 10 could be taken before January 
1979 at the earliest. 

As with option a. above, the rest of TSRB 6 would be superseded by TSRB 10. 

This option, like a., allows a degree of pensions pro­
tection for the retired; 
but since the increase falls well short of even Stage 1 of TSRB 6 and any action on TSRB 10 would be postponed indefinitely, the pensions of those retiring would be reduced in line with the level of salaries. 

Since this option confines any increase in Round 3 to the maximum allowed by the guidelines it is unlikely to create difficulties for pay policy. 

c. 

The third main possibility is to defer any action until TSRB 10 is available. 

Implementation of some part of that report, in the light of the guidelines, would lead to results very similar to those under b. above. 

But the time-scale would be different. 

The first payment would be made from 1.4.78, and there would be a presumption that further stages of TSRB 10 should wait for another 12 months* 
ie to April 1979-

## Pensions Protection Under The Three Options

8. 

There are two ways of providing pensions protection (for tho s  
e a already retired) on the basis described in paragraph 5. 

The actu pay increases agreed could be promulgated as from 1.1.75 (but * 
^ 
1 
payment deferred until a current date); or the TSRB 6 recommend^
 
u in full could be promulgated with the payment of anything more the agreed increase (from a current date) deferred indefinitely' 
first course would perhaps be more logical; the second more gene 
3 
and comparable to the treatment accorded to the other TSRB group Both options.b. and c. might well be regarded by the NIBMs frothing more than they could reasonably expect anyway under rent pay policy and therefore as in effect a final repudiation 
'
TSRB 6 with no better prospect of any improvement under TSRB 10. 

^* 
A decision cannot be long delayed. 

Apart from the intrinsic Agency of the problem, 1.1.78 is the date on which the NIBMs would 
^ e due for a Round 3 increase under the 12 months rule. 

Moreover, Sojnething will have to be said about the Government's intentions in the White Paper replying to the NEDO Report on the Nationalised 
"^dustries which specifically raised the pay question. 

## Background

In December 1974 the Review Body on Top Salaries (TSRB) made its first substantive report (Report No 6) on the four groups within its remit (Higher Civil Service, Senior Officers of the Armed Forces, the Higher Judiciary and Nationalised Industry Chairmen and Board Members (NIBMs)). 

The recommended increases for NIBMs were intended to bring them into an appropriate relationship with their counterparts in private industry as from 1 January 1975. 

2. The average increase recommended by TSRB for NIBMs was 30$. 

However, because a fundamental reassessment of the work was carried out individual increases varied widely. 

For the first and second tier boards, for example, they range from 15$ to 50$, and in the special case of the Post Office between 60-73$* 
For some third tier boards there was a nil or very small increase and for an appreciable proportion of NIBMs neither the salary increase nor the new salary was particularly high. 

3. For the other groups covered by the TSRB recommendations increases ranged from 10-50$. 

4. In his statement on 20 December 1974 the then Prime Minister recognised that the salary rates recommended by the Review Body were aPpropriate on the basis they had followed. 

He announced the acceptance of the recommendations for all groups other than NIBMs, subject to the staging of increases for levels above £13,000 (the second stage to be payable in 1976, though in fact it has not yet been Paid). 

5. Decisions on the recommendations for NIBMs were postponed pending the report of the Royal Commission on the Distribution of Income and Wealth (RCDIW). 

Decisions on the consequentials of all the TSRB 
groups many of whom earn less than £13*000 per annum were also deferred. 

 s 0 
6. No action was taken when the report of RCDIW was received and far Ministers have felt that the general pay climate precludes even partial implementation of the recommendations for NIBMs. 

7. The issue has been considered on a number of occasions (inclu^ 
CC(74)50th Meeting, EC(75)10th Meeting, EY(76)14th and 
16th Meetings). In March 1977 (EY(77)7th Meeting of 21 March) 
it was the general view that NIBMs should have a Stage I payment similar to that granted to other groups covered by TSRB 6 recomn
1611^ 
tions, except that no single increase should exceed £5,000. 

8. A target d
            a
             t
              e for payment of 1 August 1977 was adopted, subject to its acceptability in relation to developments in determination 

                                                                                                                                                                                           a
of the general policy meanwhile and to TUC views. 
                                                                                                                                                       In the event

firm decision to make payments on that date was not taken. 

e 

9. Representations about the situation have come fromnany in£oT&

quarters including sponsor Ministers, the Chairman of the Review 

0 

Body and past members of public boards. 
                                           The issue has also bee

raised in Parliament. 
                         In response, concern has been expressed 

10611 

about the present situation and it has been said that the Govern

hopes to do something as soon as possible. 

10. 
      Sir Peter Menzies, when Chairman of the Nationalised Indus

1' J 

Chairmen^ Group, submitted a lengthy memorandum to the Prime 
                                                                ^ 

at his invitation, in January 1977 to which no effective 

substanti 

response has been possible. 
                             His successor, Sir Denis Rooke is 

equally pressing in his views. 

11. 
      The Chancellor has since told Board Chairmen that it woul^ 

not be possible to start the current round with a big increase, e though he hoped that something could be done before the end of ^
011 
pay year. 

He also drew their attention to the phased correcti of anomalies which the general policy envisages. 

u
12. 

The TSRB 6 recommendations have not yet been accepted P
 
0 
Their prior acceptance in whole or in part is a pre-requisite improvement on the present position. 

The NIBMs would no doubt expect at least the same staged treatment as was applied to the other groups. 

## Salary Increases R E C O M M E N D E D For Nibms In Tsrb Report N U M B E R 6

POST 
MIDPOINT O
F CURRENT 
AVERAGE R
E
C
O
M
M
E
N
D
E
D 
SALARY RANGE 
INCREASE 
BNOC 
Chairman 
Deputy Chairman Board Member 
28,350 
16,650 
22,780 
9
,
2
2
0 
19,500 
10,500 
31,850 
13,150 
NEB 
Chairman 
Deputy Chairman 
26,000 
6,500 
BSC 
Chairman 
Deputy Chairman 
Board Member 
28,330 
11,670 
24,330 
6,170 
19,330 
5,170 
PO 
Chairman 
Deputy Chairman 
Board Member 
23,330 
16,670 
19,330 
11,170 
15,330 
9,170 
BA, BAe. BGC, BRB, BS. 
CEGB. EC, & 
NCB 
Chairman, CEGB 
Other Chairman -
Deputy Chairman, CEGB 
Other Deputy Chairmen 
Board Member 
21,330 
11,670 
23,330 
11,670 
18,330 
6,920 
19,330 
7,170 
15,330 
4,670 
SPA 
Chairman 
Deputy Chairman 
19,000 
6,000 
18,000 
1,250 
NBC & NFC 
Chairman 
Board Member 
19,830 
4,170 
12,330 
2,170 
W
D
A 
Chairman 
Chief Exeoutive 
Deputy Chairman 
17,000 
5,500 
15,750 
1,500 
12,000 
3,250 
C
D
C & UKAEA 
Chairman 
Deputy Chairman Board Member 
19,830 
2,670 
15,830 
1,420 
12,330 
920 
CAA, C+W. N3HEB & SSEB 
Chairman 
Deputy Chairman 
15,405 
7,095 
11,280 
5,970 
BAA, 
BTDB & STG 
Chairman 
Deputy Chairman 
15,405 
2,595 
11,280 
2,470 
Aroa Eleotrioity Boards 
Chairman 
Deputy Chairman 
15,330 
4,670 
10,830 
2,920 
15,405 
3,405 
B
j
j
V
B 
Chairman 
Deputy Chairman 
11,200 
2.200 

Note 
' Current salary range' means the range in payment at 1/1/75 or the corresponding range for Boards established since that time. 

I  
t does not inolude the inorease of £208.80 paid to NIBMs from 1/1/77 under the aeoond phase of inoomes policy since this inorease wil l not be subsumed when TSRB report number 6 is implemented. 

foain ways of partially implementing the recommendations in TSRB 6 
5 a  
s follows 
:­
'
* 
to accept the recommendations in full, and to treat NIBMs e*actly like the other groups. That would mean promulgating the full recommended increases from 1 January 1975 but making the a ctual payments in stages, the first stage to be deferred to a ate to be selected, with the second stage payable from the same 
^
"late as other TSRB groups. This would relieve the pension Problem and it would minimise the problems arising from the next TSRB review; 
to accept the recommendations and to implement them in full f^om a current future date on a staged basis, the first stage to 
^
e Payable from that date and the second stage when it is granted 
^
0 other TSRB groups. This would probably be acceptable to most S erving NIBMs and it would alleviate the problems over recruitment and retention. 

It would not relieve the pension problem, and it C ould leave some problems for the next review; 
3* 
to accept the recommendations and to stage the increases a s in 2. above, but with the first stage effective from a current future date and no commitment as to when the second stage is paid, ^ o m the time that it was implemented this would represent a move 
^
0 alleviate current problems and would still result in sizeable current increases, but it would leave NIBMs with a feeling of dis­
C : rimination against them as compared with other groups. 

It would ttot relieve the pensions issue, and it would leave more difficult Problems for the next review. 

This is the course most Ministers favoured in March, though a majority preferred also; 
to impose a limit of £5,000 on any individual increase. 

s would have the effect of limiting some of the more spectacular increases (eg in the Post Office) but generally would have the same effect as in 3* above. 

5. 

a further possible refinement on any of the above options would be to limit the initial payment to within an increase of 
10$. 

This could be achieved by any of the methods described in Annex B. 

The essential difference would be that it would have to be presented as an interim measure which would not preclude a further increase in Round 3 from TSRM 10. 

It would not lessen the incomes policy difficulties in the options, nor would it make them more acceptable to NIBMs. 

But it would give the appearance of doing something positive at an early date which did not of itself go further than the current guidelines. 

## ^Onalised Industries Board Members: Possible Treatment Under Ihe Wo Policy ^6 F

l 0 H o w i n g options illustrate three possible methods of applying 
6 ^0$ policy to Board members. These are: 

-—22^A: 
a 10$ increase all round. 
This would actually give 
some NIBMs a better deal than they would have got 
with TSRB 6 
giving each NIBM an increase, from the 10$ kitty for the whole group proportional to the original TSRB 6 
increases. 
As these would represent an increase of 
about 30$ on existing salary levels (a very approximate 
10 

calculation), this means that each would receive *-JQ* or 
about 33$ of the TSRB 6 increases. 
bringing the absolute levels of salary as close as 
possible to TSRB 6 within the constraint of a 10$ 
kitty. 
This would enable 85$ of the original TSRB 6 
salaries to be paid; 
a few would act\ially receive 
less than they do at present through this arrangement, 
notably the Chairman and Deputy Chairman of the British Waterways Board (who are due for a salary decrease under TSRB 6) 
Ith  ^
e c i a l consideration would need to be given to the members of 

    0se 
               TS 
               boards who were recommended for a net salary cut in the Boyle 
V . 

C P ( 7 7 ) 108 
C O P Y N O 
28 November 1977 
C A B I N E T 

## T H E 1974 R E C O M M E N D A T I O N S Of T H E T H R E E R E V I E W Bodies: Second Stage P A Y M E N T S Note By The L O R D P R I V Y Seal

1. 

I attach a memorandum by officials on this problem. 

2. 
         I agree with the conclusion that the Government cannot voluntarily 
pay Stage 2 of any of the increases recommended by the various Review 
Bodies (option ii. in paragraph 8) without creating considerable 
presentational difficulties for pay policy. 

3. 
         If this is accepted the aim must be to concede Stage 2 only in those 
cases where we are legally obliged to do so. 
                                                            The m o s t difficult case is that 
of the consultants. 
                           Whether we should let them test their case in the courts 
(option iii. ) or concede it at the outset (option i. ) depends v e r y much on our 
judgment of the l e g a l position. 
                                          In general however I would favour the 
strongest possible resistance to these claims. 
                                                               But if the consultants 
manage to get Stage 2 and any others follow it will be increasingly difficult 
to hold the line, even where the legal entitlement is comparatively weak. 

P 

Civil Service Department 

28 November 1977 

## Review Body On Top Salaries Sixth Report Staged Payments Memorandum By Officials

1 
. 

Ministers decided (before the introduction of the pay policy) 

"
t
 o 
  stage the implementation of increases in salary due to certain groups of higher paid staff who were the subject of recommen-

Sations by the various Review Bodies (TSRB, DDRB). In all cases, 

the payment of the second stage was deferred under the terms of the pay policy. This paper considers the implications for these 

staged payments of the Law Officers' opinion about the contractual 

right of NHS Consultants to the payment of their second stage, at 

l east from 1 April 1977. It also considers the implications for 

Nationalised Industries Board Members (NIBMs) for whom no payments 

tave 
    yet been authorised, and for the salaries of Members of Parliament. 

## £Overage

2* 
The groups involved are the Higher Civil Service, the Higher Judiciary, Senior Members of the Armed Forces, the Nationalised Industries Board Members all covered by Report No 6 of the Review B ody on Top Salaries, NHS Consultants covered by Report No 5 of the Review Body on Doctors' and Dentists' Remuneration; those who 
^ve their salaries adjusted consequential upon salary adjustments f o r these main groups, and Members of Parliament covered by R ePort No 7 of the Review Body on Top Salaries. The present Position of each of these groups is set out at Annex A. 

3
* 
Two of the groups whose salary adjustments are consequential uPon revisions of the pay of NIBMs are the directors of British 
^clear Fuels Ltd (BNFL) and of the Radio Chemical Centre (TRC). 

These present separate but related problems. The IPCS, who 
^Present them, claim that the BNFL directors have a contractual ^ght from their terms of appointment to continue a link with Civ"il Service salaries which they enjoyed as officials before B ^ L was formed in 1971. The Attorney General has advised that t here is a strong probability that the IPCS would be successful 
1 1 1 the legal action which they are threatening. The circumstances 
0 f the directors of TRC are identical. If conceded, or determined by the Courts ia favour of the IPCS. this claim would give immediate entitlement to what the Higher Civil Service has n received from 1 January 1975. and would place these directors i the same position as civil servants in respect of second stage­
payments, except that their contracts are clearly known to be legally enforceable. 

## Incomes Policy Considerations

4. 

This policy requires that the cost of any start made to correct serious anomalies which have arisen during the period of strict pay guidelines should be offset against the 10$ earnings limit for settlements. Increases in excess of the guidelines arising from statutory obligations can be paid, and it is also recognised that powers to restrict awards which have contractual force is now limited to breaches in the 12 months' rule. 

5. 

In this case we are dealing with the recommendations for settlement dates before the onset of the pay policy, and with 
­
pre-policy commitments announced by the Prime Minister.on 
20 December 1974 (TSRB) and by the Secretary of State for Social Services on 18 April 1975 (Consultants) which were postponed under the provisions of the Remuneration, Charges and Grants Act 1975. 

If they cannot be postponed further under the powers vested in the Secretary of State for Employment under this Act, incomes policy considerations do not strictly speaking apply "
b o them. 

6. 

Nevertheless, whatever the technical and legal positions, e it is obvious that large cash payments to well paid people in *^
public sector and outside Round 3 could create a substantial presentational problem. The complex merits of such payments could not be readily explained. This difficulty would be much reduced if it were possible to present these increases as the s correction of an anomaly within the current guidelines. But tbi would mean treating the cases as anomalies arising during the period of strict pay guidelines (which they are not) and pre­
11 
empting money which should be available for pay increases due i the present round. It would not be likely to be acceptable to the groups concerned, especially to those who believe they have a legal right to the money so far withheld. It would effectively Postpone any solution of the overall problems, and it would not Provide an effective answer if the issue came to court. 

## £He Options

7. 

As will be seen from Annex A, consideration of the options for dealing with the NHS Consultants in the light of the Law Officers' opinion brings into play a series of complex inter­
relationships. Action over the opinion as to the contractual right of the Consultants cannot be long delayed as the Health Departments need to respond to the specific enquiries they have received, to advise the health authorities on their position, and 

"
t
 o 
  be ready to answer questions likely to be posed shortly by the 

doctors' and Dentists' Review Body. In determining the options, 

the relationship with present pay policy has to be considered, 

ar*d it also has to be borne in mind that as far as contractual 

rights are concerned, these relate to the rights of the individual 

w*iich are not extinguished by arrangements which may have been aocepted by their representatives. 

8. 
The available options therefore seem to be: 
i. 

to concede that the Consultants must be paid their second stage in full from 1 April 1977. This would be in conformity with the Law Officers' view that contractual rights established before 11 July 1975 cannot, under the Secretary of State for Employment*s powers under Section 1(5) of the Remuneration, Charges and Grants Act 1975, be held up beyond the normal settlement date in the year beginning 1 August 1976. It would inevitably mean that any other groups who could show that their contractual position was as good as the Consultants would also have to be paid; for example, Judges should they decide to remove their waiver, and perhaps also any consequentials of the Civil Service in fringe bodies who have legally enforceable contracts who were told initially that the second stage pay­
ment was due from 1 January 1976 and subsequently that it was postponed under pay policy. There would also be strong pressure for the Government to act similarly for other groups, eg the Civil Service and the Armed Forces whose contrac­
tual position is less clear. This in turn could affect the Governments position on NIBMs who have no contractual right to payment but a better case on merits, and it could result in increased pressure on MPs* pay. 

ii. 

to accept that the outstanding commitment to payment of the second stage increases need not be further postponed in Round 3 of the pay policy, and to select a date for pay­
ment accordingly. This could be any date after 1 August 1977 
but probably most conveniently the first settlement date thereafter, ie 1 April 1978 for the Consultants. This would mean ignoring the Law Officers
1 advice that a contractual obligation exists from 1 April 1977 to the Consultants. It would not therefore eliminate the risk of legal action by individuals, and it would leave the problem of how to explain the position. Moreover, since this decision would not rest on the need to act to meet the contractual obligation there would be no way of distinguishing between the various groups. This in turn would increase the pressure from NIBMs and possibly from MPs. 

iii. to leave the Consultants no option but to test their case at law by suing the health authority. The authority might win, in which case the position would remain unchanged. 

The probability according to the best legal advice obtainable is, however, that they would lose. If they did the position would be no better than at i. above, except to the extent that the time taken to settle the case might move the effect to a less sensitive time in terms of pay policy. It would be rather worse than ii. because it would publicly expose the weakness of the Round 2 position. The internal reper­
cussions of the legal decision would remain. Moreover, the 
1 endeavours to Secretary of State for Social Services improve relations with the medical world might well be irreparably damaged. There is also a distinct possibility that before the matter reached the courts the BMA and the DDRB would themselves expose the weakness of the Government's stance. 

Conclusion 
9. 
    Considerations of pay policy seem to rule out 
                                                    the 

"voluntary" implementation of State 2 
                                      payments outside the 

Round 3 guidelines whatever its technical status as a pre-policy 

commitment. Quite apart from the adverse effect which such 

-Large cash increases would have, there would then be no justi­

fication for 
             withholding full implementation of the TSRB recommen­

^ations for 
            all 
                the other groups as well, including NIBMs and 

their consequentials who would have to get Stage 1 
                                                    as well. Even 

lri the context of legal vulnerability this is not really a viable 

0Ption as it would be likely to create the maximum embarrassment 

to pay policy, 

^0. But if Stage 2 has 
                             to be conceded to the Consultants on 

iegal grounds, the Government will have to decide whether to 

concede Stage 2 
                to the other groups for 
                                         reasons of equity; or 

Aether pay policy considerations must restrict the concession 

^0 those groups who can also establish a l e g a l right to it. But 

before that situation is reached it will be necessary to decide 

Whether in view of the Law Officers' opinion the Government has 

no alternative but to give the Consultants' Stage 2 from 

1 April 1977 
                                    as a legal entitlement without testing the practice 

l
  n the Courts; or whether there is sufficient element of doubt 

^

0 justify leaving it to the Consultants to sue the health 

authorities. The 
                                                   Government will also wish to bear in mind in 

^his context that the position over civil servants legal rights 

l s by no means clear, and that if it is decided to proceed only 

a fter action in 
                                                      the courts, the Civil Service unions might 

Pursue their case in this way too (as the IPCS are already known 
^
0 be contemplating), 

## 1 -1

'
* The position on the two special cases of BNPL and TRC 
is S
:
i-niilar in its legal aspects to that of the Consultants, though 
' 
* 
relates to an entitlement, via the Civil Service position, to 
^tage I payment from 1 January 1975* The decision on this again S P E N D S on whether the Law Officers' opinion leaves no alternative u"k to grant payment of Stage I, or whether there is sufficient 
^Ubt to leave the IPCS to sue in the courts0 The strength of e
^  legal view appears to be similar to that for the Consultants S o the two should move in step. 

## Nhs Consultants

NHS Consultants are in contract with statutory Health Authorities 
(which are the agents of the Secretaries of State for Social Services for the administration of the National Health Service); 
which were directed, early in 1976, that in pursuance of the pay Policy, the staged payments which were due to be paid from 
1 **April** 1976 were not to be payable from that date. 

They are entitled to further advice as to what to do, and in particular to know if they are to face a continuing risk of being sued. 

2 . 

The Law Officers
1 opinion is that the NHS Consultants have a contractual right to the payment of their second stage, and that while this right would probably be held to have been lawfully Postponed under the first round of pay policy if a determination to that effect were made by the Secretary of State for Employment Under section 1(5) of the Remuneration, Charges and Grants Act 
3-975, there is a substantial risk that legal action to secure Payment from 1 **April** 1977 under the second round of the policy 
^ould be successful even in the face of a purported determination t^at it may be further postponed. 

3- 
The opinion indicates that in the view of the Law Officers t h e Health Authorities would be in breach of contract if they did n o t make these payments from 1 April 1977, and that Consultants, i f they were to sue, would stand a very good chance of success. 

T h i s raises the issue whether, in the face of a threat to sue, t h e Government should allow the legal action to take its course, 
0 r should in the light of the legal advice they have obtained a Qcept that payment must be made. 

It also raises the question o t how to deal with direct questions about the statutory basis non-payment which have now been put by the BMA and an d i v i d u a l Scottish Consultant. 

The Health Departments have S o far avoided a direct answer, saying that the matter of staged Payments is under consideration, but they cannot put off an 

a h s 3
               W
                  e
                      
                     r 
                          f
                              o
                                  r
                                        v
                                              e
                                                   r
                                                       y 
                                                              m
                                                                  u
                                                                      c h longer and would be in an insupportable 

p oeihion if they were to expose the extent of their present 

knowledge and nevertheless were to force the issue to the courts. 

The Departments had previously heard that the BMA 
were considering litigation, and the present enquiries suggest that this consideration continues. 

At the least health authorities would have to be advised that they might be sued, and this advice could not be given confidentially. 

4. 

Further, the DDRB have, on a number of occasions, expressed the view that the staged payments should be made, but have accepted that this was not possible because of incomes policy. 

They have asked the Department to provide them with evidence on the effect of incomes policy on the wish that the doctors and dentists have expressed to them that they should immediately reconsider medical and dental salaries. 

It is highly likely that they will seek an explanation from the Departments of the legal basis for continuing to withhold pay­ ment, and will publish the answer. 

The Departments take the view that they would have if challenged directly on this point to answer the DDRB on the basis of the advice that the Law Officers have given. 

## The Higher Judiciary

5. 

The Higher Judiciary has a statutory right to payment of the second stage from 26 July 1976. 

The position is at presen protected by voluntary waivers the terms of which (in England) 
are: 
"Notwithstanding that the salary legally payable to me with effect from 26 July 1976 in respect of the judicial office I now hold is [£X] a year, I wish to be paid the salary payable with effect from 26 July 1975 in respect of that office and in respect of any judicial office I may n hereafter hold until such time as there is an increase i any of the salaries mentioned in the statement by the Prime Minister on 20 December 1974; 
and I abandon any claim for payment of money withheld from me in accordance with this wish." 
(The terms of the waiver, though not the essential substance) 
differs in Scotland). 

formally the Judges' waivers are already spent through the Payment of the supplement of £208.80 earlier this year to all the TSRB groups, including those specifically mentioned in the statement. 

The Judges have not sought, on the strength of this, to assert their statutory right to Stage 2 increases; hut clearly they might consider doing so if the Consultants were to receive such increases while they and the other TSRB groups continued to be denied them. 

In any event they would certainly no longer regard themselves as bound by the waivers. 

## T H E Higher Civil Service

6. 

Although it is generally believed that civil servants do not have enforceable contracts of service, the position is in fact more complex. 

It is safe to say that this question has never been tested in the courts, but beyond this there is a body of academic opinion which favours the view that there is a contract of employment between the Crown and a civil servant but that it contains an implied term that the Crown may dismiss at will. 

The Privy Council case of Kodeeswaran v Attorney General of Ceylon is also relevant as indicating that a civil servant might successfully sue for pay accrued. 

There can therefore he no certainty about the outcome if a legal test case were to be Counted in respect of a civil servant's right to the second stage Payments of the TSRB6 recommendations. 

These were promulgated in the Civil Service Pay and Conditions of Service Code which carries the force of an instruction under Article 5 of the Civil Service Order in Council 1969 and is mandatory on Departments. 

A s with the Consultants, the subsequent postponements of the Payments have to be viewed in this light. & 
Since senior civil servants are in precisely the same Position as Consultants in relation to the second stage payment, it would be invidious to treat them differently. 

If they were, 
9nd Consultants were settled out of court, this would be bound to 
^e seen as the Government giving way to the most vocal and powerful S r o u p , and any suggestion that the settlement arose from a different C ontractual position might simply lead to a test case by civil servants which could have wider undesirable implications. 

## The Armed Forces

8. 

It is unlikely that a contractual right exists for senior officers of the Armed Forces, but in other respects their position is similar to that of the Civil Service. 

But there is an added complication in this area that the senior officers feel very strongly about the position of the pay for lower ranks and would find themselves in a difficult position if they were asked to accept second stage payments while the pay problems which exist below (subject to current consideration by AFPRB) are outstanding. 

Any discrimination against senior officers of the Armed Forces would nevertheless be greatly resented by the Forces generally. 

## Nationalised Industry Board Members (Nibms)

9. 

Although any decisions to implement the Review Body's recommendations would almost certainly lead to a contractual right to payment, the present situation is that the Government has not yet accepted those recommendations and has therefore taken no steps to implement them. 

No contractual right to payment therefore exists. 

10. 

This does not mean, however, that NIBMs can be ignored. 

Even though some board members are on much higher salaries, it is hardly feasible that second stage payments could be made to other groups before anything is done for NIBMs. 

Moreover, to the extent that the position on second stages is being considered for other groups,this is itself a relevant consideration for what might then be done for the NIBMs' 
group and the two issues cannot easily be separately considered. 

## Members Of Parliament

11. 

Following the recommendation in Report No 7 of the Top Salaries Review Body, Members of Parliament, by Resolutions of the House, have a "rate for the job" of £8,000 plus the Round 2 
increase of £208, though the amount actually in payment is restricted at most to £6,270. 

(This rate includes the Rounds 
1 and 2 increases). 

No undertakings have been given as to how and when the full rate will be brought into payment. 

If, however, Stage 2 payments are made elsewhere, whether to meet contractual rights or otherwise, this could have implications for the position on MPs1 pay. 

## Consequential^

1 2 . 

Any groups whose s a l a r i e s are i n d i r e c t l y related to the Recommendations of the Review Bodies w i l l have to follow what is decided for the main groups. 

Judicial and Board Member consequentials are at present help up pending a **decision** on board members1 pay. 

No contractual right to **payment** can 
"therefore exist for them. 

"Non-Boyle" consequentials of the Higher C i v i l Service w i l l have received the f i r s t stage payment and w i l l have the expectation of the second stage when i t i s Received by the main group. 

But a number of these consequentials 
*ie in the fringe body area where there i s a strong probability that contractual rights w i l l exist. 

Such people w i l l be in 
"the same position in law as the Consultants, and any action t h e y might be disposed to take would repercuss on the C i v i l Service. 

There i s also a strong probability that action would be contemplated, certainly i f the Consultants were to take action. 

The IPCS is already minded that way in the case of t h-e directors of British Nuclear Fuels Limited where they claim t ;iere i s a contractual entitlement to Higher Civil Service i n c r e a s e s and are challenging a decision to apply the same treatment as for NIBMs. 

9
 November 1977 

## M I L K Prices Memorandum By The Secretary Of State For For Ei Gn And Commonwealth Affairs I N T R O D U C T I O N

1. 
           A s Chairman of the Ministerial Committee on European Questions 
I seek decisions by the Cabinet on the l e v e l of our domestic producer p r i c e 
for milk and certain related issues, on which the Committee has been unable 
to reach agreement. 

## P R O D U C E R P R I C E

2. 
         The Minister of Agriculture, Fisheries and Food has proposed a 
producer p r i c e from 1 January to 31 March of 49. 2p per gallon compared 
with an a v e r a g e of 46. 5p for the period A p r i l - D e c e m b e r 1977 and an actual 
p r i c e of 47. 75p f r o m September to December 1977. 
                                                                 He considers that such 
an increase i s needed for the January-March quarter when costs a r e at 
their seasonal peak and production i s low, and that this i s the minimum 
p r i c e needed to stabilise the size of the national herd which i s declining 

contrary to the Government 1 s declared policy of expansion. 
                                                           Other 
Ministers saw no justification for a producer p r i c e of m o r e than 47. 4p which 
they thought would allow for adequate returns to producers while minimising 
the increase that would be needed in the retail p r i c e (paragraph 4 below). 
The Committee w e r e however prepared to a g r e e to a c o m p r o m i s e p r i c e of 
48p if the Minister of Agriculture, F i s h e r i e s and Food could accept it. 

3. 
         Given the Committee's decision on the retail p r i c e (paragraph 4 below) 
an increase in the producer p r i c e from 1 January involves an i n c r e a s e in the 
subsidy payable to meet the Government's outstanding liability of 
£23 million to distributors. 
                                     A producer p r i c e of 48p involves a subsidy 
increase of £13. 75 million. 
                                     A producer price of 49. 2p involves a subsidy 
i n c r e a s e of £23 million . 
                                 The Committee saw no objection in principle to 
making whatever i n c r e a s e in the subsidy within those limits was needed to 
finance whatever producer p r i c e might be agreed. 

4. 
          The Committee agreed to increase the retail p r i c e from 11jp to 
12^p per pint from 1 January in o r d e r to m e e t rising production and 
distribution costs provided that it could be announced as applicable (barring 
exceptional and unforeseen developments) until the end of 1978. 
                                                                                          It could 
thus be presented as an increase of l e s s than 10 per cent and as being in 
accordance with counter-inflation policy. 
                                                            The Committee recognised that 
a p r i c e of 12-lp might be overtaken by rising costs in the autumn, but 
considered that any shortfall should be recouped f r o m a further retail p r i c e 
i n c r e a s e in 1979. 
                          Another way of delaying the need for a retail p r i c e 
increase in 1977 would be to i n c r e a s e the subsidy by the fall amount of 
£23 million r e f e r r e d to in paragraph 3 while keeping the producer p r i c e 
below 49. 2p. 
                     Depending on the l e v e l of the producer p r i c e between 48p 
and 49. 2p per gallon there would then be an additional sum of up to about 
£9 million available to m e e t rising costs (equivalent to the deferment of 
a lp i n c r e a s e in the retail p r i c e for one month). 

5. 
          It now appears that a categorical undertaking to hold the retail p r i c e 
for a year would be inconsistent with the Government's obligation to r e v i e w 
it objectively and openly with the distributors in the spring and again in the 
autumn. 
               But it should be possible to announce our f i r m aim and intention 
to hold the p r i c e for a year barring exceptional and unforeseen 
developments; 
                      and to achieve this aim in practice. 

## Conclusions 6. Cabinet Is Invited

a. 
to decide the l e v e l of the producer p r i c e for milk for 
January-March 1978 having regard to the proposal of 49.2p put 
forward by the Minister of Agriculture, F i s h e r i e s and Food, the 
figure of 47. 4p favoured by some other Ministers, and the 
c om pr om i s e of 48p. 

b. 
         To decide whether the subsidy should be increased to an 
extent corresponding to the l e v e l of the producer p r i c e , or to a 
greater extent, but subject to a limit of £23 million, for the sake of 
greater flexibility in the handling of the next retail p r i c e i n c r e a s e . 

c. 
          To a g r e e that the announcement of the retail p r i c e of 12^p 
should be made along the lines suggested in paragraph 5. 

D A L O 

F o r e i g n and Commonwealth Office 
5 December 1977 
CF(T7)110 
C O P Y N O 
6 December 1977 

## T H E New Pensions Scheme

# Memorandum By The Secretary Of State For Social Services And The Minister For Social Security

1. 
           It seems to us, after consultation with the P r i m e Minister, that it 
may be helpful to Cabinet to have a note of the main features of the new 
pensions scheme which i s to come into force next y e a r . 
                                                                                         The planning of the 
scheme was undertaken immediately after we took office in March 1974, and 
it was first put forward in the White Paper "Better P e n s i o n s " in 
September of that y e a r . 
                                        Legislation followed in the Social Security 
Pensions A c t 1975. 
                                That A c t received a l l - P a r t y support in its passage 
through Parliament and brought to an end a 20-year wrangle over the future 
of pensions. 

2. 
         Contributors to the new scheme will qualify for a basic pension on 
the lines of the present flat rate and also for earnings-related "additional 
pension". 
              This additional pension will build up to its full l e v e l in return 
for 20 y e a r s ' contributions after 1978: a m a r r i e d man on average earnings 
will then have a total pension entitlement - basic and additional together - of 
considerably m o r e than half pay. 
                                           The scheme will cover invalidity and 
widowhood as well as retirement; it will entitle a woman to the same 
personal pension as a man with the same earnings, and i t will make special 
provision for those, men and women alike, who have to give up work because 
of responsibility at home. 
                                  It will be fully protected against inflation. 
                                                                                         And 
it will eventually give especial help to people with fluctuating earnings (that 
i s , in practice, to manual workers in particular) by basing their pensions 
on their best 20 y e a r s of earnings after 1978. 

3. 
        The development of a state pension related to earnings will, rather 
belatedly, bring Britain into line with the European Economic Community ( E E C ) 
generally and with other advanced industrialised countries: by the end of the 
century our pensions will bear comparison with those payable anywhere in 
the world. 
              However the scheme we a r e adopting i s unique in that it makes 
provision for contracting out, and therefore does not divert resources into 
making duplicate provision for people who a r e already covered b/ good 
occupational schemes. 
                           The partnership which has been forged between state 
and private pensions is perhaps the main reason why informed opinion 
generally welcomes and supports the new scheme. 

## 4. The Annex To This Paper

i. 

explains the new pension arrangements in greater detail; 

i i . 
                  draws attention to certain issues on which there may be 
some public debate in the coming months - in particular the position 
of existing pensioners; 
                                                           and 

i i i . 
                   sets out the steps which a r e being taken to publicise the new 
scheme before it takes effect in A p r i l . 
                                                                                                      In addition to Departmental 
publicity, 17 Labour P a r t y regional conferences have been arranged 
between February and A p r i l to discuss the new scheme. 
                                                                                                                                                   We shall 
undertake the bulk of these P a r t y engagements between us; 
Barbara Castle and E r i c Deakins will also be involved. 
                                                                                                                                                 The 
T r a d e s Union Congress ( T U C ) who will have a l a r g e delegation at 
the launching conference in January, will actively encourage 
constituent unions to send m e m b e r s to the Labour Party Conferences. 
W e r e g a r d this educational p r o g r a m m e , both in the Party and the 
country, as being of extreme importance and of offering scope for 
r e al p o l i t i c a l gain. 
                                                      The publicity will emphasise that the scheme 
represents the first major pension r e f o r m undertaken in this country 
since Beveridge, and i s accordingly something of which the 
Government can be proud. 
                                                                       Any willingness on colleagues' part 

to devote time in public speeches to giving the widest possible 
publicity to the new pensions scheme will be greatly w e l c o m e . 

D E 
S O 

Department of Health and Social Security 
6 December 1977 

## Annex: The New Scheme In Detail

1. 

In April 1978 people in employment will begin to contribute towards the Government's new earnings-related scheme, and will start to build up title to a pension in two parts, known as the basic and the additional pension. 

## Basic Pension

2. 

The basic pension will be virtually the same as the present flat-rate national insurance pension. The April 1978 level 
(£17.50 a week for a single person and £28 for a married couple) 
will be that of the present standard rate of pension and, as a minimum, it will be up-rated each year in line with the movement of earnings or of prices, whichever has risen the faster. It will be open to Government, as it is now, to raise the pension faster than the indices warrant or more frequently than annually, if this can be afforded. 

3. There will however be two important changes in the rules 
of entitlement, both of particular interest to women. First, the 
"half-test", which is a special condition which a married woman 
has to satisfy before she can qualify for a pension on her own 
contributions, will be abolished. Secondly a person whose absence 
from the employment field has been due to "home responsiblity" 
(broadly, responsbility for a child under the age of 16 or the need 
to care for a recipient of attendance allowance) will in future be 
able to qualify for a full pension from contributions in fewer years 
than are required at present, although a minimum of 20 years' 
contributions will still be needed. 

## Additional Pension

H. The new scheme's major innovation is its introduction of the earnings-related additional pension. This has the following features:­

(i) 
It will be earned by the payment of contributions as an 
employed person on earnings between the level of the 
basic pension and an upper limit (about 7 times the 
basic pension) beyond which no further contributions 
are payable. 
In 1978/79 this will mean earnings between 
£17.50 and £120 
per week. 
(ii)
 
The pension will represent l/80th of such earnings 
for each year of contributions under the new scheme. 
Thus a person who contributes for oust one year 
before his retirement and who earns £75 a week will earn 
an additional pension of 72p per week (ie 1/80th of 
£75 minus £17.50) by his year*s contributions and 
this will be payable in addition to his basic pension. 
The amount which will be earned by someone who contributes at the maximum level of earnings (£120 a week or more) 
during 1978/79 will be £1.28. Women will earn the same 
pensions as men with the same earnings. 
(iii) After 20 years of contributions additional pension will 
amount to i (20/80ths) of earnings above the basic level 
in those years. Thus, in today
fs money, the employee 
who has contributed steadily on earnings of £75 a week 
will qualify for additional pension of £14.38
 "
a week, 
e 

giving him a total pension entitlement of £31.88 if singl
or £42.38 if married. 
(These amounts represent about 
42^6 - single - or 56£% - married - of his earnings.) 
s 

The person who contributed on maximum earnings for 20 yeaf
would qualify for additional pension of **£25**.60 a week 
on top of his basic pension. 
 
After the new scheme has operated for 20 years the 
(iv)
formula for pension will remain at i of earnings but 
the earnings taken into account will be those in the contributor^ best 20 years. This aspect of the new scheme will particularly favour manual workers v/hose 
peak earnings do not come immediately before retirement 
but early in life. 
 
Before pension is calculated, earnings will be revalued. 
(v)
Earnings in each year of working life will be raised 
in line with the increase which has taken place in 
earnings generally since that time. 
Thus additional 
pensions will be based on earnings but will also refl
e  
C 
^ 
the rise which has occurred in the general standard of 
(vi) 
Once it is in payment additional pension will be 
increased each year at least in line with prices. From next 
year onwards price-protection will also be extended to the 
graduated pensions which many contributors earned 
between 1961 and 1975.) 
(vii) The two-tier formula of basic plus additional pension 
will apply not only in retirement but also to the benefits 
payable in the event of invalidity and widowhood. 
In 
the case of a widow of working age it will be her late 
husband*s earnings, not her own, which are taken into 
account. 
(viii) A widow who has retired may be entitled to additional 
pension on the basis of her own contributions as well 
as her husband's. If so, she may draw both pensions, 
subject to the proviso that she would not receive more 
than would be payable to a single person who had contributed to the scheme on maximum earnings since its inception. A 
man whose wife dies when both he and she are over pension 
age will also be entitled to draw the additional 
pension for which they have both contributed, subject to 
the same maximum. 

## Contracting Out

There will be provision for . 

contracting out of a part of the state arrangements, but to do so an occupational scheme will have to provide its members with pensions at least at the level of the 
^ew additional pension. In such a case the scheme members will pay a reduced contribution and will qualify only for the state basic Pension. After they have retired, however, the state will undertake ^ke inflation-proofing of that part of their occupational pension which is being paid as a substitute for the state additional Pension. 

## T**He Self-Employed** J

^here is no provision^s yet, for the inclusion of the self­
etoployed in the new scheme. However, from 1978/79 onwards 
( the amount they pay will be determined in the same way as the contributions of employees who are contracted out of the additional pension, and their contribution liability will therefore be reduced, broadly from 8% to 5% of their earnings, as from April. 

## Potential Problems (I) The Demand For "Crediting-In" Existing Pensioners

7. The 1974 White Paper "Better Pensions" acknowledged that a new earnings-related scheme would not normally operate retrospectively to cover those who had not contributed to it, but said that "With the introduction of the new scheme, the position of existing pension' 
ers will be ' further reviewed in the light of the development of the economy." Since then the possibility has been explored of a system whereby existing pensioners would be credited-in to the new scheme by becoming entitled to an additional pension at a minimum level; 
the same minimum would be available to people retiring after 1978 
 o r whose contributions had earned them only a small additional pension
 
a none. However, even a very modest scheme on these lines offering supplement of £1 a week to the basic pension would incur very sub­
e a r stantial extra expenditure - more than £300 million in the first y for which no provision has been made. 

8. In view of the cost, we cannot at this stage recommend crediting" 
in as an option to be pursued. But there could well be a strong campaign - from the "poverty lobby", representatives of pensioners and from our own supported - in favour of crediting-in or, at least, urging us that some special measures should be undertaken to help existing pensioners in order to compensate them for their exclusion from the new scheme. The strength of such a campaign, and whether it will make some concession essential if damage is to be avoided to the whole concept of the new scheme, are matters which we cannot gauge before the publicity build-up for the scheme begins early in the new year. However, decisions about possible extra expenditure on existing pensioners, whether associated with the November 1978 up-rating; 
or operating from April 1979 (when the first additional pensions become payable to new-scheme contributors) need not be taken before the spring. For the time being, therefore, we suggest that questions about existing Pensioners should be answered in part by reference to the Government's excellent record on pensions since 1974,and our success in protecting social security beneficiaries from the effects of economic crisis and pubLic expenditure cuts, and partly by a reiteration of our 1974 
pledge that, when the new scheme is introduced, their position will be further reviewed. 

## (Ii) Contribution Changes

9. From April 1978 employees who are contracted-out, the self­
employed and the few voluntary contributors will all pay less than they do now for the same pension. For employees fully within the state scheme, however, there will be a contribution increase; for men with families this will come at a time when a reduction in child tax allowances, linked to the phasing in of the child benefit scheme, may also mean a reduction in take-home pay. The national insurance increases can however be justified as a very reasonable Premium for the benefits they will earn. The new contribution level will be 6£% 
of earnings and this will involve employees in paying more than at present. But the additional pension accruing each year in return - l£$of earnings above the lower limit of (in current terms) £17.50 a week - will be much larger than the contribution increase, 
*Q* There may be some additional criticism on behalf of those people who will reach pension age before April 1979, since they will earn n o additional pension from their months of contributions to the new scheme. It is however inherent in the task of keeping the frew arrangements reasonably comprehensible that benefits under them 
^ust accrue in whole tax years, so that the contributions paid xn the part-year before retirement earn no specific addition to Pension rights. This is already the position under the flat-rate na-tional insurance scheme. 

## ( I I I ) Arrangements For Contracting-Out

11. In spite of v/idespread publicity aimed at employers, i t seems l i k e l y that delays on their part in applying to the Occupational Pensions Board for -contracting-out c e r t i f i c a t e s may w e l l lead to a rush of such applications immediately before 6 A p r i l , and therefore to some administrative inconvenience and delays. 

The Occupational Pensions Board are f u l l y aware of this p o s s i b i l i t y , and Regulations have been made to enable them to streamline their procedures in issuing contracting-out c e r t i f i c a t e s on an interim b a s i s . 

Further Regulations w i l l be made before Christmas allowing employers and employees to pay the lower (contracted-out) rate contributions for a few weeks from 6 A p r i l pending receipt of t he i r contracting­
out c e r t i f i c a t e s . 

## ( I V ) Complexity Of The New Scheme

12. The benefit formula of the new scheme i s simpler than that of the Crossman scheme and no more complex than those of earnings­ related schemes abroad. 

Nevertheless i t i s not easy to explain in the way that a f l a t - r a t e pension increase would be. 

Any scheme which aims to reconcile the d i f f e r i n g social aims of r e l a t i n g pensions to earnings, enabling past earnings to retain their value, benefiting low earners proportionately more than the higher-paid, and protecting pensions in payment against i n f l a t i o n i s bound to be complicated, quite apart from the constraints imposed by a system of contracting-out and the need for the rules for the new additional pension to be consistent with those which already govern f l a t - r a t e entitlement. 

13. Once the new scheme has begun, therefore, i t may often be d i f f i c u l t for the individual pensioner to see how his p a r t i c u l a r benefit i s calculated in terms of basic pension, additional pensi o r  
l and graduated pension, especially i f he has been contracted-out and i f such features as an increase in his pension because of deferred retirement come into the reckoning. 

Moreover, since the f f i pension w i l l r e f l e c t his individual record of earnings, a l o c a l o w i l l not normally be able to answer his detailed questions about without obtaining information which i s held centrally on computer­
To date there has been some criticism of the quality of the general advice being given about the new scheme by our local offices: but the training of local staff has been under way for some time and is being intensified. They should therefore be able to deal adequately with public enquiries by the time that these arise in any numbers. 

## Publicity For The New Scheme

14. The Governments immediate task is to give sufficient publicity to the new scheme to make it clear to those who will pay higher contributions from next April that these are the passport to a very significant increase in benefit rights. Previous pension schemes, from the graduated arrangements onwards, have not excited any marked degree of public interest but we are determined that the latest reform should be recognised for the advance that it is. As a first step, the Department of Health and Social Security is organising a one-day conference to launch the scheme on 25 January 1978; a large audience of interested parties including MPs, TUC, CBI and many other pensions interests will be invited. 

15. The January conference will be the occasion at which we shall bring out a series of leaflets on new pensions, including a popular one-page summary of the scheme as well as detailed material about it. The conference will be followed in February and March by an extensive Governmental advertising campaign aimed at bringing the salient features of the new scheme to the attention of the general public. Speaking briefs and other material on the scheme will also J^ejnade available to Government spokesmen and to MPs of all parties. 

16. As already explained in the paper, we will also be undertaking 
17 Labour Party regional conferences. 

5 December 1977 
C A B I N E T 

## T O P S A L A R I E S - N A T I O N A L H E A L T H S E R V I C E C O N S U L T A N T S A N D O T H E R S Memorandum By The Attorney General

1. 
           This item was not reached in Cabinet on 1 December 1977, and it 
raises some complex legal points. 
                                                       I think that it would be helpful to m y 
colleagues to r e c o r d m y views in writing. 

## A . British N U C L E A R F U E L S L I M I T E D Directors

2. 
         In CP(77) 107 and 108 the L o r d P r i v y Seal suggests that the cases 
of the National Health Service Consultants and the British Nuclear Fuels 
Limited ( B N F L ) directors must be treated alike as the strength of the legal 
advice seems to be s i m i l a r . 
                                     That i s not my view. 
                                                                 In m y opinion there 
is a clear pre-pay policy contractual link between the B N F L d i r e c t o r s ' 
salaries and the corresponding Civil Service grades. 
                                                                   This i s not the 
position (see below) in respect of the Consultants' claim. 
                                                                        My advice is 
that a claim by the B N F L directors would succeed in the courts. 

3. 
         Leaving aside the legal position, m y colleagues may also think that 
the political impact of upholding the claim of a v e r y small number of 
nationalised industry board m e m b e r s to equality of treatment with the 
Civil S e r v i c e i s likely to be v e r y different from the political impact of 
allowing a l a r g e number of National Health Service (NHS) Consultants to 
obtain l a r g e retrospective payments in respect of the second stage of the 
Doctors and Dentists R e v i e w Body (DDRB) recommendation, when, as I 
understand it, no other "top sal ary" group has r e c e i v e d the benefit of that 
stage. 

## B. N A T I O N A L H E A L T H S E R V I C E C O N S U L T A N T S

4. 
          In July 1975 the Consultants w e r e awarded an i n c r e a s e to be staged 
as to Stage 1 ( retrospecti vel y) f r o m 1 A p r i l 1975, and as to Stage 2 from 
1 A p r i l 1976. 
                     This was agreed by the Joint Negotiating Committee ( J N C ) 
and received the necessary statutory approval of the Secretary of State by 
circular. 

5. 

In February 1976 a circular ("the second c i r c u l a r " ) provided as follows and received the necessary statutory approval of the Secretary of State: ­

## "Staged Increases

7. 
          Increases in remuneration which w e r e due to be paid from 
1 A p r i l 1976 in accordance with the staging arrangements set out in 
paragraphs 3 and 15-17 of the Appendix to HSC(IS) 159 and 
paragraphs 8-10 of HSC(IS) 167 will not now be payable from that date. 

## Payments Withheld

8. 
          Payments withheld in accordance with paragraphs 6 and 7 
of this notice will not subsequently be paid retrospectively, but will 
be credited in full for superannuation purposes. " 

6. 
          Circulars in similar t e r m s w e r e issued for Wales and Scotland. 

7. 
          In August, 1977, the Solicitor-General, in m y absence abroad, 
advised that there w e r e two important areas of doubt ­

a. 
          A s to whether in law the Consultants retained any right to 
the Stage 2 increase (having r e g a r d to the real posaibility that the 
second circular might be held by the courts to have deferred the 
Consultants 1 rights other than for superannuation purposes 
indefinitely) or whether their right s w e r e m e r e l y deferred in law 
until Pay P o l i c y permitted them to be paid; 
                                                                and 

b. 
         as to whether, if the second circular gave the Consultants 
a claim in law to their increase under Stage 2 as soon as Pay P o l i c y 
permitted, the Second White Paper permitted the whole of Stage 2 
i n c r e a s e to be paid from 1 A p r i l 1977, or only the £4 provided for 
in the Second White P a p e r . 

8. 
          My advice, with which the Solicitor General a g r e e s , is that the 
doubts on both these points a r e now so great that the Government i s fully 
entitled to r e s i s t the Consultants' claim. 
                                                           In the light of the information 
available since August I believe that there is a v e r y substantially l o w e r 
chance of the Consultants succeeding than the Solicitor General and the L o r d 
Advocate envisaged at that t i m e . 
                                                W e have still had no legal claim from 
the Consultants founded upon a right to the Stage 2 increase accruing since 
1 A p r i l 1977, notwithstanding that the Department of Health and Social 
Security have approved payment of the Second White Paper £4 i n c r e a s e . 
We may be confident that, if they had had even moderately strong legal 
advice in their favour, we should have heard something of it by now. 

9. 

If we rely on these v e r y serious doubts as to their legal entitlement the issue becomes purely one of policy as to how much to allow the Consultants and when. 

I think that we should be quite safe in adopting this line. 

I do not think that we could be fairly criticised even if (which I r e g a r d as unlikely) any claim they thereafter make in the courts w e r e to succeed. 

10. 
         Having regard to the views expressed above on the effect of the 
second circular, it remains to apply the Pay P o l i c y to the Consultants' case. 
They clearly have no claim until A p r i l 1978, 12 months after they r e c e i v e d 
the £4 increase under the Second White Paper. 
                                                          But it i s open to question 
whether they should be regarded as being then entitled to the full amount 
of the Stage 2 increases or whether any increase at that time should still 
be subject to the guidelines, i . e. confined to not m o r e than 10 per cent. 
My colleagues may think that there a r e arguments in equity for giving them 
the full amount and that there i s a clear distinction between the Consultants 
and other "top s a l a r i e s " groups in that the Consultants did at one stage 
have a legal right to payment as from 1 A p r i l 1976, of which they have been 
deprived by executive act in the form of the second circular. 
                                                                          Payment on 
1 A p r i l 1978 would thus involve a 2-year deferment of a payment which all 
concerned thought in February 1976 would be subject only to a 1-year 
deferment, i . e . until 1 A p r i l 1977. 
                                           This, however, i s a matter of policy 
and equity rather than of law. 

S S 

Royal Courts of Justice 
5 December 1977 
CP(77) 112 
C O P Y NO 
6 December 1977 
C A B I N E T 

## P A Y O F N A T I O N A L I S E D I N D U S T R Y Board M E M B E R S Memorandum By The L O R D P R I V Y Seal

1. 
           A t last Thursday's meeting (CM(77) 38th Conclusions) I was asked 
to report on a scheme to pay a 5 per cent increase to board m e m b e r s and 
consequentials, either on the kitty principle, or as a flat rate, with a few 
exceptions of up to 10 per cent to deal with cases of particular hardship. 
I have not been able in the time available to make a thorough examination 
of hard cases with colleagues, though the bids we have r e c e i v e d a r e listed 
at Annex B. 

2. 
         Annex A analyses the various arrangements which could be adopted 
to give effect to a general b per cent increase on the lines we discussed. 
T h e r e a r e no obvious special factors other than pay l e v e l s which would 
provide a consistent and generally acceptable means for distributing the 
i n c r e a s e . 
               Of the various options I would myself favour that described in 
paragraphs 4 and 5 of the Annex, preferably using the £13, 000 l e v e l to 
determine who should have the higher i n c r e a s e s . 

3. 
          But before we finally decide upon the increases to be given, I think 
we should pause to consider other aspects of the matter. 
                                                                                Since the increases 
would not be in respect of a p r e - p o l i c y commitment under the 1.1. 75 
recommendations (Top S a l a r i e s R e v i e w Body, sixth report (TSRB 6)), or 
constitute an interim payment with the balance t o be made later, it must 
c l e a r l y be regarded as the Round 3 settlement for board m e m b e r s and 
consequentiale which establishes their pay l e v e l s for the following 12 months. 

4. 
          It would be possible to relate payment to TSRB 6 and to make it on 
1 January 1978. 
                        The 1.4.78 recommendations for board m e m b e r s 
(TSRB 10) would then remain to be considered for a settlement date at least 
9 months later. 
                        This would l e a v e board m e m b e r s with an increased feeling 
of injustice if the Government's decision was confined to them alone and was 
not presented as part of a coherent policy for the R e v i e w Body groups as a 
whole. 

5. 
          M o r e o v e r a decision to implement 5 per cent in January ar, a 
Round 3 settlement would be seen by the TSRB as in effect the rejection of 
their 1974 recommendations without any prospect that their A p r i l 1978 
r e c . vnmendations will be treated differently. 
                                                                   They might well resign in 
consequence. 
                      This in turn would threaten the existence of the other two 
R e v i e w Bodies (covering the A r m e d F o r c e s and Doctors and Dentists). 

6 . 
                M o r e generally, our decision would be seen as an act of explicit 
discrimination against the public sector - directed m o r e o v e r against the 
group which has the best claim for preferential treatment. 
                                                                                                                                    It would be 
assumed that the other T S R B groups would be s i m i l a r l y treated, and the 
Civil S e r v i c e unions and the Doctors would be likely to see this as the writing 
on the well for them. 

7. 
          Many of these difficulties could be avoided by awaiting T S R B 10. 
This would mean that nothing could be done before A p r i l for board m e m b e r s . 
But once TSRB 10 comes out we shall be able to consider board m e m b e r s 
at the same time as other T S R B groups; and the T S R B report along with 
the other R e v i e w Body r e p o r t s . 
                                               Individual Round 3 settlements could then 
be developed consistently with one another. 
                                                               I think this course should be 
seriously considered. 
                                 If on reflection we adopt it, an early announcement 
will be necessary. 

8. 
          Any decision not to allow TSRB 6 to be treated as a p r e - p o l i c y 
commitment makes it difficult to do anything on pensions. 
                                                                                   If we maintain 
that increases should be r e s t r i c t e d to 5 per cent in Round 3, whether we 
relate these to TSRB 6 or TSRB 10, we cannot credibly maintain that there 
is any intention of implementing TSRB 6. 
                                                            Retrospective promulgation of 
the full recommended rates would then be difficult to square with Inland 
Revenue 1 s rules. 
                          It is therefore difficult not to conclude thet any device 
to protect pensions i s basically inconsistent with our decision on salaries 
and that there is no acceptable way of providing protection. 

P 

Civil S e r v i c e Department 

6 December 1977 

## Ways Of Distributing An Overall 5 Per Cent Pay Increase Equal Cash Increase

1. 

This would achieve a bias in percentage terms towards the lower paid members of the Group. 

But i t would also cause severe compression of both r e l a t i v i t i e s between boards and internal d i f f e r e n t i a l s within boards. 

The percentage increases at the lowest s a l a r i e s would be close to 10 per cent, but those at the higher s a l a r i e s would be very low. 

The approximate cash increase would be £550. 

The percentage increases would range from about 9 per cent at the bottom to 2 per cent at the top, with an average of 5 per cent. 

## Proportional Increases On Existing Or Recommended Rates

3 . 

Proportional increases within the overall 5 per cent pay b i l l figure would in cash terms favour the higher paid: 
i . 

A 5 per cent f l a t rate increase would produce cash increases ranging from £300 at the bottom to £1,500 at the top. 

It would preserve existing r e l a t i v i t i e s and d i f f e r e n t i a l s . ­
i i  
. 

Increases based on a proportion of the TSRB 
recommended increases ( i e ; 
approximately ^th of these) would r e f l e c t r e l a t i v i t i e s within the existing structure. 

The percentage increases range from 1$ per cent to 16 per cent. 

The cash increases would range from about £150 at the bottom to £2,750 at the top. 

i i i  
. 

Increases within a 5 per cent kitty distributed to achieve the highest common proportion of the TSRB recommended rates (approximately 81 per cent of these) would r e f l e c t the r e l a t i v i t i e s of the recommended structure, but the actual 
-
percentage increases would range as high as about 39 per cent at the top, and there would be some cases where current s a l a r i e s are already more than 81 per cent of those recommended. 

## Flat Rate Of 5 Per Cent With Exceptional Additions Up To 10 Per Cent For Hard Cases

4. 

This solution would go beyond an o v e r a l l 5 per cent increase. 

The problem would be to define the hard cases. 

When TSRB6 
increases were postponed an exercise was conducted to e s t a b l i s h whether some lower paid individuals might be allowed' through. This exercise showed that i t was not possible to discern any special features which would j u s t i f y special treatment but which would not involve repercussions on others within the group. 

The l i s t at Annex B shows the current departmental b i d s . 

There i s no clear c r i t e r i a other than salary l e v e l . 

This solution would require the f i x i n g of a r b i t r a r y limits below which higher percentage increases would be allowed. 

For example, i f a 10 per cent increase were allowed to those at or below £6,000, this would r a i s e the average percentage increase to 5.02 per cent; 
at 
£8,000 the figure would be 5.4 per cent; 
at £ 1 0 , 0 0 0 i t would be 
5.8 **per cent and at** £ 1 3 , 0 0 0 (the limit to which TSRB6 was paid in f u l l to other groups) i t would be 7 per cent. 

5. 

There are considerable advantages in this system. 

I t would be r e l a t i v e l y easy to administer and i t follows current practice of dealing with pay in percentage rather than cash terms. 

I t would be e s p e c i a l l y advantageous i f the salary point for the 
10 **per cent increase were to be fixed at** £ 1 3 , 0 0 0 as this was the l e v e l to which the "TSRB 6 recommendations were allowed in f u l l for other groups. 

The disadvantages are that increases might have to be tapered at the change over point to avoid anomalies, and that the a r b i t r a r y nature of the dividing l i n e could lead to substantial d i s t o r t i o n in r e l a t i v i t i e s within and between boards at this point, 

## Mixed Cash And Percentage Increase

6. 

The basis here would be a fixed cash amount plus a percentage increase which would produce a 5 per cent increase at the mean salary for the group. 

This cash and percentage increase would then be applied at a l l salary l e v e l s . 

This would provide a balance in individual percentage increases in favour of the lower paid in the group. 

The percentage increases would then be l e s s for the higher rates and more for the lower r a t e s , but the actual cash increases would of course r i s e with s a l a r y . 

7. 

The mean salary would be determined so as to ensure that the o v e r a l l increase in the pay b i l l was at the accepted f i g u r e . 

This could be 5 per cent, or i t could be higher i f the position in paragraph 4 above was to be reflected, ie that the overall increase including hard cases should be more than 5 per cent. 

The balance of advantage to higher and lower paid groups would be determined by the proportion of cash to percentage increase. 

But as an i l l u s t r a t i v e example, i f the mean salary was approximately 
£11,000 a cash sum of £275 plus 2
-
j
? per cent of salary would give 
£550 -
a 5 per cent increase. 

At £30,000 the increase would be 
£1,025 -
a 3.4 per cent increase, whereas at £6,000 i t would be 
£425 -
a 7 per cent increase. 

A 10 per cent increase would occur well below the salary of any member of the group. 

This system would have the advantage that once the cash and percentage increases are determined they w i l l operate evenly ovt the salary range. 

There i s no sharp change point. 

As with the a r b i t r a r y l e v e l below which higher percentage increases would be allowed (paragraph 4) this system would provide higher percentage increases for the lower paid in the range, but i t would do so within rather than in addition to the agreed overall percentage increase. 

In neither case would the higher increases be s p e c i f i c a l l y related to "hard" cases. 

The most serious disadvantage is that i t introduces the concept of cash payments into a policy designed to provide for percentage adjustments. 

| DEPARTMENT                        | BID                       |
|-----------------------------------|---------------------------|
| DHSS                              | NIL                       |
| DES                               | VICE-CHANCELLORS          |
| Maximum permissible               |                           |
| For a l l other consequentials    |                           |
| MAFF                              | NIL                       |
| LORD CHANCELLORS                  | 3 Law Commissioners       |
| OFFICE                            | President Pensions Appeal |
| Tribunal                          |                           |
| Chairman of Council on            |                           |
| Tribunal                          |                           |
| Judge Advocate of the Fleet       |                           |
| H                                 | O                         |
| a l l                             | 15                        |
| s a l a r i e s are too low.      |                           |
| DE                                |                           |
| NIL                               |                           |
| DOE                               |                           |
| Water Authority Chairmen          |                           |
| Presidents and Vice-              |                           |
| Presidents of Rent                |                           |
| Assessment Panels                 |                           |
| WELSH OFFICE                      |                           |
| Water Authority Chairmen          |                           |
| DEPT OF TRANSPORT                 | NIL                       |
| DEPT OF                           |                           |
| In general believe                | 1/6                       |
| INDUSTRY                          |                           |
| recommended increases             |                           |
| j u s t i f i e d .               | But i f a                 |
| limit on general increase, then   |                           |
| special cases would be the        |                           |
| chairman and members of Post      |                           |
| Office and Cable and Wireless     |                           |
| Boards                            |                           |
| 5                                 |                           |
| DEPT OF ENERGY                    | NCB                       |
|                                   | BGC                       |
| UKAEA                             | one member (possibly also |
| the Deputy Chairman)              |                           |
| Possibly certain consequentials   |                           |
| i n BNFL and TRC                  |                           |
| Area E l e c t r i c i t y Boards | ­                          |
| 8 Chairmen                        |                           |
| A l l ,                           |                           |
| 1                                 |                           |
| 2 Deputy Chairmen                 |                           |
| DEPT OF TRADE    | CAA       |
|------------------|-----------|
| 3 members        |           |
| BAB              | 2 members |

The salaries for these bids range from about £8,000 to £23,000. 

C P ( 7 7 ) 113 
C O P Y N O 
7 December 1977 
C A B I N E T 

## Inquiry I N T O T H E C R O W N A G E N T S Memorandum By The L O R D Chancellor

1. 
           The note by officials attached at Annex sets out in paragraph 8 the 
questions which Ministers must now consider in the light of the decision of 
the House of Commons on 5 December 1977. 
                                                                     This was, in effect, to reject 
the G o v e r n m e n t s proposals to set up an inquiry which would sit in private 
but would publish its report, its t e r m s of reference limited to assessing the 
culpability of individuals in the Crown Agents, the Ministry of O v e r s e a s 
Development, the T r e a s u r y , the Bank of England and the Exchequer and 
Audit Department. 
                               That rejection by the House of Commons followed a 
similar reaction by the whole of the P r e s s to the announcement of the 
Government's decision. 

2. 
         The reasons put forward for the rejection are set out in paragraph 2 
of the Annex. 
                    The major factor was the fear that a private inquiry would be 
a " c o v e r - u p " which would protect those who should not be protected. 

3. 
          In this situation, nothing less than a public inquiry would, I believe, 
now satisfy P a r l i a m e n t a r y and public opinion. 
                                                                 Paragraph 5 of the Annex 
identifies three possible f o r m s of public inquiry - a non-statutory Inquiry, a 
1921 A c t Tribunal and a Select Committee of the House of Commons. 

4. 
          While a non-statutory Inquiry would get round any difficulty created by 
the language of the 1921 A c t which requires the matter being enquired into to 
be "a definite matter of urgent public importance", and might (although I think 
this is doubtful) make i t easier to build upon the F a y Report and its supporting 
evidence, I think the absence of compulsory powers would be a serious defect. 
Although in practice it may be true that even then the n e c e s s a r y evidence 
would be forthcoming, n e v e r t h e l e s s a non-statutory Inquiry would, I bel i eve, 
not inspire the same public confidence in the Tribunal's ability to get at the 
full truth. 
                I think therefore that the only real choice now is between a 
Tribunal and a Select Committee. 

5. 
          A s to the ground to be covered by the Inquiry, the possibilities a r e 
set out in paragraph 8(b) of the Annex. 
                                                          That set out in paragraph 8(b)(ii), 

i. e. "all individuals whose part in the Crown Agents affair may be thought to be 
blameworthy", would c o v e r not only the individuals concerned in the Crown 
Agents, the Ministry of O v e r s e a s Development, the T r e a s u r y , the Bank of 
England and the Exchequer and Audit Department, but also the responsible 
Ministers and the businessmen and solicitors involved in the relevant Crown 
Agents "own account" transactions. 
                                      It would therefore be appreciably wider 
than the original t e r m s of reference proposed by the Government. 

6. 
          I do not think the scope should be n a r r o w e r than this. 
                                                                                          The difficult 
question is whether the failure of organisations as well as cf individuals should 
be expressly included. 
                                   A s organisations act through the individuals who run 
them, investigation of the failures of those individuals would enable the 
enquiring body, if so minded, to comment on failures attributable to organisa­
tional defects. 
                        In these circumstances I do not think it would be necessary to 
include a specific reference to the failure of organisations in the t e r m s of. 
reference, particularly when to do so could involve the risk of a v e r y w i de­
spread inquiry covering again the whole ground of the Fay Report. 

7. 
          A s to item 8(b)(iv) of the Annex, the investigation of the conduct of the 
individual businessmen and solicitors involved would enable the enquiring body 
to examine and report upon the relevant business and c o m m e r c i a l practices in 
so far as they contributed to that conduct. 
                                                             A wide ranging investigation of 
c o m m e r c i a l morality generally would not be appropriate for this kind of inquiry. 

8. 
          The m e r i t s and demerits of proceeding by way of a Tribunal under the 
1921 A c t or a Select Committee are conveniently set out in paragraphs 6 and 7 
of the Annex. 
                     An additional difficulty attaching to a Select Committee is that 
it would cease to operate at the end of the Parliamentary session unless 
re-activated in the succeeding session. 
                                                         Dissolution cf P a r l i a m e n t before the 
completion cf the Select Committee's work could give rise to awkward 
consequences. 

9. 
         It is also to be borne in mind that any f o r m of public inquiry into the 
conduct of individuals would almost inevitably preclude the institution of any 
criminal proceedings against them and could well involve the abandonment of 
any pending prosecution. 
                                  Civil proceedings too might be prejudiced and could 
hardly be continued while the public inquiry was taking place. 

10. 
        Of the two options, I think a Tribunal of Inquiry would be a better means 
of satisfying public anxiety and public opinion, and of ensuring that those 
concerned are seen to be given fair treatment, even though this would 
inevitably take longer and be far m o r e costly than a Select Committee. 

11. 
        A t this stage it may be sufficient to announce the G o v e r n m e n t s intention 
that there should be a public inquiry and that its f o r m and p r e c i s e scope will be 
announced shortly. 
                        This would give the Government m o r e time to consider both 
its terms of reference and, if it is to be a Tribunal, its composition, or, if it is 
to be a Select Committee, to enter into consultation with the other P a r t i e s in the 
House of Commons. 
                         "Whichever procedure is decided upon, there would have to 
be a P a r l i a m e n t a r y debate on a Resolution - in both Houses in the case of a 
Tribunal of Inquiry, or in the House of Commons in the case of a Select 
Committee. 

E-J 

L o r d Chancellor's Office 
7 December 1977 

## Note By Officials

The Minister of State for Overseas Development announced on 1 December the Government's decision that following the Fay Report there should he a subsidiary inquiry under Sir Carl Aarvold with the following terms of reference ­
"In the light of the report of the Fay Committee, to assess the nature and gravity of any neglect or breach of duty by individuals which may have occurred in the Crown Agents, the Ministry of Overseas Development, the Treasury, the Bank of England and the Exchequer and Audit Department." 
This inquiry would have sat in private but its report would have been published. 

It would have had a clear and narrow objective - to help the management of the organisations concerned decide on any disciplinary action which was needed against individuals who were blameworthy for neglect or breach of duty. 

2. 

In the House of Commons debate on 5 December (Hansard, Col. 1026-1096) 
and in press and public comment it has been strongly argued that the terms of reference are too narrow and that the inquiry should be in public. 

There are five strands in the criticisms ­
(l) The inquiry should be in public in order to demonstrate that people in public positions are held to account for their misdeeds in the same way as private citizens; 
(2) 
the inquiry should be in public to give Ministers and officials who were criticised in the Fay Report a public opportunity to justify themselves; 
(3) 
a statutory inquiry is needed to compel evidence because some people (in fact three, of whom two were subject to criminal proceedings) 
refused to give it to the Fay Committee; 

(4) the inquiry needs to cover not just the behaviour of individuals 
but also the behaviour of the organisations concerned; 
(5) 
the inquiry should deal with standards of commercial morality 
exposed by the Fay Report. 
(A summary of the main points made in the Debate is at Appendix A.) 

## The Questions For Consideration

3. 

The Government does not formally need to take any action following its defeat on a motion to adjourn the House. 

There are indeed arguments for continuing with the private inquiry as originally conceived. 

It would be the quickest and cheapest way of establishing the culpability of individuals in the public service without pillorying in public individuals who were subsequently held to be relatively free of blame. 

It would keep to a minimum any duplication with the work of the Fay Committee and any diversion of effort from current work by the organisations concerned. 

Moreover if any public inquiry is set up it will in practice be necessary to abandon the criminal proceedings against Mr Sidney Finley (because the proceedings of the inquiry could prejudice his trial). 

This course would not however meet the strong views which have been expressed both in Parliament and more widely and Ministers may feel that some form of public inquiry is now inevitable. 

In that event the main questions for consideration are ­

a. What should be the scope of such a public inquiry? 
b. What form should it take? 

## The Scope Of A Public Inquiry

k. There are four main possibilities ­
a. A public inquiry with the same terms of reference as were proposed 
for the Aarvold inquiry 
This would not meet the pressure from G-overnment supporters for a wider inquiry although it would meet the desire of the Opposition that Mr Richard Wood should have an opportunity to defend his actions in public. 

In practice such an inquiry might well be driven wider than its terms of reference and a more effective inquiry might result if this were accepted from the start. 

It might well he thought inequitable that the public servants involved in the Crown Agents affair should be subjected to a public inquiry while those outside the public service who contributed to that affair were not formally subject to it. 

On the other hand it can be argued that there are clear standards of duty owed by public servants and that no corresponding obligations bind the other individuals involved. 

If they acted illegally the remedy lies in criminal proceedings. 

If not there is no reason why they should be subject to a public inquiry the proceedings of which could in practice leave a stain on their reputations even if they were cleared by the eventual report. 

## B. A Public Inquiry Covering The Conduct Of Individuals Both Inside And Outside Tho Public Services Involved In The Crown Agents Affair

This would go a long way to meet the criticisms both in Parliament and in the press. 

The inquiry would still be kept within bounds. 

On the other hand such an inquiry could leave unfinished business if it exposed weaknesses in organisations without including recommendations to deal -with them. 

## C. A Public Inquiry Dealing Both With The Conduct Of Individuals And The Working Of The Organisations Involved (Crown Agents, Odm, Treasury. Bank Of England And Exchequer And Audit Department)

This course -would meet the widely-held view that weaknesses in organisations were as important as the failings of individuals in contributing to the difficulties of the Crown Agents and could provide the basis for effective remedies. 

An inquiry of this sort would however be more appropriately undertaken by a Royal Commission than by a judicial or semi-judicial body. 

It would be prolonged and could seriously divert the organisations concerned from their ongoing business and obviously duplicate the work of the Fay Committee. 

It could affect public confidence in Government as a whole as well as in the other institutions concerned. 

In any case an inquiry worth its salt looking into the conduct of individuals would be likely in practice to expose any weaknesses in organisations which came to its attention. 

d. A public inquiry ranging into the general issues of commercial 
morality raised in the House of Commons debate. 
There was some demand for such an inquiry. 

It would however range so widely as to be of doubtful utility. 

It would overlay the work of the Wilson Committee on Financial Institutions. 

## Form Of A Public Inquiry

5. 

It would be possible to have a non-statutory public inquiry. 

This would not be able to require the attendance of witnesses, a point to which much attention was directed in the House. 

This attention was somewhat misplaced. 

Fay managed well without powers but was of course sitting in private. 

Only three people refused to give evidence, two of them in any case subject to criminal proceedings. 

It would be most unlikely that the question of powers would arise with any still serving in the public sector as to disclosure of papers in that sector. 

If however a power to compel witnesses is felt to be essential in the case of an inquiry to be held in public the choice lies between ­

a. an inquiry under the Tribunals of Inquiry (Evidence) Act 1921; 
its establishment would require affirmative resolutions in both 
Houses of Parliament; 
b. an investigation by a Select Committee of the House of Commons. 
6. An inquiry under the **1921** 
Act would be the normal procedure for dealing with this sort of case. 

It would ensure a judicial hearing for those who were subject to criticism. 

The tribunal would have statutory powers to compel witnesses to attend and give evidence. 

On the other hand such an inquiry would be slow-moving (probably taking at least a year) and expensive 
(the costs could amount to about £1 million). 

The proceedings of the tribunal could attract maximum publicity while it was sitting. There could be a problem of forming terms of reference which met the requirement of the 
1921 Act that a tribunal is to inquire into "a definite matter ... of urgent public importance". 

7. 

A Select Committee of the House of Commons could inquire into the way the House itself handled the Crown Agents affair. 

It can be held that a situation which has been provoked by an unprecedented surge of back bench opinion requires action by Parliament itself. 

A Select Committee would in practice be able to compel evidence. 

Failure to submit it would be a breach of privilege. 

The problem is essentially bipartisan: the events in question took place under administrations of both Parties. 

On the other hand since the Select Committee on the Marconi scandal in **1912** 
Select Committees have been generally thought to be an unsatisfactory way of investigating allegations of public misconduct. 

The Report of the Royal Commission on Tribunals of Inquiry under Lord Justice Salmon in 1966 
commented ­

"The Marconi scandal for this purpose sounded the death knell of this 
form of investigation, and because it was wholly discredited, the 
Act of 1921 
            was passed. 
                          To go back to it would, in our view, be a 
retrograde step. 
                   We of course recognise that there are many purposes 
for which Select Parliamentary Committees are most useful and indeed 
indispensable - but the investigation of allegations of public 
misconduct is not one of them. 
                                 Such matters should be entirely 
removed from political influences." (Cmnd. 3121 
                                                para. 35) 

In addition a Select Committee would also be costly as those involved would no doubt expect to be provided with legal representation. 
                                                                 And there 

could be some awkwardness if a Select Committee had not completed its work during the life of the present Parliament. 

## Questions For Decision

8. 
The questions which Ministers will wish to consider are ­
a. Should the inquiry be held in public or private (paragraph 3 ) ; 
If the inquiry is to be held in public ­

b. Should it cover ­
i. the conduct of individuals in the Crown Agents, the ODM, the Treasury, the Bank of England and the Exchequer and Audit Department; 

ii. all individuals whose part in the Crown Agents affair 
may be thought to be blameworthy; 
iii. failure of organisations as well as of individuals; iv. the wider question of commercial morality raised by the 
Crown Agents affair? 
(paragraph I+) 
Should it be conducted in ­

i. a non-statutory public inquiry; 
ii. a tribunal under the 1921 
Act; 
iii. a Select Committee of the House of Commons (paragraphs 5-7). 

## Debate On The Adjournment - House Op Commons Monday, 5 December 1977 (Official Report Cols 1026-1096)

The main criticisms made on the debate on 5 December were as follows -

## The Business Practices Of The City

Criticism of such practices as letters of comfort or window-dressing (ie giving false information to shareholders). "This happens in the City all the time." - Mr John Mendelssohn. 

## The Bank Of England

Criticism of the Bank for turning a blind eye to what was going on at the Crown Agents for so long, to which was coupled criticism of the auditors and solicitors involved. 

- Mr John Mendelssohn 
Mr Cunningham 
Mr Skinner 
The need to tighten tho regulations and rules under which auditors prepare balance sheets ­

- Mr Peter Brooke 

## The Civil Service

The Service was criticised especially for its mode of recruitment, its lack of business expertise and, in the case of the Treasury, for its pre-occupation with relatively minor matters concerned with the Crown Agents when it failed to notice massive losses resulting from speculative dealings. 

- Mr Michael English 
Mr George Cunningham Mr Dennis Skinner 

## Tho Director Of Public Prosecutions

Criticism of his jrlcwness of action in this case. 

- Mr Dennis Skinner 

## The Excessive Independence Of The Controller And Auditor General

- Mr Michael English 

## Suppression And Cover Up

Criticism of attempts made to dissuade the present Minister of Overseas Development from pursuing her attempts to bring the affairs of the Crown Agents into the open. Reference to "a closing of ranks". 

- Sir Harold Wilson 

## The House Of Commons

Failure to organise itself so that Select Committees could pursue investigations of the kind that could have revealed at an earlier stage the situation of the Crown Agents. 

- Mr George Cunningham Failure of the House to exercise proper control 

- Sir Harold Wilson 
Failure of the House to react to warnings from the Press about the difficulties of the constitutional relationship, the speculative work of the Crown Agents and the possible financial dangers for the Government. 

- Mr George Cunningham 

## The Select Committee On Overseas Development

Lack of urgency to start investigation of the affairs of the Crown Agents and lack of tenacity in terminating their inquiries prematurely. 

- Mr Cunningham II. Proposals for an open inquiry came from Mr Mendelssohn who opened the debate and most of those who followed, The main points in favour of this course of action were -
The need to avoid a whitewash and to counter "great distrust about Whitehall and about Parliament". 

- Mr Richard Luce 
The need for judicial procedures to give adequate protection to witnesses. The form of inquiry should be such as to compel witnesses to give evidence; 
reference to the Salmon Report on Tribunals of Inquiry in support of the 
1921 Act procedure. 

- Sir Michael Havers 
Request for a special inquiry in respect of the Crown Agents Australian Investment. 

- Mr Prank Tomney 
7 December 1977 
CP(77)114 
C O P Y NO 
81 
12 December 1977 
C A B I N E T 

## P U B L I C E X P E N D I T U R E W H I T E P A P E R Memorandum By The Chief Secretary, T R E A S U R Y

1. 
           In accordance with the Cabinet Conclusions of 20 October 
(CM(77) 32nd Conclusions), I am circulating herewith a draft of Volume I of 
the Public Expenditure White Paper. 
                                                            If we can clear the draft at our 
meeting on 15 December, that will enable us to publish on Thursday 
12 January, shortly after the House reassembles on 9 January. 
                                                                                                     I am 
circulating Volume II separately with the suggestion that it should be cleared 
in correspondence. 

2. 
         The main purpose of the White Paper is to present publicly the public 
expenditure p r o g r a m m e s as revised by the decisions we took in October. 
Account is taken of some later developments, including the new agreement 
now concluded with the banks on refinancing of export and shipbuilding credit 
and estimating changes on social security and agricultural support. 
                                                                                       The 
contingency r e s e r v e /igures for 1979-80 and the tw* subsequent years have 
been raised to £1, 500 million, 
                                       £1, 750 million and £2, 000 million 
respectively (all figures at 1977 survey p r i c e s ) . 

3. 
          The section on the economic context (paragraphs 48-59) contains a 
table of illustrative economic projections on the lines of those given in the 
Chancellor of the E x c h e q u e r ^ paper discussed at Cabinet in July (CP(77) 70). 
The text emphasises that the projections are no m o r e than illustrations of 
one possible evolution of resource use over the years ahead, on one 
particular assumption about the growth of total output. 

4. 
          The draft also includes a table of revenue projections (Table 9). 
The figures in the table are subject to final checking. 
                                                                               The Expenditure 
Committee and others have been pressing for a fuller account of the general 
economic background to the expenditure plans, and in particular for 
revenue projections (which were provided in the 1969 White Paper 
(Cmnd 4234). 
                      We have told the Committee that we will provide revenue 
projections. 

5. 
        Subject to any further minor revisions or drafting changes which may 
be necessary, I invite my colleagues to approve the attached draft of 
Volume I of the White Paper for publication. 

J B 

T r e a s u r y Chambers 

12 December 1977 
T h e G o v e r n m e n t s E x p e n d i t u r e P l a n s , 
1 9 7 8 - 7 9 t o 
1 9 8 1 - 8 2 

## V O L U M E I

Presented to Parliament by the Chancellor of the Exchequer by Command of Her Majesty January 
1978 
LONDON 
H E R M A J E S T V S 
S T A T I O N E R Y 
O F F I C E 
p net CmndOOOO-I 

## Part I

| Contents                                           | Paragraph No.    |
|----------------------------------------------------|------------------|
| The Government^ expenditure plans                  | 1-5              |
| Summary of the plans                               | 6-10             |
| Expenditure in 1976-77                             | 11-16            |
| Expenditure in 1977-78                             | 17-22            |
| Expenditure plans, 1978-79 and after               |                  |
| Central government                                 | 23-24            |
| Nationalised industries                            | 25-28            |
| Local authorities                                  | 29-36            |
| Contingency reserve                                | 37-38            |
| Debt interest                                      | 39-^0            |
| Analysis by economic category                      | 41-43            |
| Public expenditure and gross domestic product      |                  |
| The economic context                               | 48-59            |
| Revenue projections and general government balance | 60-67            |
| Conclusion                                         | 68               |

## S U M M A R Y Of Tables

Page 
1 
Public expenditure plans 
2 
2 
Public expenditure, 1974-75 to 1977-78 
4 
3 
Central government expenditure programmes 
6 
4 
Nationalised industries' borrowing 
6 
5 
Public expenditure by local authorities (Great Britain) 
8 
6 
Financing of local authority relevant expenditure (Great Britain) 
9 
7 
Ratios of public expenditure to G D  
P at market prices ... 
... 
11 
8 
Gross domestic output and expenditure 
13 
9 
General government account 
14 
10 
Public expenditure by programme and in total 
17 
11 
Public expenditure by economic category and in total 
18 
12 Public expenditure by spending authority and programme and in 
total 
... 
.: 
19 
13 
Public expenditure by spending authority and economic category 
20 
14 
Comparison of planned expenditure and estimated outturn in 
1976-77 and 1977-78 by spending authority and economic 
category 
21 
| 15                | Summary of changes since Cmnd 6721                   |     |
|-------------------|------------------------------------------------------|-----|
| 16                | Changes to expenditure programmes since Cmnd 6721    | 23  |
| 17                | Changes to expenditure programmes since Cmnd 6721 by |     |
| economic category | 26                                                   |     |

## T H E G O V E R N M E N T S Expenditure P L A N S , 1978-79 T O 1981-82 P A R T 1

This White Paper presents the Governments latest plans for public expendi­
ture. Volume I gives a general account of the plans and their economic and fiscal context, Volume II details of individual expenditure programmes and supporting material. 

2. 

The improvement in the country's financial situation, to which the cuts in public expenditure plans which preceded last year's White Paper (Cmnd 6721) 
made an important contribution, enables the Government now to plan for resumed and continuing expansion of many programmes financed by public expenditure. Along with other measures to improve the outlook for employment and to bring the growth of output on to its intended path, the Chancellor of the Exchequer announced on 26 October 1977 the Governments decision to add £1 billionQ to the plans for 1978-79. 

That decision is reflected in the present White Paper. 

3. 

Renewed expansion in expenditure plans must be governed by the Governments broad economic objectives of containing inflation, reducing unemployment and promoting industrial efficiency. 

In addition, the Govern­
ment now aim at a greater degree of stability than has been achieved in recent years, so that expenditure programmes can be managed with confidence that they will not be subjected to the disruption of sudden cuts. 

4. 

Both for this reason, and in order to leave room for manoeuvre on tax­
ation, it is necessary that the planned growth rate for total public expenditure should be within the prospective growth rate of national income. 

The present plans are constituted to this end. 

As always those for the later years are provisional. 

The Government want to improve and in many cases expand the provision of public services, and will do so as circumstances permit; but they do not intend to set up plans which go beyond what the economy can safely be assumed capable of sustaining. 

5. 

The Government intend to maintain and develop the procedures of expenditure control, including the new features introduced in recent years, such as the system of cash limits and strict observance of the announced control figure for the contingency reserve, and the arrangements for monitoring expendi­
ture in the course of the year as described in Cmnd 6721. The latter is an important management tool which, as experience grows in its use, should promote a closer match between plans and outturn. 

1 Allfigures i n t h i s W
h i t e P
a p e r a r e a t 
1
9
7
7 s u r v e y p r i c e s u n l e s s o t h e r w i s e s t a t e d
. T
h e y h a v e e a c h b e e n r o u n d e d t o t h e n e a r e s t £
1 m i l l i o n a n d d o n o t t h e r e f o r e n e c e s s a r i l y s u m t o t h e t o t a l s
. 

## Summary Of The Plans

6. 

The planning figures for public expenditure until 1981-82 are shown in table 1, together with the Cmnd 6721 planning figures for the current year. The tables at the end of this volume give more details. 

## Public Expenditure Plans

1977-78 
1978-79 
1979-80 
1980-81 
1981-82 
as in 
Cmnd 
6721 
Expenditure on programmes: 
Central government 
39,582 
41,660 
41,982 
42,419 
42,569 
Local authorities 
15,399 
15,488 
15,718 
15,889 
15,990 
Total general government 
54,981 
57,148 
57,700 
58,308 
58,559 
Certain public corporations^) 
992 
952 
1,012 
1,002 
1,015 
Total expenditure on programmes ... 
55,973 
58,100 
58,712 
59,310 
59,575 
Contingency reserve 
... 
750 
750 
1,500 
1,750 
2,000 
Total 
56,723 
58,850 
60,212 
61,060 
61,575 
Debt interest 
2,500 
2,000 
1,900 
1,800 
1,600 
Total public expenditure 
59,223 
60,850 
62,112 
62,860 
63,175 
Total programmes, contingency reserve 
and overseas and 
market borrowingof 
nationalised industries 
57,263 
58,550 
59,612 
60,860 
61,325 

7. 

The figures for the year immediately ahead, 1978-79, are firm plans. 

These provide the basis of Estimates, cash limits and rate support grant. 

The figures for the succeeding years are increasingly provisional: they will be reviewed in successive annual surveys. 

8. 

The planned total of public expenditure programmes and the contingency reserve for 1978-79, adjusted to include the total net borrowing requirement of the nationalised industries (see paragraph 9 below), is approximately £1 billion higher, at 1977 survey prices, than the provisional plans for that year published in Cmnd 6721. 

9. 

Public expenditure, as defined in these White Papers, includes finance provided by the Government to the nationalised industries, whether by loans, public dividend capital or grants. The amount provided by the Government is greatly affected by the net amounts which the industries borrow from, or repay to, overseas lenders or the market. As the Select Committee on Expenditure have pointed out, such borrowing, or repayments, can distort the year-to-year path of government lending to the industries, and hence of public expenditure as a whole: over the next few years the industries are due to repay substantial amounts borrowed from overseas lenders in the mid-1970s, and to replace this by borrowing from the National Loans Fund. One way of discounting this is to adjust the planned total of programmes and the contingency reserve to include the *total* net borrowing requirement of the nationalised industries (not just what the Government lends to them). Line 10 of table 1 
gives figures for the total adjusted in this way. 

10. 

This adjusted total rises by about 2\ per cent in 1978-79, compared with the Cmnd 6721 plans for the current year (1977-78)0. The rate of growth in the two succeeding years—1979-80 and 1980-81—is of the order of 2 per cent a year. The present figure for 1981-82 is under 1 per cent, but the plans in the later years are increasingly provisional and subject to revision in subsequent surveys; this applies especially to the final year. The precise figures are: 

| 1978-79    | 1979-80    |
|------------|------------|
| +2         |            |
| .270       |            |
|            | -hl.8%     |
|            | +2         |
| .15S       |            |
|            | -f-0.8%    |

## Expenditure In 1976-77

11. 

At outturn prices, total public expenditure in 1976-77 was £55J 
billion. This was nearly 11 per cent more than the outturn price figure for 
1975-76, but in volume terms (constant prices) the total of programmes excluding debt interest was *less* than in 1975-76, by nearly 3$ per cent. This fall owed much to a reduction in net government lending to nationalised industries, as the industries borrowed heavily in foreign currency. In total public expendi­ ture including debt interest the fall was somewhat less than in programmes alone, because payments of debt interest increased. Table 2 gives the figures. 

12. 

The outturn of programmes in 1976-77 was less in volume terms than the Cmnd 6721 plans for that year, by about 3J per cent, or *12\* billion at 1977 
survey prices. 

13. 

One major difference between plans and outturn was in programme 5, government lending to nationalised industries. This is a particularly difficult programme to forecast. The 1976-77 outturn figure of £330 million was not only much lower than in the previous year (see paragraph 11 above) but also well below the 1976-77 provision of £917 million in Cmnd 6721: overseas borrowing by the industries was greater than assumed in Cmnd 6721, which provided only for such overseas borrowing as had already been undertaken when the figures were prepared. In addition, both the trading results and the capital expenditure of the nationalised industries turned out differently from the assumptions used in Cmnd 6721. 

14. 

The aggregate outturn in 1976-77 in volume terms on all programmes other than the nationalised industries was about 3 per cent below the planning figure in Cmnd 6721. In some programmes, notably education, health and social security, the difference was slight, but outturn was below the plan in every programme. Details are in tables 14 and 16 and in Part 2. 

15. 

Many factors contributed to this difference. The more extensive use of cash limits was itself probably one, as many programme managers were especially careful to run no risk of exceeding their limits. On the central govern­
ment programmes covered by cash limits, expenditure (at outturn prices) was about 2 per cent or £600 million below those limits. In volume terms the difference was somewhat greater, since prices rose faster than had been allowed for when the cash limits were set. Another factor was that expenditure on new measures to promote employment turned out less than the original estimate. Other factors included over-provision for refinance of export credit, unavoidable delays in obtaining some defence equipment, and delays in road building as a result of weather conditions in the second half of the year. 

16. 

The volume of local authority current expenditure was marginally below that envisaged just before the year began for England and Wales, and marginally above for Scotland. The overrun expected last autumn, and built into the Cmnd 6721 figures, did not occur. 

## Public Expenditure, 1974-75 To 1977-78

| T A B L E 2                       | £ million at 1977 survey prices    |
|-----------------------------------|------------------------------------|
| 1974-75                           |                                    |
| 1975-76                           |                                    |
| 1976-77                           | 1977-78                            |
| estimated                         |                                    |
| 39,245                            |                                    |
| 15,910                            |                                    |
| 38,126                            |                                    |
| 15,161                            |                                    |
| 40,280                            |                                    |
| 16,739                            |                                    |
| 39,661                            |                                    |
| 16,904                            |                                    |
| Expenditure on programmes:        |                                    |
| Central government                |                                    |
| Local authorities                 | ...                                |
| Total general government          |                                    |
| 56,565                            |                                    |
| 57,019                            |                                    |
| 55,155                            |                                    |
| 53,287                            |                                    |
| Certain public corporations^)     |                                    |
| 1,138                             |                                    |
| 1,176                             | 1,047                              |
| 922                               |                                    |
| Total expenditure on programmes   |                                    |
| 57,703                            |                                    |
| 58,194                            | 56,201                             |
| 54,209                            |                                    |
| Debt interest                     |                                    |
| 907                               |                                    |
| 1,169                             | 1,662                              |
| 1,900                             |                                    |
| Total public expenditure          |                                    |
| 58,610                            |                                    |
| 59,363                            |                                    |
| 57,863                            | 56,109                             |
| Total programmes and overseas and |                                    |
| market borrowing                  | of                                 |
| industries                        |                                    |
| 58,743                            |                                    |
| 59,077                            |                                    |
| 57,635                            | 54,739                             |

1Sce note (1) to table 1. 

## Expenditure In 1977-78

17. 

Table 2 summarises the estimate of outturn in 1977-78 used in this White Paper, alongside the latest estimates for the past three years. For 1977-78 the volume of expenditure on programmes is now put at about 95£ per cent of the Cmnd 6721 provision for programmes and contingency reserve. In addition, the expected net outturn of debt interest is significantly below the figures in Cmnd 6721. 

18. 

A considerable part of the difference of 
4\ per cent between the outturn for programmes now expected and the earlier plans is attributable to two major items: government lending to nationalised industries, which is again expected to be substantially lower than planned initially, and refinancing of export and shipbuilding credit, which, partly owing to the new arrangements with the banks, is expected to show net repayments to the government this year. Apart from these two items, the outturn is now estimated at over 97 per cent of the Cmnd 6721 plans. 

19. 

The changes from Cmnd 6721 reflect many causes. For example, lower i nterest rates have reduced the scale of housing subsidies, some delay is still being experienced in defence works and procurement programmes and, in some cases, firmer estimates of expenditure in 1976-77 have led to revised estimates for the current year. 

20. 

The value of central government expenditure covered by cash limits in the first half of the financial year was about 3J per cent below what depart­
ments had expected at the beginning of the year. For the year as a whole the estimates given in this White Paper reflect the belief of departments that the volume of their expenditure over the full year will be somewhat nearer the initial plans. For local authority current expenditure the figures now given are consistent with those available at the time of the negotiation of the rate support grant for 1978-79. 

21. 

Some continuing divergence between planning figures and outturn is to be expected in future years. Any system of control which applies limits to pro­ grammes will normally result in outturns being somewhat less than planned levels. The likelihood of such shortfall is taken into account in the forecasts for the economy and the public sector borrowing requirement which inform the Governments consideration of public expenditure, and hence in the decisions on the planned level of expenditure.(1) 
22. 

How completely plans will be achieved in any one year is hard to predict, particularly in the light of recent experience. There is a general tendency to over-estimate the extent to which expenditure can be increased rapidly in the short run. But increasing familiarity with the new control and information systems should promote a closer match between estimates and outturn. 

## Expenditure Plans, 1978-79 And After Central Government

23. 

The main services provided by the central government (including transfer payments) account for over 70 per cent of total programmes. Figures for these services are summarised in table 3. 

## Central Government Expenditure Programmes T A B L E 3 £ Million At 1977 Survey Prices

| 1975-76                     | 1976-77    | 1977-78    |
|-----------------------------|------------|------------|
| 1978-79                     |            |            |
| 1979-80                     |            |            |
| estimated                   |            |            |
| Defence                     |            |            |
| 6,445                       | 6,361      | 6,255      |
| 6,289                       | 6,494      |            |
| National health service ... |            |            |
| 5,981                       | 6,051      |            |
| 6,132                       |            |            |
| 6,255                       | 6,350      |            |
| Social security             | 12,309     |            |
| 12,717                      | 13,226     |            |
| 14,063                      |            |            |
| 14,174                      |            |            |
| Other expenditure           | 15,545     |            |
| 14,115                      | 12,513     |            |
| 15,053                      | 14,964     |            |
| Total                       | 40,280     | 39,245     |
| 41,660                      |            |            |
| 41,982                      |            |            |

24. 

About 40 per cent of public expenditure by the central government, excluding debt interest, is on goods and services, the largest elements being defence and the national health service. The remainder consists of transfer payments—including social security benefits, housing subsidies and industrial support—and net lending, which includes loans to nationalised industries. 

## Nationalised Industries

25. 

The table 3 figures for public expenditure by the central government include provision for government lending to the nationalised industries. Estimates of this lending are shown in table 4, along with estimates of the total net borrowing requirement of the industries, which are included in the adjusted planning total in table 1. The differences between the two sets of figures reflect the industries' net borrowing from, or repayments to, the market and overseas, and in particular the major programme of foreign currency and market debt repayments which the industries are expected to make between 1978-79 and 
1980-81. The precise timing of this programme is uncertain. If repayments were made sooner than assumed in table 4, that would affect the figures for net government lending, but total net borrowing by the industries would not be affected to any great extent. 

## Nationalised Industries' Borrowing T A B L E 4 £ Million At 1977 Survey Prices

1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 
estimated 
Net government lending 
330 
420 
1,350 
1,550 
1,350 
1,100 
Total net borrowing (other than 
short-term) 
1,764 
950 
1,050 
950 
1,150 
850 

26. 

The estimates for total net borrowing show the industries' requirements for loans from all sources and for public dividend capital. They depend on assumptions about the level of investment by the industries, their markets, pricing policies and productivity. They may need to be revised further when the Government has completed the process of setting financial targets for each of the industries, and in the light of the current consideration of the problems of the British Steel Corporation. 

27. 

Notwithstanding these uncertainties, the fall in the industries' overall net borrowing requirement after 1976-77 marks an improvement in the financial position of most of them. After the deficits caused by price restraint in the early 1970s most of the industries are now profitable again as a result of the progressive return to economic pricing. They are therefore able to make a substantial contribution to the financing of their own investment which is expected to amount to about £3J billion in 1977-78 and in 1978-79. It is part of the Governments medium term expenditure strategy that this improvement in the industries' financial position should be maintained. 

28. 

Volume II contains a commentary on each of the nationalised industry programmes and presents figures for the industries' capital investment programmes and their financing. 

## Local Authorities

29. 

Local authorities are responsible for more than one-quarter of public expenditure. They are responsible for the greater part of expenditure on education (which accounts for more than half of their current expenditure), on housing (which accounts for a similar proportion of their capital spending), and on other environmental services. They employ more than one in ten of the working population. 

30. 

The Government does not have the same direct control over expenditure by local authorities as over its own spending. Part 1 of Cmnd 6721 explained the means of influence open to the Government and the extent to which the Governments ability to regulate this expenditure within a reasonable margin is dependent on the co-operation of local government. Green Papers on Local Government Finance (Cmnd 6811 and 6813) were published in May 1977 
following the report of the Layfield Committee. These emphasised the need to develop, on a partnership basis between central and local government, the duties and responsibilities involved in the provision of local public services. They proposed financial arrangements designed to give a substantial degree of local autonomy while safeguarding the central governments economic responsibilities and policy interests. This was intended to provide a satisfactory long-term basis for ensuring that total local authority expenditure was main­ tained at a level which the country can afford. Discussions are continuing with the local authority associations about these proposals. 

31. 

Over the past three years, current expenditure by local authorities has had to be reined back. A year ago it was still feared that the adjustment was not being achieved as quickly as the Government had hoped, and that an absolute reduction in the volume of expenditure might be required in 1978-79. In the event, a rate of growth which had reached nearly 10 per cent in the one year 
1974-75 has been succeeded by an increase of only about half that amount over the whole of the following three-year period. 

32. 

General recognition of the requirements of the economic situation, and restrictions on the availability of government finance, have no doubt con­ tributed to the speed with which this necessary adjustment has been achieved. 

But it also illustrates the increasingly close co-operation between central and 

local government i
                 n 
                   the 
                      planning 
                               and control 
                                          of public 
                                                   expenditure, 
                                                              through 

the Consultative Councils on Local Government Finance i
                                                      n England and 

Wales 
     and in 
            discussions 
                     with the 
                             Convention of 
                                          Scottish 
                                                  Local 
                                                       Authorities. 

## Public Expenditure By Local Authorities (Great Britain) T A B L E 5 £ Million At 1977 Survey Prices

| 1975-76                                | 1976-77    |
|----------------------------------------|------------|
| 1977-78                                |            |
| 1978-79                                |            |
| 1979-80                                |            |
| estimated                              |            |
| Current expenditure:                   |            |
| Environmental servicesO                |            |
| 1,382                                  |            |
| 1,431                                  |            |
| 1,466                                  | 1,445      |
| Law, order and protective services ... |            |
| 1,321                                  | 1,378      |
| 1,393                                  | 1,416      |
| Education and libraries, science and   |            |
| arts                                   |            |
| 6,351                                  |            |
| 6,384                                  |            |
| 6,438                                  | 6,535      |
| Health and personal social services    |            |
| 987                                    | 1,012      |
| 1,044                                  | 1,072      |
| 1,096                                  |            |
| Other programmes                       |            |
| 1,664                                  |            |
| 1,541                                  |            |
| 1,502                                  |            |
| 1,495                                  | 1,513      |
| Total                                  |            |
| 11,705                                 | 11,746     |
| 11,843                                 | 11,962     |
| Capital expenditure                    |            |
| 4,815                                  | 3,945      |
| 3,083                                  | 3,282      |
| 3,376                                  |            |
| Total                                  |            |
| 16,520                                 | 15,691     |
| 14,926                                 |            |
| 15,244                                 |            |
| 15,467                                 |            |

1
 Programme 8 "other environmental services" 

33. I
     t 
      i
       s 
         no 
            longer 
                   necessary 
                            for 
                               the 
                                   t
                                    o
                                     t
                                     a
                                      l 
                                        volume 
                                               of 
                                                  current 
                                                         expenditure 
                                                                    to 

be cut 
      i
       n 1978-79. 
                  After taking account of 
                                         demographic factors 
                                                            and of 
                                                                   the 

continuing revenue e
                   f
                    f
                     e
                      c
                      t
                       s 
                         of capital projects, 
                                            there w
                                                   i
                                                   l
                                                    l be l
                                                          i
                                                           t
                                                           t
                                                            l
                                                             e 
                                                               scope 
                                                                    for improvements i
             n the l
                    e
                    v
                     e
                      l of s
                           e
                            r
                             v
                              i
                               c
                               e provision, and continued r
                                                         e
                                                          s
                                                           t
                                                            r
                                                            a
                                                             i
                                                              n
                                                               t 
                                                                i
                                                                 n 

local 
     authority spending plans 
                               w
                                i
                                l
                                 l 
                                   be necessary. 
                                                 However, 
                                                           as 
                                                              thefigures 
                                                                          i
                                                                           n 

table 
     5 
       show, 
             the 
                 rate 
                     support 
                             grant 
                                   settlements 
                                              for 
                                                  1978-79 
                                                          provide 
                                                                  for 
                                                                      some 

resumption of 
             growth i
                     n 
                      the 
                          t
                           o
                           t
                            a
                             l 
                               of 
                                 current 
                                        expenditure. 

34. Similarly, 
              the 
                  plans 
                       i
                        n 
                          Cmnd 6721 
                                     for 
                                         the 
                                             capital 
                                                    expenditure 
                                                               of 
                                                                  l
                                                                  o
                                                                   c
                                                                    a
                                                                     l 

authorities 
           also 
               provided 
                         for 
                            a 
                              reduction 
                                        i
                                         n 
                                           1978-79 
                                                    compared with 
                                                                   the 
                                                                       current 

year. N o w i
           t 
             i
              s 
                possible 
                        to 
                          look 
                               ahead 
                                     to 
                                        a 
                                          small 
                                               increase. Thefigures 
                                                                    shown 
                                                                          in 

table 
     5 
      r
       e
        f
         l
         e
          c
           t 
             the 
                s
                 p
                  e
                   c
                   i
                    a
                     l 
                       measures 
                                to 
                                  a
                                   s
                                    s
                                     i
                                      s
                                      t 
                                        the 
                                            construction 
                                                        industry 
                                                                announced 

during 
      1977. 

35. The Government w
                      i
                       l
                        l 
                          be discussing the implications of 
                                                          the plans 
                                                                    i
                                                                    n 

t
h
 i
  s 
   White Paper 
              for 
                 the 
                    years 
                         a
                          f
                          t
                           e
                            r 
                              1978-79 
                                     with 
                                         the 
                                            local 
                                                authority 
                                                        associa­
tions 
    i
     n 
       the 
          Consultative 
                     Councils 
                            and the 
                                   Convention i
                                              n 
                                                the 
                                                   normal 
                                                          course 

of 
  the 
     next 
         public 
               expenditure 
                         survey. 

36. The d
          e
          f
           i
            n
             i
              t
               i
                o
                n 
                  of 
                     local 
                          authority 
                                    current 
                                           expenditure 
                                                       for 
                                                          White Paper 

purposes d
         i
          f
           f
            e
            r
             s 
               i
                n 
                 certain 
                        respects 
                                from "relevant expenditure" 
                                                           which i
                                                                  s 
                                                                    the 

aggregate 
         on 
            which 
                  the 
                      l
                      e
                       v
                        e
                         l 
                          of 
                             government 
                                         grants 
                                               to 
                                                  local 
                                                       authorities 
                                                                 i
                                                                  s 
                                                                    based 

each 
    year 
         following 
                  the 
                     rate 
                         support 
                                 grant 
                                      discussions. 
                                                 For 1978-79 the 
                                                                per­
centage 
       of 
         aggregate 
                  Exchequer grant 
                                  has 
                                     beenfixed 
                                               a
                                                t 
                                                  the 
                                                     same l
                                                           e
                                                            v
                                                            e
                                                             l 
                                                               as 
                                                                 for 

1977-78, 
        that 
            i
             s 
               61 
                 per 
                     cent 
                         for 
                             England 
                                     and 
                                        Wales 
                                              and 
                                                  6
                                                   8
                                                    -
                                                     £ 
                                                      per 
                                                          cent 
                                                              for 
                                                                  Scotland. 

Table 6 
       shows how relevant 
                          expenditure has 
                                         beenfinanced 
                                                      since 1975-76 
                                                                  as 

## Financing Of Local Authority Relevant Expenditure (Great Britain)

£ million at outturn prices 
1975-76 
1976-77 
1977-78 
1978-79 
estimated 
Total expenditureC1) 
11,230 
12,610 
13,990 
15,120 
Government grants 
7,420 
8,260 
8,610 
9,280 
Local rates, including rate rebate grants and 
changes in local balances 
3,810 
4,350 
5,380 
5,840 

1
 Includes a small element of expenditure met from rates which is not relevant for grant purposes. 

## Contingency Reserve

37. 

The planning totals for the years ahead include substantial contingency reserves to cover unforeseen items and items which cannot be properly quantified at this stage. The scale of provision is shown in table I, line 6. The size of the contingency reserve for the later years is reviewed along with the spending programmes in each successive annual survey. 

38. 

As explained in Cmnd 6721, any addition to a programme decided upon during the year is charged against the contingency reserve if it cannot be offset by an appropriate saving in the programme concerned or other programmes. The arrangements for approving claims on the contingency reserve, and for monitoring these claims, form an important part of the Governments procedures for control of public expenditure. 

## Debt Interest

39. 

The figures for total public expenditure shown in table 1 include debt interest, but debt interest payments are not included in the planning totals dis­
cussed in paragraphs 7-10 above. In Cmnd 6721 a new concept of debt interest payments was introduced, including only those payments which have to be financed from taxation or further government borrowing. Payments met from interest receipts on money lent, or for which provision is made from trading surpluses or rents, are excluded. 

40. 

On this basis the estimate for 1977-78 is £1,850 million compared with the 1976-77 figure of £1,700 million (both at 1977 survey prices). The estimates for this year and next are substantially below those in Cmnd 6721, which were £2,650 million and £ 
million respectively, on a comparable basis. The reductions are due mainly to lower borrowing and interest rates than were assumed when the Cmnd 6721 estimates were made. Volume II of this White Paper gives a fuller explanation. 

## Analysis By Economic Category

41. 

Tables 10 and 12 show that the economic analysis of public expenditure is not expected to change much over the planning period. Current expenditure on goods and services, which now accounts for nearly half the total, continues to rise slowly. 

42. 

Public expenditure on fixed investment increases over the planning period but remains relatively low compared with the years up to 1975-76. 

Most of it is construction work, and the extra spending on construction announced during 1977 means that a steady level of direct public spending on construction in the next four years is now planned, at rather over £4$ billion a year. In addition, government grants and lending help to finance other construction work, for example by the nationalised industries and housing associations. If construction expenditure by those bodies is included, the total planned level of public spending on construction rises to some £6$ billion in 
1978-79 and some £6f billion in 1981-82. Fuller details are being published separately and will appear in the next issue of "Housing and Construction Statistics". 

43. 

Transfer payments increase in total over the planning period, with some changes in composition. Payments to individuals, notably of pensions and other social security benefits, continue to rise, while subsidies tend to fall. There are marked changes in net lending, including the increased government lending to nationalised industries and the reduced government refinancing of fixed rate export and shipbuilding credit mentioned earlier. 

## Public Expenditure And Gross Domestic Product (Gdp)

44. 

In the first half of this decade public expenditure continued to grow at much the same rate as in the previous decade, while national disposable income grew very little, partly because of the slow growth in output and partly because of the deterioration in the terms of trade. The ratio of total public expenditure to GDPC) increased from 38 per cent in 1971-72 to 46$ per cent in 1975-76, and fell to 44$ per cent in 1976-77. 

45. 

This ratio is not a wholly satisfactory indicator of the importance of the public sector in the economy as a whole. Total public expenditure includes transfers and loans to the private sector, which require government taxation or borrowing but finance private, not public, consumption and investment. 

Moreover, the total is affected by changes in the extent to which the national­
ised industries rely on the Government to meet their external financing needs. 

46. 

For some purposes a more useful ratio is that for general government^) 
expenditure on goods and services. This ratio rose from 22$ per cent of G D  
P in 
1971-72 to 27 per cent in 1975-76, and fell to 26 per cent in 1976-77. On either basis there was a sharp increase up to 1975-76 followed by some fall last year. 

Table 7 gives a run of figures. 

1
 To calculate these ratios total public expenditure is taken at current prices (or, for future years, in cost terms) and increased by an estimate of the value of government capital assets consumed during the year to make the figures comparable with the figures of GDP. The latter are measured at market prices (inclusive of indirect taxes and net subsidies) because this is the valuation basis of the public expenditure figures. The provision for capital con­
sumption was included in the figures for government consumption and G D P this year for the first time in place of the former concept of notional or imputed rent on buildings owned and occupied by the Government. 

## Ratios Of Public Expenditure To Gdp At Market Prices

|                    | TABLE 7     | per cent    |
|--------------------|-------------|-------------|
| Tota               | Total publi | public      |
| expenditure        |             |             |
| General government |             |             |
| expenditure on     |             |             |
| goods and services |             |             |
| 1971-72            |             |             |
| 38                 |             |             |
| 22i                |             |             |
| 1972-73            |             |             |
| 39                 |             |             |
| 22i                |             |             |
| 1973-74            |             |             |
| 41                 | 24          |             |
| 1974-75            |             |             |
| 45i                |             |             |
| 26                 |             |             |
| 1975-76            |             |             |
| 46                 | 27          |             |
| 1976-77            |             |             |
| 44J                | 26          |             |

47. 

On present expenditure plans and the illustrative assumptions on G D  
P 
growth made in paragraph 6, the ratios would tend downwards over the planning period-especially the general government goods and services ratio. The growth of transfer payments in the total is likely to keep the ratio of total public expenditure to G D  
P well above what it was in the early 1970s. 

## The Economic Context

48. 

In all industrialised countries the period since the oil price increases in late 1973 has been marked by high levels of unemployment and by rates of inflation which have remained high by previous standards. The persistence of inflation and, in many cases, the external financing problems created by the oil producers' surpluses have inhibited actions by governments to stimulate activity. 

Except in the United States, recovery from the recession has been hesitant and insufficient to stem the tide of rising unemployment. World trade has been depressed. 

49. 

In spite of this, considerable progress was made in 1977 in carrying through the adaptation of the  U K economy, and in particular in removing the financial imbalances that had proved so disruptive in 1976. The current account of the balance of payments moved into surplus, helped by the increasing flow of North Sea oil and an improvement in the terms of trade but also by a strong rise in the volume of exports. The rate of inflation decelerated. Confidence returned to the financial markets and was reflected both in lower interest rates and the strength of sterling. 

50. 

In contrast to the financial indicators the real economy was sluggish. 

It became both feasible and desirable to give a stimulus to activity. In October the Chancellor of the Exchequer announced measures estimated to raise the rate of growth by about 1 per cent in 1978, to 31 per cent. He emphasised that attainment of this faster growth rate would depend on an average earnings rise in the current pay round consistent with the Government^ guidelines, that is, not more than 10 per cent. Any faster rise in earnings would reduce growth by its adverse effects on confidence, interest rates and competitiveness. 

51. 

The uncertainty over the future rate of inflation poses the major question mark over the medium-term prospects for the economy. A second uncertainty, partly linked with inflation, concerns the growth of productivity, and hence of the economy's productive potential. Over the 25 years or so up to the beginning of the recent recession the trend rate of growth of gross domestic product was 2f per cent a year. Over the past four years output has been virtually flat, and there has been almost no growth in recorded productivity. It is impossible to say how much of this absence of growth of productivity is cyclical—and so will be made good as output recovers—and how much it reflects a downward shift in the underlying growth of productivity. There are some grounds for thinking that the large changes in energy prices in 1973 and the low levels of investment in recent years may affect the future growth of productivity. This is an uncertain assumption, but, even allowing for the faster growth of labour supply and the contribution made by the rising output of North Sea oil, in the light of the available evidence it would be imprudent to count on a faster growth of productive potential than 3 per cent a year. 

52. 

The economy, however, has excess capacity, which should permit for a period a rate of growth above that of productive potential. The extent of this slack, and the pace at which it can be taken up, are not easy to determine. The unemployed capacity—both labour and plant—is unevenly distributed, and there are physical constraints on the pace at which manufacturing output can grow without leading to over-heating in some sectors and a sharp worsening of the trade balance. It is essential to aim at a rate of growth that can be sustained over a number of years. 

53. 

That rate of growth will be largely determined by developments in three areas—inflation, productivity and the growth of the world economy. On the last of these, concerted efforts are needed to raise demand and bring down unemploy­
ment in the industrialised countries; but the persisting problems of inflation and the OPEC surplus make it unlikely that action taken in the near future will be sufficient to return world trade to the growth rate seen on average in the decade before the oil price rise. 

54. 

In this situation it is more than ever important for British industry to improve its competitiveness both by containing costs and by raising productivity. 

Only in this way can both high employment and an external current account surplus sufficient for our needs be achieved. 

55. 

Provided inflation is contained and there is some recovery in world trade, the economy should be able to grow at above its past trend rate. But on present prospects a marked improvement in industrial performance would be necessary to sustain a growth rate above 31 per cent over the next few years. 

The aim must be to achieve such an improvement; but it cannot be assumed in advance as a basis for planning public expenditure. A growth rate of 31 per cent would be better than has been achieved on average since the war. But with the current degree of unemployment and the bonus of North Sea oil it would be disappointing if this were the limit. It should bring down unemployment, but the reduction would be gradual. Even growth of 31 per cent, however, cannot be taken for granted unless inflation is controlled. 

56. 

Table 8 provides an illustrative projection of a pattern of demand that might be associated with a growth of 3£ per cent in G D  
P and a growth of about 2 per cent in the volume of public expenditure on goods and services. 

Table 8 sets this out in a rather longer perspective, covering the decade before the oil price rise and the years of recession and adjustment after it. The changes shown for 1977-82 are not forecasts: they are simply intended to illustrate one possible pattern of expenditure that would be consistent with the assumed growth of output. 

(average annual % changes at 1970 prices) 
| 1964-73                                     | 1973-77                 | 1977-82                 | 1973-82     |
|---------------------------------------------|-------------------------|-------------------------|-------------|
| Consumers                                   | Consumers' expenditure^ | expenditure^)           |             |
| 2i                                          |                         |                         |             |
| -                                           | t                       |                         |             |
| 3i                                          |                         |                         |             |
| l i                                         |                         |                         |             |
| Publi                                       | Public authorities      | authorities' consumptio | consumption |
| Gross fixed investment                      |                         |                         |             |
| 31                                          | - 3                     | i                       |             |
| 7                                           |                         |                         |             |
| 2i                                          |                         |                         |             |
| Increase in stock levels                    |                         |                         |             |
| 3                                           |                         |                         |             |
| 1                                           |                         |                         |             |
| 3f                                          |                         |                         |             |
| 2J                                          |                         |                         |             |
| Exports of goods and services               | 6i                      |                         |             |
| 4i                                          | 7                       |                         |             |
| 5J                                          |                         |                         |             |
| Total final expenditure                     |                         |                         |             |
| 3j                                          |                         |                         |             |
| t                                           |                         |                         |             |
| i                                           |                         |                         |             |
| 4f                                          | 2i                      |                         |             |
| Imports of goods and services               |                         |                         |             |
| 6                                           | 1                       |                         |             |
| 8i                                          |                         |                         |             |
| 5i                                          |                         |                         |             |
| Gross domestic product at market prices ... | 3                       | 0                       |             |
| 3i                                          |                         |                         |             |
| 2                                           |                         |                         |             |
| Gross domestic product at factor cost       |                         |                         |             |
| 21                                          |                         |                         |             |
| 0                                           |                         |                         |             |
| 3*                                          | 2                       |                         |             |

1
Including consumption financed by public expenditure on transfers. 

57. 

Table 8 brings out the contrast between the trends in the years before 
1973 and developments in the past four years. Between 1973 and 1977 there was no change in output and real national disposable income fell by 2"3 per cent, reflecting the adverse movement in the terms of trade. Whereas public and personal consumption had been growing more or less in line in the earlier period, they diverged after 1973: personal consumption actually fell between 1973 and 
1977 while public authorities consumption rose at an average annual rate of 
2
-
J per cent. The fall in real take-home pay was even sharper than the fall in consumption, which was moderated by substantial increases in social security benefits. Total public expenditure, in cost terms, rose at an average rate of 
00 per cent a year between 1973-74 and 1977-78. Investment, public and private, fell during the period. But there was a substantial improvement in the balance of payments—from a current account deficit of almost £1 billion in 1973 (and 
£3-5 billion in 1974) to a surplus in 1977. 

58. 

Along with a satisfactory balance of payments, the first claim on higher output must be investment. A rise in the proportion of national income devoted to industrial investment is essential both for underpinning the faster growth rate assumed and more generally for increasing industrial efficiency and providing more employment. 

59. 

After meeting these needs for industrial investment a 3$ per cent growth of output would provide more resources for public and private con­ sumption and other investment than has been available in the past. On the illustrative projections above, a growth of 2 per cent a year in public expenditure on goods and services and the rise in transfer payments in the public expenditure plans would permit personal consumption to grow by around 3f per cent a year. This would be considerably above the past trend, but would still leave the average increase in personal consumption in the years 1973-82 at under 
2 per cent, compared with an average increase in public authorities' consumption of 2\ per cent over the same period. 

## Revenue Projections And General Government Balance

60. 

Table 9 gives projections of the revenue and expenditure, and of the financial balance and borrowing requirement, of general government for the first three years of the survey period. The projections relate to the borrowing requirement of general government (ie central and local government) rather than the more familiar concept of the public sector borrowing requirement, which also includes borrowing by nationalised industries and other public corporations from sources outside government. The definition of public expenditure in these White Papers is now close to that of general government expenditure. The figures in the table are on the basis used by the Central Statistical Office for general government receipts and expenditure, as published in "Financial Statistics". 

## General Government Account

£ billion at 1976-77 prices 
1976-77 
1977-78 
1978-79 
1979-80 
Receipts 
36-8 
36-2 
38-2 
40-4 
1 Taxes on income and expenditure 
0-9 
0-8 
0-7 
0-7 
2 Capital taxes 
... 
... 
8-8 
8-4 
80 
8-3 
3 National insurance contributions^) 
3-1 
2-9 
30 
30 
4 Other receipts 
2-4 
2-6 
2-6 
2-4 
5 Interest receipts 
Total receipts 
520 
50-9 
52-5 
54-8 
Expenditure 
30-2 
19-5 
32-5 
19-3 
30-4 
20-9 
0-7 
- 1  
0 
5-9 
31-3 20-9 
1-4 
- 1  
0 
5-6 
5-8 
5-7 
1 Expenditure on goods and services 
2 Grants and subsidies(2) 
3 Contingency reserve 
4 Shortfall(3 ) 
5 Interest payments 
Total expenditure 
57-5 
55-5 
56-9 
58-5 
Financial balance 
-5-5 
-4-6 
-4-4 
-3-3 
Net lending and miscellaneous capital receipts, 
etc 
-1.8 
-0-9 
- 1  
0 
-1-0 
General government borrowing requirement^) 
-7-3 
-5-5 
-5-4 
-4-3 

1 Includes national health service and redundancy and maternity fund contributions. 2 Includes increase in book value of stocks. 

3 See paragraph 63. 

4 Minus sign indicates a borrowing requirement. 

61. 

The projections for 1977-78 and 1978-79 are consistent with the fore­
casts for the public sector borrowing requirement published on 26 October. 

For 1979-80, they are based on the assumption that G D  
P will continue to grow at 3J per cent and that private sector expenditure will be sufficient to produce a level of demand consistent with that growth rate. The figures for 
1979-80 are thus not forecasts, but illustrations of what might be consistent with one assumption concerning the growth of GDP. 

62. 

The figures of revenue for 1977-78 and 1978-79 are based on the existing tax rates and the levels of personal allowances announced by the Chancellor of the Exchequer on 26 October 1977. The projections for 1979-80 
assume existing tax rates and an increase in personal allowances in line with the forecast rise in retail prices during 1978, following the provisions of the 1977 
Finance Act. 

63. 

The figures for public expenditure are based on current programmes, but a number of adjustments have been necessary to make the series consistent with the national accounts concepts used by the CSO. As the table shows the balance of receipts and expenditure, it is necessary also to make some allowance for the likelihood that, for the reasons explained in paragraphs 21-22 above, the outturn of expenditure programmes as a whole will fall somewhat below the planned level. Past experience shows that this kind of underspending varies considerably and cannot be closely predicted for any particular year. For 
1977-78, the expenditure figures in this White Paper have already been revised downwards on this account. For 
1978-79 and 
1979-80, the allowance represents only a very broad judgment about the possible outcome, having regard to the experience of the previous two years, but assuming some improve­
ment in the match between outturn and plans as a result of greater familiarity with the new control and monitoring systems. 

64. 

As with the forecast published on 26 October the projections assume growth of average earnings at 10 per cent a year and an effective exchange rate index of 62£. Both expenditure and revenue are expressed at 1976-77 prices. 

65. 

Forecasts of borrowing requirements are subject to a wide margin of error. The borrowing requirement is the difference between two large flows, and proportionately small changes in either can be large in relation to the borrowing requirement itself. 

66. 

The projections show total tax revenue (at 1976-77 prices) declining in the current year, reflecting the changes in tax rates and allowances during 
1977, but thereafter increasing faster than GDP. An important element in this rise is the growing volume of tax and royalty revenues arising from North Sea oil. These account for approximately £1-4 billion of the £4-1 billion projected rise in tax revenue between 1977-78 and 1979-80. The fall in the real value of social security contributions between 1976-77 and 1977-78 is largely accounted for by the movement of real earnings. For future years it has been assumed that the annual receipts and outgoings of the National Insurance Fund are roughly in balance. 

67. 

Total general government receipts are projected to rise by about 
8 per cent between 1977-78 and 1979-80, and total expenditure by 5 per cent. Thus, at unchanged tax rates, the general government borrowing require­
ment, at 1976-77 prices, is projected to fall through the period from about 
£5-5 billion in 1977-78 to about £4-5 billion in 1979-80. 

## Conclusion

68. 

An overall growth of public expenditure along the lines detailed in this White Paper should permit a sustained improvement in standards, while allowing at the same time a substantial growth in personal consumption after four years of no growth. The illustrative figure of 3£ per cent annual growth of gross domestic product used in the projections above is, it must be emphasised, not a prediction. If industrial performance improves it should be possible to sustain a faster growth than this. But, equally, a growth of 3£ per cent cannot be counted upon if inflation is not contained. There is now, thanks to North Sea oil and the adjustments carried out to the economy in the past year, an opportunity to move to a higher rate of growth than has been achieved for many years. But it is only an opportunity. To make it a reality is the major task now facing government, management and unions, and the nation as a whole. 

1972-73 
1973-74 
1974-75 
1975-76 
1976-77 
1977-78 
1978-79 
1979-80 
1980-81 
1981-82 
6,451 
6,370 
6,123 
6,445 
6,361 
6,255 
6,289 
6,494 
6,660 
6,660 
1 Defence 
2 Overseas aid and other overseas 
1,185 
1,235 
1,183 
1,008 
1,188 
1,722 
1,860 
1,351 
1,958 
1,962 
881 
997 
1,950 
1,761 
866 
654 
1,133 
706 
649 
642 
services 
3 Agriculture, fisheries, food and 
forestry 
4 Trade, industry and employment: 
636 
747 
2,271 
--174 
1,892 
874 
3,267 
792 
2,702 
- 4  
4 
2,632 
852 
3,435 
145 
2,798 
-114 
2,589 
2,5430
2,5430) 
- 3  
0 
2,547 
2,085 
2,516 
3,125 
2,608 
1,527 
364 
2,719 
4,127 
2,833 
1,610 
1,116 
3,079 5,601 
2,832 
1,734 
1,347 
3,173 
4,914 
2,820 
1,851 
330 
2,784 4,870 
2,682 
1,895 
420 
2,590 
4,475 
2,532 
1,906 
1,350 
2,563 
4,702 
2,594 
1,948 
1,550 
2,583 4,814 
2,626 
1,947 
1,350 
2,572 
4,948 
2,643 
1,970 
1,100 
2,554 4,995 
2,657 
1,992 
Refinance of home shipbuilding 
and fixed rate export credit 
Other 
5 Government lending to nation­
alised industries 
6 Roads and transport 7 Housing 
8 Other environmental services 
... 
9 Law, order and protective services 
10 Education and libraries, science 
8,319 
8,010 
8,102 
7,600 
8,090 
8,156 
8,293 
8,143 
8,205 
8,255 
social 
and arts 
11 Health 
and 
personal
services 
12 Social security 13 Other public services 
6,863 
10,674 
740 
6,514 
10,675 
982 
6,994 
11,368 
804 
7,390 
13,226 
844 
7,238 
12,309 
888 
7,287 
12,717 
848 
7,537 
14,063 
854 
7,652 
14,172 
865 
7,776 
14,458 
865 
7,927 
14,602 
883 
14 Common services 15 Northern Ireland 
802 
1,397 
803 
1,468 
800 
1,676 
903 
1,725 
896 
1,737 
883 
1,741 
910 
1,815 
952 
1,811 
986 
1,796 
1,022 1,808 
Total programmes 
51,366 
53,033 
57,703 
58,194 
56,201 
54,209 
58,100 
58,712 
59,310 
59,575 
Contingency reserve 
-
-
-
-
-
-
750 
1,500 
1,750 
2,000 
Total 
51,366 
53,033 
57,703 
58,194 
56,201 
54,209 
58,850 
60,212 
61,060 
61,575 
Debt interest 
913 
1,082 
907 
1,169 
1,662 
1,900 
2,000 
1,900 
1,800 
1,600 
Total 
52,279 
54,115 
58,610 
59,363 
57,863 
56,109 
60,850 
62,112 
62,860 
63,175 
of 
nationalised 
in­
Total programmes, contingency re­
serve and overseas and market borrowing
dustries 
51,603 
54,427 
58,742 
59,079 
57,635 
54,739 
58,550 
59,612 
60,860 
61,325 

1 Net of £559 million for proceeds of sale of shares in the British Petroleum Company. 

1972-73 
1973-74 
1974-75 
1975-76 
1976-77 
1977-78 
1978-79 
1979-80 
1980-81 
1981-82 
Current expenditure 
Wages and salaries 
15,325 
15,932 
16,683 
17,409 
17,643 
17,762 
18,004 
18,142 
18,258 
18,416 
9,555 4,576 
13,358 
1,059 
552 
9,333 
4,098 
13,888 
1,092 
847 
9,411 
3,534 
14,650 
976 
1,034 
10,169 
3,005 
16,345 
1,080 
1,558 
9,801 
3,115 
15,797 
1,053 1,440 
9,529 
3,290 
15,602 
1,047 1,342 
10,088 
3,058 
16,155 
1,059 1,556 
9,363 
5,520 
12,295 
995 
386 
8,886 
2,122 
11,641 
859 
487 
9,148 
3,624 
11,641 
939 
631 
Other 
current 
expenditure 
on 
goods and services 
Subsidies 
Current grants to persons Current grants to private bodies ... Current grants abroad 
Total excluding debt interest ... 
39,320 
41,916 
45,241 
46,509 
46,901 
47,366 
48,812 
49,348 
50,175 
50,573 
for­
6,450 
7,115 
6,909 
7,014 
6,296 
5,116 
5,363 
5,420 
5,435 
5,462 
Capital expenditure 
Gross domestic fixed capital
mation 
Increase in value of stocks 
130 
53 
38 
68 
73 
83 
88 
69 
45 
45 
1,546 
236 
1,560 
259 
1,265 
484 
1,396 
22 
1,556 
122 
1,541 
151 
1,442 
1,240 
1,378 
161 
1,513 
560 
1,585 
735 
Capital grants 
Net lending to the private sector Net lending to nationalised in­
552 
727 
1,737 
1,897 
1,678 
1,419 
1,230 
1,424 
452 
2,129 
179 
120 
96 
10 
81 
74 
74 
74 
236 
301 
dustries and some other public 
corporationsC) 
Net lending to overseas govern­
ments 
Drawings from United Kingdom 
international 
66 
93 
130 
157 
119 
142 
167 
200 
200 
200 
subscriptions 
to
lending bodies 
Other net lending and investment 
abroad 
702 
757 
762 
726 
593 
-109 
150 
-
3 
-
76 
-
11 
26 
-55
-556 
10 
10 
13 
4 
12 
333 
199 
411 
16 
6 
3 
89 
71 
126 
Cash 
expenditure 
on 
company 
securities (net) 
Capital transfers abroad 
-
2 
- 
-
7 
- 
Total 
12,047 
11,118 
12,462 
11,686 
9,300 
6,843 
9,288 
9,365 
9,136 
9,002 
Contingency reserve 
-
-
-
-
-
-
750 
1,500 
1,750 
2,000 
Total 
51,366 
53,033 
57,703 
58,194 
56,201 
54,209 
58,850 
60,212 
61,060 
61,575 
Debt interest 
913 
1,082 
907 
1,169 
1,662 
1,900 
2,000 
1,900 
1,800 
1,600 
Total 
52,279 
54,115 
58,610 
59,363 
57,863 
56,109 
60,850 
62,112 
62,860 
63,175 

1
The principal corporations other than nationalised industries are the National Enterprise Board and the Scottish and Welsh Development Agencies. 

A list is given in part 6. 

1972-73 
1973-74 
1974-75 
1975-76 
1976-77 
1977-78 
1978-79 
1979-80 
1980-81 
1981-82 
Central government 
Defence and overseas services 
... 
7,599 
7,559 
7,272 
7,418 
7,527 
7,589 
7,983 
8,324 
8,589 
8,592 
634 
2,469 
641 
2,426 
646 
2,539 
698 
2,896 
859 
1,670 
1,126 3,140 
1,747 
3,458 
1,935 
4,254 
986 
4,110 
884 
2,987 
1,100 1,054 
2,254 
1,350 1,075 
2,221 
1,550 
1,092 
2,120 
1,350 1,104 
2,160 
420 
1,120 
2,155 
330 
1,186 
2,066 
1,347 
1,405 1,456 
1,116 1,408 
1,588 
364 
1,134 1,082 
2,085 
995 767 
1,305 
6,712 
14,602 
1,279 
6,594 
14,458 
1,261 
6,499 
14,174 
1,253 
6,406 
14,063 
1,205 
6,287 
13,226 
1,350 
6,191 
12,717 
1,355 6,124 
12,309 
1,331 
5,950 
11,369 
1,386 
5,905 
10,674 
1,310 
5,695 
10,675 
3,848 
3,787 
3,776 
3,746 
3,614 
3,613 
3,660 
3,437 
3,045 
3,048 
Agriculture, fisheries, food 
and 
forestry 
Trade, industry and employment 
Government lending to national­
ised industries 
Roads and transport Housing Education and libraries, science 
and arts 
Health and personal social services 
Social security Other programmes including Northern Ireland 
Total programmes 
36,046 
36,244 
39,661 
40,280 
39,245 
38,126 
41,660 
41,982 
42,419 
42,569 
1,472 
2,457 
1,974 1,501 
1,470 
2,446 
1,961 1,487 
1,466 
2,417 
1,912 
1,475 
1,428 
2,314 
1,888 
1,474 
1,445 
2,135 
1,825 
1,455 
1,562 
2,524 
1,965 
1,454 
1,731 
3,104 
2,034 
1,413 
1,643 
3,653 2,062 
1,330 
1,584 
2,838 
1,916 
1,249 
1,520 
2,240 
1,767 
1,195 
6,950 
1,215 
164 
6,925 
1,183 
165 
6,882 
1,152 
165 
6,848 
1,132 
161 
6,942 
1,096 
148 
6,805 
1,103 
158 
6,964 
1,113 
161 
6,824 
1,044 
149 
6,703 
958 
122 
6,290 
819 
102 
255 
252 
250 
243 
234 
219 
219 
200 
271 
403 
Local authorities 
Roads and transport 
Housing 
Other environmental services Law, order and protective services Education and libraries, science 
and arts 
Personal social services 
... 
Other programmes (Great Britain) 
Local 
authorities 
in 
Northern 
Ireland 
Total programmes 
... 
14,336 
15,642 
16,904 
16,739 
15,910 
15,161 
15,488 
15,718 
15,889 
15,990 
Certain public corporations^) 
985 
1,147 
1,138 
1,176 
1,047 
922 
952 
1,012 
1,002 
1,015 
59,575 
2,000 
59,310 
1,750 
58,712 
1,500 
 
... 
51,366 
53,033 
57,703 
58,194 
56,201 
54,209 
58,100 
750 
Total programmes
Contingency reserve 
61,575 
1,600 
61,060 
1,800 
60,212 
1,900 
58,850 
2,000 
54,209 
1,900 
56,201 
1,662 
58,194 
1,169 
57,703 
907 
53,033 
1,082 
51,366 
913 
Total 
Debt interest 
Total 
52,279 
54,115 
58,610 
59,363 
57,863 
56,109 
60,850 
62,112 
62,860 
63,175 

1
 Corporations whose capital expenditure is included in public expenditure; mainly the water authorities and housing corporations. A list is given in part 6. 

£ million at 1977 survey prices 
1972-7? 
1973-74 
1974-75 
1975-76 
1976-77 
1977-78 
1978-79 
1979-80 
1980-81 
1981-82 
17,428 
20,624 
17,261 
20,489 
16,946 
20,105 
16,626 
20,024 
16,187 18,789 
16,381 18,946 
15,659 
18,115 
16,253 18,376 
15,396 
16,05
16,058 
15,137 14,49
14,493 
1,41
1,416 
1,311 
1,39
1,394 
1,296 
1,419 
1,293 
1,455 
1,319 
1,297 
1,233 
1,650 
1,129 
1,525 
1,247 
1,675 
1,28
1,281 
1,502 
1,20
1,204 
1,684 1,28
1,285 
1,419 
1,678 
1,897 
1,737 
727 
552 
452 
1,230 
1,424 
2,129 
37
371 
300 
322 
499 
-459 
1,448 
945 
1.384 
1,950 
1,318 
Central government 
Current: 
Goods and services Subsidies and grants 
Capital: 
Goods and services 
Grants Net 
lending 
to 
nationalised 
industries and 
some 
other 
public corporations1 
Other net lending and capital 
transactions 
Total excluding debt interest 
36,046 
36,244 
39,661 
40,280 
39,244 
38,126 
41.660 
41,982 
42,419 
42.570 
11,085 
1,340 
10,996 
1,300 
11,156 
1,364 
10,907 
1,255 
10,792 
1,247 
10,789 
1,136 
10,386 
1,080 
10,711 
1,169 
9,074 
616 
9,685 
777 
3,192 
240 
3,218 
241 
3,214 
241 
3,012 
157 
3,127 
229 
3,874 
128 
4,476 
302 
4,403 
135 
4,498 
236 
4,017 
227 
- 3  
0 
- 1  
1 
5 
14 
- 1  
6 
- 4  
7 
321 
704 
402 
402 
Local authorities 
Current: 
Goods and services Subsidies and grants 
Capital: 
Goods and services Grants Net lending and other capital 
transactions 
Total excluding debt interest 
14,336 
15,642 
16.904 
16,739 
15,910 
15,161 
15,488 
15,718 
15,889 
15,990 
868 
8 
877 
8 
890 
6 
878 
8 
869 
8 
1,030 
2 
970 
4 
947 
2 
1,017 
2 
879 
1 
127 
126 
130 
75 
72 
26 
144 
189 
128 
105 
Certain public corporations2 
Capital: 
Goods and services Grants Net lending and other capital 
transactions 
Total 
985 
1,147 
1,138 
1,176 
1,047 
922 
952 
1,012 
1,002 
1,015 
on 
pro­
51,366 
53,033 
57,703 
58,194 
56,201 
54,209 
58,100 
58,712 
59,310 
59,575 
Total 
expenditure
grammes 
Contingency reserve 
-
-
-
-
-
-
750 
1,500 
1,750 
2,000 
Total 
51,366 
53,033 
57,703 
58,194 
56,201 
54,209 
58,850 
60,212 
61,060 
61,575 
Debt interest 
913 
1,082 
907 
1,169 
1,662 
1,900 
2,000 
1,900 
1,800 
1,600 
Total 
52,279 
54,115 
58,610 
59,363 
57,863 
56,109 
60,850 
62,112 
62,860 
63,175 

1 See note 1 to table 11. 

2 See note 1 to table 12. 

## C O M P A R I S O N Of P L A N N E D Expenditure A N D Estimated O U T T U R N In 1976-77 And 1977-78 By Spending A U T H O R I T Y A N D E C O N O M I C Category

£ million at 1977 survey prices 
1976 
-77 
1977-78 
Percentage 
change 
Difference 
Percentage 
change 
Difference 
Central government 
Current: 
Goods and services 
-557 
- 
3-3 
-148 
- 
0-9 
Subsidies and grants 
-317 
- 
1-7 
- 
68 
- 
0-4 
Capital: 
Goods and services 
- 
24 
- 
1-5 
- 
69 
- 
5-0 
Grants 
- 
71 
- 
5-4 
-1-5-6 
4­ 4-7 
- 51-2 
-592 
-499 
-41-7 
- 15-2 
-168 
-649 
Net lending to nationalised 
industries and some other 
public corporationsO 
Other net lending and capital 
transactions 
Total 
-1,729 
- 
4-2 
-1,377 
- 
1-6 
Local authorities 
Current: 
Goods and services 
-274 
- 
2-5 
-106 
- 
10 
- 
46 
- 
80 
-
 
3-9 
-
 
6 0 
-
 
1-6 
- 
84 
-
 
2-7 
- 
61 
Subsidies and grants 
Capital: 
Goods and services 
Grants 
- 
58 
- 31-2 
- 
20 
- 11-3 
Net lending and other capital 
transactions 
- 
62 
+ 65 
Total 
-501 
- 
3-1 
-225 
- 
1-5 
Certain public corporationsf) 
Capital: 
Goods and services 
-101 
- 
9-4 
- 
37 
- 
4 0 
Grants 
Net lending and other capital 
transactions 
-
3 
- 
4-4 
- 
36 
- 600 
Total 
-104 
- 
90 
- 
73 
- 
7-4 
Total expenditure on programmes 
-2,333 
- 
3-8 
-1,675 
- 
3 0 
Contingency reserve 
-750 
Total 
-2,425 
- 4-3 

1 See note 1 to table 11. 

2 See note 1 to table 12. 

Pro­
grammeC1) 1976-77 
1977-78 
1978-79 
1979-80 
1980-81 
4  
4 
4  
6 
466 
474 
463 
+ 14 
4 
8 
4  
4 
4-4 
4  
4 
4  
4 
12 
A. 
March 1977 Budget measures 
Employment schemes!2) 
Inner cities (construction) Effect of tax changes on child 
benefit tax offset 
+ 81 
4144 
410 
4-8 
B. 
Statement of 25 May 1977 
1977 uprating of social security 
benefits 
12 
446 
4-120 
4120 
4120 
4198 
4200 
4131 
4 
418 
412 
4-4 
10 
C. 
Statement of 29 June 1977 Employment measures 
Associated education expendi­
ture 
4  
6 
-
4  
6 
4-135 
4212 
4216 
-
4  
3 
4134 
+19 
3 
4 
 
... 
 free 
429 
4302 
432 
4308 
429. 
4314 
+ 17 
4-7 
10 
12 
D. 
Statement of 15 July 1977 
Milk subsidy 
Electricity discount scheme
Extension of eligibility for
school meals 
Child benefit 
Construction 
various 
493 
4270 
4346 
4340 
4331 
4200 
411 
411 
412 
4369 
420. 
4  
2 
410 
410 
412 
411 
4  
9 
412 
various 
2 
4 
9 
10 11 
Statement of 26 October 1977 Construction 
Overseas aid 
Assistance to small firms Law and order Teachers in deprived areas 
Health authorities 
4  
6 
4  
6 
4  
6 
497 
419 
418 
414 
12 12 
4-14 
414 
414 
4  
3 
12 
Local authorities personal social 
services 
Christmas bonus for pensioners 
Uprating of mobility allowance Effect of tax changes on child 
benefit tax offset 
4100 
4457 
4272 
471 
4138 
4148 
4154 
4108 
4  
7 
 
... 
various 
F. 
Other announced changes
4946( 3 ) 
4258 ­
- 1 2 ( 3 ) 
-2,375 
-2,393 
 
various 
G. 
Other changes
H. 
Total changes to programmes ... 
-2,386 
-1,764 
41,614 
41,090( 3 ) 
41,830( 3 ) 
-750-
-275 
n.a. 
n.a. 
I. 
Change to Contingency reserve 
-
J. 
Total change 
- 2,386 
-2,514 
41,339 
- 
- 
K. 
Change to debt interest 
- 9 8 
-600 
-500 

1 In addition to the programmes shown, many of these changes affect expenditure on programme 1 5  
-
Northern Ireland. 

2 Includes employment package announced on 3 March. 3 Excludes refinancing of home shipbuilding lending and fixed rate export credits and government lending to nationalised industries for which no estimates were published in Cmnd 6721. 

£ million at 1977 survey prices 

1976-77 
-170 
Defence Statement of 26 October: construction Other changes 
-170 
- 
-108 
Overseas aid and other overseas services Statement of 26 October Butter subsidy-EEC contribution (27 April) 
Other changes(2) 
-108 
- 
-t-6 
- 
- 
Agriculture, fisheries, food and forestry Statement of 15 July: milk subsidy 
Other announced changes: 
Pig subsidy (20 January) Private woodland grants (30 March) Butter subsidy (27 April) Potato support (5 October) 
- 2 2 
Other changes(2) 
- 1 6 
Trade, industry and employment March 1977 Budget measures: employment 
schemes(s) 
Statement of 29 June: employment measures 
Statement of 15 July: electricity discount 
scheme 
- -
- 
Statement of 26 October: 
Construction Assistance to small firms 
Other announced changes: 
Marathon: assistance with rig (22 Decem­
ber 1976) 
Redundancy Rebates Bill (7 February) ... Interim strategy for shipbuilding 
-
-
(24 February) 
Coal for Scottish power stations 
(12 March) 
Extension of Price Commission powers 
(1 April) 
Regrading assisted areas (14 April) 
Kirkby Manufacturing and Engineering 
- -
-
- 
- 5 7 
-357 
Ltd (26 April) 
Rephasing of grants to Govan Ship­
builders (29 June) 
Instrumentation and automation industry 
(9 August) 
... 
Energy conservation 
Other changes: 
Refinancing of home shipbuilding lending 
and fixed rate export credits 
Other 
-414 
1977-78 
1978-79 
1979-800) 1980-8  
K 1 ) 
- 7 1 
4-8 4-4 
- 5  
0 
4-122,. 
- 7 1 
4-12 : 
- 5  
0 
4-122 
- 5 1 
-117 
4-20 
- 2 
- 
- . 
4-29 
- 1 6 
4-28 
-168 
4-47 
- 1 6 
4-28 
- 
- -
- 
4-134 ­
4-10 
- 
4-1 -
4-1 
4-2 
4-3 
4-68 
4-3 
4-36 
4-2 . 
—. ­
4-122 
4-83 
4-78' 
+251 
4-128 
4-84 
4-80 
4-63 
4-6 
4-66 
4-6 
4-4 
4-131 
4-200 
4-198 
4-19 
4-3 
-
­
4-18 
4-8 
4-2 
- 
- 
4-6 4-9 
- 1 
- 1 
4-2 
4-2 
4-2 
-
4-14 
-
­
4-7 
4-7 " 
4-7 
4-7 
4-2 4-1 
4-5 
­
-
4-1 4-2 
-
-
-
-
-
-
- 
4-1 
4-2 
4-2 
4-3 
4-7 
4-9 
-237 
n.a. 
n.a. 
-577 -332 
4-58' 
4-137(4) 
4-126C) 
-793 
4-73 
4-368(9 
4-347C) 

## Table 16 (Continued) £ Million At 1977 Survey Prices

1976-77 
1977-78 
1978-79 
1979-800 1980-810 
5. Government lending to nationalised industries 
-587 
-440 
4319 
n.a.( 6 ) 
n.a.0 
6. Roads and transport 
Statement of 15 July: construction 
- 
4 4 
- 
- 
- 
Statement of 26 October: construction 
... 
428 
41
412 
Other announced changes: 
Airport security (18 February) I M C O ubilding (26 October) 
Other changes 
... 
- 
.— 
-273 
-273 
- 9  
6 
466 
435 
438 
7. Housing 
Statement of 15 July: construction 
Statement of 16 October: construction 
... 
- 
- 
Other announced changes: 
Housing improvements (2 May) 
- 
4 30 
- 
- 
- 
lending etc, 
Local authority mortgage
Wales (20 June) 
etc, 
- 
4 2 
- 
- 
- 
Local authority mortgage lending
Scotland (30 June) 
National housing survey (6 July) 
- 
- 
- 
4 
1 
- 
- 
- — 
Additions offset by reductions in housing 
subsidies etc 
- 
- 3  
8 
- 1 
- 
- 
Energy conservation 
Other changes 
- 
-284 
- 
-311 
-284 
-264 
- 2  
3 
-279( 6 ) 
- 1 4 6  
0 
8. Other environmental services 
March 1977 Budget measures: inner cities 
construction 
- 
414 
474 
- 
- 
Statement of 15 July: construction 
415 
- 
- 
Statement of 26 October: construction 
... 
- 
449 
427 
Other changes 
-166 
- 4  
2 
421 
-133 
- 7  
3 
-166 
- 1  
3 
4144 
-106 
- 7  
3 
9. Law, order and protective services 
Statement of 26 October: 
Law and order measures 
- 
- 
410 
411 
411 
Construction 
- 
- 
4 9 
4 5 
Other changes 
- 3  
8 
- 1  
1 
439 
430 
459 
- 3  
8 
- 1  
1 
458 
446 
470 
10. Education and libraries, science and arts 
- 
- 
4 4 
412 
418 
Statement of 29 June: Holland report— 
associated education expenditure 
Statement of 15 July: 
Extension of eligibility for free school 
meals 
... 
- 
417 
429 
432 
429 
Construction 
- 
412 
- 
- 
- 
Statement of 26 October: 
Teachers in deprived areas 
Construction 
- — 
- 
- 
4 9 
- 
Energy conservation 
Other changes 
... 
- 
- 7  
6 
- 
-156 
- 7  
6 
-127 
490 
4121 
4145 
- 9 4 8 
439 
- 
4 4 
104 
- 1 1 
4 7 
427 
- 1  
1 
4 2 
447 
- 
4103 
4-47 
- 
- 
417
4172 
4 5 4 1 
428 
-223 
428 
- 4 1 0  
0 
428 
- 1 7 4  
0 
410 431 
411 416 
414 436 
412 
477 
4 5 
411 

## Changes To Expenditure P R O G R A M M E S Since C M N D

£ million at 1977 survey prices 
| 1976-77                                     | 1977-78                             | 1978-79        | 1979-800 1980-81O    |
|---------------------------------------------|-------------------------------------|----------------|----------------------|
| 11.                                         | Health and personal social services |                |                      |
| Statement of 15 July: construction          | ...                                 | -              | +15                  |
| Statement of 26 October:                    |                                     |                |                      |
| Health authorities                          | 4-12                                | +12            | +12                  |
| Local authorities' personal social services | -                                   | 4-6            | 4-6                  |
| Construction                                | -                                   | 4-40           | 4-20                 |
| Other announced changes:                    |                                     |                |                      |
| Withdrawal of NHS road traffic accidents    |                                     |                |                      |
| charges scheme (14 February)                | ...                                 | -              | 4-21                 |
| Energy conservation                         | -                                   | -              | 4-2                  |
| Other changes                               | - 7                                 | 2              | - 1                  |
| 12.                                         |                                     |                |                      |
| Social security                             |                                     |                |                      |
| March 1977 Budget measures:                 |                                     |                |                      |
| Effect of tax changes on child benefit tax  |                                     |                |                      |
| offset                                      |                                     |                |                      |
| -                                           |                                     |                |                      |
| 4-4                                         |                                     |                |                      |
| 4-4                                         |                                     |                |                      |
| 4-4                                         |                                     |                |                      |
| 4-4                                         |                                     |                |                      |
| Statement of 25 May: 1977 uprating of       |                                     |                |                      |
| benefits                                    |                                     |                |                      |
| 4-46                                        |                                     |                |                      |
| 4-120                                       |                                     |                |                      |
| 4-120                                       |                                     |                |                      |
| 4-120                                       |                                     |                |                      |
| Statement of 15 July: child benefit         |                                     |                |                      |
| -                                           |                                     |                |                      |
| 4-7                                         |                                     |                |                      |
| 4-314                                       |                                     |                |                      |
| +308                                        |                                     |                |                      |
| 4-302                                       |                                     |                |                      |
| Statement of 26 October:                    |                                     |                |                      |
| -                                           |                                     |                |                      |
| Christmas bonus for pensioners              |                                     |                |                      |
| 4-97                                        |                                     |                |                      |
| Uprating of mobility allowance              |                                     |                |                      |
| 4-14                                        | 4-18                                |                |                      |
| 4-19                                        |                                     |                |                      |
| Effect of tax changes on child benefit tax  |                                     |                |                      |
| offset                                      |                                     |                |                      |
| -                                           |                                     |                |                      |
| 4-3                                         |                                     |                |                      |
| 4-14                                        |                                     |                |                      |
| 4-14                                        |                                     |                |                      |
| 4-14                                        |                                     |                |                      |
| Other announced changes:                    |                                     |                |                      |
| -                                           |                                     |                |                      |
| Miscellaneous Provisions Bill (22 March)    |                                     |                |                      |
| 4-11                                        |                                     |                |                      |
| + 15                                        |                                     |                |                      |
| 4-15                                        |                                     |                |                      |
| 4-15                                        |                                     |                |                      |
| Other changes                               |                                     |                |                      |
| - 9                                         |                                     |                |                      |
| -222                                        |                                     |                |                      |
| 4-13                                        |                                     |                |                      |
| 4-244                                       |                                     |                |                      |
| 4-456                                       |                                     |                |                      |
| Other public services                       |                                     |                |                      |
| Statement of 26 October: construction       | ...                                 |                |                      |
| 4-2                                         |                                     |                |                      |
| Other changes                               |                                     |                |                      |
| - 3 3                                       | - 1 5                               |                |                      |
| 4-4                                         | 4-2                                 |                |                      |
| Common services                             |                                     |                |                      |
| Statement of 26 October: construction       | ...                                 |                |                      |
| 4-3                                         |                                     |                |                      |
| 4-4                                         |                                     |                |                      |
| Other changes                               |                                     |                |                      |
| - 4                                         | 3                                   |                |                      |
| 4-11                                        |                                     |                |                      |
| 4-22                                        |                                     |                |                      |
| 4-8                                         | 4-19                                |                |                      |
| Northern Ireland                            |                                     |                |                      |
| Announced                                   | changes:                            | consequentials | of                   |
| changes to GB programmes                    |                                     |                |                      |
| 4-1                                         |                                     |                |                      |
| 4-14                                        |                                     |                |                      |
| 4-33                                        |                                     |                |                      |
| 4-31                                        |                                     |                |                      |
| 4-24                                        |                                     |                |                      |
| Other changes                               |                                     |                |                      |
| - 9                                         | 8                                   |                |                      |
| - 2                                         | 3                                   |                |                      |
| 4-35                                        |                                     |                |                      |
| 4-28                                        | 4-37                                |                |                      |
| Total changes to programmes                 |                                     |                |                      |
| -2,386                                      |                                     |                |                      |
| -1,764                                      |                                     |                |                      |
| 4-1,614                                     |                                     |                |                      |
| 4-1,0900                                    |                                     |                |                      |
| 4-1,8300                                    |                                     |                |                      |

1 Cmnd 6721-1, paragraph 4, explained that the figures for 1979-80 and 1980-81 were even more provisional than usual, since they had not been further reviewed in the light of the developments which had led to the reductions in programmes for 1977-78 and 1978-79 announced on 15 December 1976. The changes for these years in this White Paper need to be read with this in mind. 

8 Increased expenditure on market regulation under the common agricultural policy, partly offset by reductions in net EEC contributions. 

3 Includes employment package announced on 3 March. 1 Excludes refinancing of home shipbuilding lending and fixed rate export credits for which comparable estimates were not published in Cmnd 6721. 

6 N o comparable estimates published in Cmnd 6721. 

* These changes are mainly due to changed forecasts of the need for housing subsidy (see part 2, chapter 7, paragraph 5). 

7 See footnote a to table 14. 

| - 7 2    | 4-35    |
|----------|---------|
| - 9      |         |
| - 5      | 4       |
| 4-494    |         |
| 4-723    |         |
| 4-930    |         |
| - 3 3    |         |
| - 1 5    |         |
| 4-2      |         |
| 4-4      |         |
| 4-2      |         |
| - 4      | 3       |
| 4-11     | 4-25    |
| 4-12     | 4-19    |
| - 9      | 7       |
| - 9      |         |
| 4-68     |         |
| 4-59     |         |
| 4-61     |         |
£ million at 1977 survey prices 
| 1976-77                             | 1977-78                    | 1978-79                   | 1979-80    | 1980-81    |
|-------------------------------------|----------------------------|---------------------------|------------|------------|
| A.                                  | March 1977 Budget measures |                           |            |            |
| Current: goods and services         |                            |                           |            |            |
| -1-4                                | -1-3                       |                           |            |            |
| subsidies and grants                |                            |                           |            |            |
| 4-63                                | 4-67                       | +10                       | 4-8        |            |
| Capital: goods and services         |                            |                           |            |            |
| + 14                                | 4-74                       |                           |            |            |
| +81                                 | +144                       | +10                       | 4-8        |            |
| B.                                  | Statement of 25 May 1977   |                           |            |            |
| Current: subsidies and grants       | 4-46                       | 4-120                     | 4-120      | 4-120      |
| C.                                  |                            | Statement of 29 June 1977 |            |            |
| Current: goods and services         | 4-1                        | 4-7                       | 4-14       | 4-17       |
| subsidies and grants                | 4-5                        | 4-127                     | 4-193      | 4-191      |
| Capital: goods and services         | 4-1                        | 4-5                       | 4-8        |            |
| 4-6                                 | 4-135                      | 4-212                     | 4-216      |            |
| D.                                  | Statement of IS July 1977  |                           |            |            |
| Current: goods and services         |                            |                           |            |            |
| 4-18                                |                            |                           |            |            |
| 4-29                                | 4-32                       |                           |            |            |
| 4-29                                |                            |                           |            |            |
| subsidies and grants                |                            |                           |            |            |
| -                                   |                            |                           |            |            |
| 4-161                               | 4-317                      | 4-308                     | 4-302      |            |
| Capital: goods and services         |                            |                           |            |            |
| -                                   |                            |                           |            |            |
| 4-51                                |                            |                           |            |            |
| -                                   | -                          | -                         |            |            |
| grants                              |                            |                           |            |            |
| -                                   |                            |                           |            |            |
| 4-20                                |                            |                           |            |            |
| -                                   | -                          |                           |            |            |
| -                                   |                            |                           |            |            |
| net lending and other capital trans |                            |                           |            |            |
| actions                             |                            |                           |            |            |
| -                                   |                            |                           |            |            |
| 4-20                                |                            |                           |            |            |
| -                                   | -                          |                           |            |            |
| ­                                    |                            |                           |            |            |
| -                                   |                            |                           |            |            |
| 4-270                               |                            |                           |            |            |
| 4-346                               | 4-340                      | f331                      |            |            |
| Statement of 26 October 1977        |                            |                           |            |            |
| Current: goods and services         |                            |                           |            |            |
| 4-42                                | 4-27                       |                           |            |            |
| 4-22                                |                            |                           |            |            |
| subsidies and grants                |                            |                           |            |            |
| -                                   |                            |                           |            |            |
| 4-100                               | 4-69                       | 4-54                      | 4-48       |            |
| Capital: goods and services         |                            |                           |            |            |
| -                                   | -                          |                           |            |            |
| 4-332                               | 4-189                      | 4-1                       |            |            |
| grants                              |                            |                           |            |            |
| -                                   | -                          |                           |            |            |
| 4-14                                | 4-2                        |                           |            |            |
| -                                   |                            |                           |            |            |
| -                                   |                            |                           |            |            |
| 4-100                               | 4-457                      | 4-272                     |            |            |
| 4-71                                |                            |                           |            |            |
| Other announced changes             |                            |                           |            |            |
| Current: goods and services         |                            |                           |            |            |
| 4-26                                |                            |                           |            |            |
| 4-53                                | 4-61                       |                           |            |            |
| 4-62                                |                            |                           |            |            |
| subsidies and grants                |                            |                           |            |            |
| 4-7                                 | 4-34                       | 4-62                      | 4-47       | 4-46       |
| Capital: goods and services         |                            |                           |            |            |
| -                                   |                            |                           |            |            |
| 4-34                                | 4-24                       | 4-36                      | 4-32       |            |
| grants                              | 4-1                        |                           |            |            |
| 4-8                                 | 4-3                        | 4-3                       |            |            |
| net lending and other capital trans­ |                            |                           |            |            |
| actions                             |                            |                           |            |            |
| -                                   |                            |                           |            |            |
| 4-13                                |                            |                           |            |            |
| 4-7                                 |                            |                           |            |            |
| 4-1                                 |                            |                           |            |            |
| - 5                                 |                            |                           |            |            |
| 4-7                                 |                            |                           |            |            |
| 4-108                               |                            |                           |            |            |
| 4-154                               |                            |                           |            |            |
| 4-148                               | 4-138                      |                           |            |            |
| G.                                  | Other changes              |                           |            |            |
| Current: goods and services         |                            |                           |            |            |
| -833                                |                            |                           |            |            |
| -304                                |                            |                           |            |            |
| 4-10                                |                            |                           |            |            |
| 4-2                                 |                            |                           |            |            |
| 4-384                               |                            |                           |            |            |
| subsidies and grants                |                            |                           |            |            |
| -369                                | -484                       | 4-106                     | 4-331      |            |
| 4-585                               |                            |                           |            |            |
| Capital:                            | goods and services         |                           |            |            |
| -186                                |                            |                           |            |            |
| -293                                |                            |                           |            |            |
| - 7                                 | -371                       |                           |            |            |
| -142                                |                            |                           |            |            |
| grants                              |                            |                           |            |            |
| -129                                |                            |                           |            |            |
| -                                   |                            |                           |            |            |
| 4-96                                |                            |                           |            |            |
| - 1 3                               |                            |                           |            |            |
| - 2 3                               |                            |                           |            |            |
| net lending to nationalised in­      |                            |                           |            |            |
| dustries and some other public      |                            |                           |            |            |
| corporations                        |                            |                           |            |            |
| -643                                |                            |                           |            |            |
| -510                                |                            |                           |            |            |
| 4-319                               |                            |                           |            |            |
| 4-43                                |                            |                           |            |            |
| -4-50                               |                            |                           |            |            |
| Other net lending and capital       |                            |                           |            |            |
| transactions                        |                            |                           |            |            |
| -233                                |                            |                           |            |            |
| -784                                |                            |                           |            |            |
| -266                                | - 4                        |                           |            |            |
| 4-92                                |                            |                           |            |            |
| -2,393                              |                            |                           |            |            |
| -2,375                              |                            |                           |            |            |
| 4-258                               |                            |                           |            |            |
| - 1 2 0                             |                            |                           |            |            |
| +946C                               |                            |                           |            |            |
|                                     | 1                          |                           |            |            |
| )                                   |                            |                           |            |            |

1 See footnote (*) to table 15. 

## Category-Continued

£ million at 1977 survey prices 
| 1976-77                     | 1977-78            | 1978-79           | 1979-80    |
|-----------------------------|--------------------|-------------------|------------|
| -255                        |                    |                   |            |
| - 7 5                       |                    |                   |            |
| -194                        |                    |                   |            |
| +21                         |                    |                   |            |
| -833                        |                    |                   |            |
| -362                        |                    |                   |            |
| -186                        |                    |                   |            |
| -129                        |                    |                   |            |
| + 144                       |                    |                   |            |
| 4-136                       |                    |                   |            |
| 4-514                       |                    |                   |            |
| 4-868                       |                    |                   |            |
| 4-1,063                     |                    |                   |            |
| 4-1,300                     |                    |                   |            |
| 4-424                       |                    |                   |            |
| -141                        |                    |                   |            |
| -101                        |                    |                   |            |
| 4-118                       |                    |                   |            |
| - 8                         |                    |                   |            |
| - 2 0                       |                    |                   |            |
| -510                        |                    |                   |            |
| -643                        |                    |                   |            |
| 4-319                       | 4-43               |                   |            |
| 4-50                        |                    |                   |            |
| -751                        |                    |                   |            |
| -259                        | - 3                | 4-87              |            |
| -233                        |                    |                   |            |
| H.                          | Summary            |                   |            |
| of                          | changes            |                   |            |
| Current: goods and services |                    |                   |            |
| subsidies and grants        |                    |                   |            |
| Capital:                    | goods and services |                   |            |
| grants                      |                    |                   |            |
| Net lending                 |                    |                   |            |
| to                          | nationalised       | in­                |            |
| dustries                    | and                | some other public |            |
| corporations                |                    |                   |            |
| Other                       |                    |                   |            |
| net                         | lending            | and               | capital    |
| transactions                |                    |                   |            |
| -1,764                      |                    |                   |            |
| -2,386                      |                    |                   |            |
| 4-1,614                     |                    |                   |            |
| 4-1,0900                    | 4-1,8300           |                   |            |

1
 See footnote ( 3) to table 15. 

## B E N E F I T S Of N O R T H Sea Oil

Memorandum by the Chancellor of the Exchequer and the Secretary of State for Energy 

1. 
          We attach a discussion paper on the benefits of North Sea Oil 
along thc lines of that presented to the T r a d e s Union Congress Labour 
P a r t y Liaison Committee, on Monday 21 N o v e m b e r . 

2, 
         Colleagues may wish to consider the following questions which 
are set out in the paper ­

i. 
How l a r g e and permanent are the benefits? 
i i . 
What are our objectives? 
i i i . 
What is the overall strategy within which the oil revenues 
will be spent, short-term and l o n g - t e r m ? 
i v . 
Should the revenues be hypothecated to an Oil Fund? 
v. 
How should the revenues be allocated? 
v i . 
What are the options? 
a. 
overseas investment? 
b. 
repayment of foreign debt? 
c. 
tax reductions? 
d. 
public s e r v i c e s and social infrastructure? 
e. 
investment in manufacturing industry? 
f. 
investment in energy? 
D W H 
T r e a s u r y Chambers A W B 
12 D e c e m b e r 1977 
Paper by the Chancellor of the Exchequer and the Secretary of State for Energy North Sea oil will provide Britain with balance of payments gains and a new source of Government revenue. 

This paper sets out the probable size and duration of these direct benefits and considers how they should be used. 

1 . 

How large and permanent are the benefits? 

2. 

The output of North Sea oil will amount to nearly half the nation 
's oil requirements during **1977** and should have eliminated our net oil import bill by **1980.** 
If the real price of oil remains unchanged, the addition to GNP will be between £3 billion and 
£4 billion in **1980** (measured in **1976** prices) and around £5 billion in **1985** - figures equivalent to **3-5** *P^r* cent of our present GNP. 

3. 

One major benefit of North Sea oil comes in the form of savings of foreign currency. 

Our underlying balance of payments position is likely to be improved as a result of the oil programme by about £5 billion in **1980,** rising to **£7-8** billion in 
1985. 

4. 

The other major benefit is that North Sea oil will provide a new source of revenue to the Government. 

Receipts will be small this year and next while investment costs are being recovered. 

But in **1979** the revenue is expected to reach over S.11 billion (at **1976** prices) and it will probably rise to at least **£31** billion a year in the mid-1980s. 

5. 

On present evidence it seems likely that oil production will begin to fall off in the late **1980s,** although it will continue at a diminishing rate through the **1990s.** 
The size and timing of renewed dependence on oil imports will depend very much on future energy development. 

But benefits from North Sea oil as 
- 1 ­
such, in particular Government revenues from oil production, will necessarily decline. 

6. 

It is important to realise that even at the peak of production in the mid-1980s the direct benefits from North Sea oil will be modest in comparison with the size and needs of the economy as a whole. For example, oil revenues of about £ 3 ! billion a year must be put in the perspective of total public sector revenue which is already some £50 billion a year and a present depressed level of investment in manufacturing industry which amounts to some £5 billion a year. 

7. 

The size of the benefits each year after the early 1980s will depend to some extent on how far the Government delays depletion of North Sea oil fields in order to secure a more gradual rundown of production later on and thereby reduce the eventual need for imports of oil which might be very costly, But whatever conclusions are reached on control of depletion, oil production will certainly be high enough to provide approximate self­
sufficiency throughout most of the 1980s. 

8. 

A brief outline of the Government
1s oil policy and factors influencing the size of the oil revenue is set out in the Appendix. 

## 2 . What Are Our Objectives?

9. 

It is important to find ways of using the additional resources provided by North Sea oil which will enable us to achieve full employment, economic growth and rising living standards and maintain them not only while the oil is in flow but after it runs out. 

10. 

This will only come about if the resources of North Sea oil are used as part of an overall economic strategy to ensure that expansion is sustainable over a long period. 

This strategy must involve public and private services as well as industry, provision of 'jobs as well as expansion of output and productivity, the needs of individual areas as well as those of national finance and the balance c f payments and it should provide for greater equality as well as economic growth. 

11. 
More specificially we are concerned: 
a. 

to raise living standards, reduce inflation and restore full employment in all parts of the United Kingdom - in particular in Scotland, Wales, Northern Ireland and English regions which have suffered most severely from industrial decline; 
b. 

to ensure that full employment and high living standards can be maintained when the oil runs out. 

12. 

These objectives have some immediate implications. 

To restore full employment a very large number of extra jobs, possibly as many as 2\ million, will be needed in the next decade and the majority of them must be in regions which have suffered from industrial decline. 

A proportion of these will be found in manufacturing industry; many will have to come from the expansion of public and private services of all kinds and in construction, transport and distribution. 

But such growth of services and other sectors will only be possible if there is at the same time a rapid and sustained increase in industrial production and productivity, involving reorganisation and re-equipment and retraining, in order to meet demand for manufactured goods without a large trade deficit. 

13. 

North Sea oil will only provide modest assistance in making a start on the programme of economic and social reconstruction which is required. 

But if we are to adopt a coherent strategy the long-run objectives must be kept clearly In mind. 

3. 
What is the overall strategy within which the oil revenues 
will be spent? 
14. 
The economic strategy which accompanies the oil revenues will 
be as important as the revenues themselves. To be effective this economic strategy must take account of both immediate and medium term problems of managing the economy. 

15. 

Now that the worst financial problems arising from the rise in world oil prices and the world recession have been overcome, the Government has taken steps to start the economy moving ahead even before North Sea revenues begin to be available on a substantial scale. 

1 6 . 

The immediate purposes are a controlled expansion of production, to continue reducing inflation and to start improving living standards and public services. Co-operation between the trade union movement and the Government has been a major reason for success in correcting the financial situation and reducing inflation so far. 

With the return to more normal collective bargaining and following a period when living standards have been squeezed, there are great pressures to improve take-home pay by increasing money wages. 

17. 

The Government has now been able to start reducing the burden, of taxation and this, together with productivity increases as production expands, should make it possible for the real take-home pay for working people to increase without needing large money wage rises which would set off a renewed spiral of inflation. Reduction of taxation, the revival of investment and public spending and the growth of exports will all help to expand demand and bring about growth of production in the coming year. 

1 8 . 

The approach to a longer-term strategy has been discussed by the Government, the TUC and the Labour Party and some conclusions were set out in the "The Next Three Years", expressing a joint commitment to sustained expansion of the economy with adequate planning machinery, recognising that this cannot be left entirely to market forces. 

1 9 . 

Tho performance of our manufacturing industry since the war has not kept pace with that of our competitors. 

Our share of world trade in manufactured goods has fallen from 2 5 per cent in 1950 and 16 per cent in i960 to about 9 per cent now,- although it has risen slightly in recent months. 

Because of our poor­
trading performance we have been unable to raise the' 
overall growth rate of the economy and have had to cut out plans for public expenditure. 

The consequence has been a fall in industrial confidence, investment and employment and the postponement of cherished social programmes. 

20. 

There are a number of problems affecting prospects for achieving high investment, full employment and a sustained growth in social spending, which include inflation, world wide recession and the rapid increase in domestic labour supply. 

2 1 . 

Any strategy for using the benefits of North Sea oil to promote sustained economic recovery in Britain must therefore ensure that the oil revenues are used in expanding home production and employment. 

Creation of confidence in a steadily growing home market is a necessary but not a sufficient condition for this. 

We cannot rest our fate on the assumption that private industries, uncoordinated, will respond satisfactorily if left to themselves. 

2 2 . 

The programme of planned reconstruction will necessitate investment of public funds accountable to Parliament and the development of industrial democracy. 

Public agencies such as the NEB and the Development Agencies will have a large role to play in expanding investment, particularly in projects which aim to modernise and expand industry in declining areas and to improve the industrial infrastructure. 

The nationalised industries will have to carry out a great deal of productive investment. 

Company investment should be coordinated by Planning Agreements and the industrial strategy and supported by Industry Act assistance. 

Investment Reserve Funds built up from retained profits have been advocated as a mechanism for doing this. 

2 3 . 

Planning must also extend to the service sector and to assistance for small scale industry, with a significant role 

for the Co 
          - 
           opera 
                tiv ^ n c 
                       v 
                        eleeme N 
                                t
                                .
                                 .
                                 .AksJD 
                                       cy 
                                         .and local authorities. 

## 1. Should The Revenues Be Hypothecated To An Oil Fund?

2L\. 

An important preliminary question is whether North Sea oil revenues should be separately and specifically allocated through an Oil Fund, or whether they should be absorbed into public funds as a whole. 

The arguments in favour of such an Oil Fund are ­
a. 

that use of the revenue would be visible and accountable, helping to ensure that they were not frittered away and enabling the public to assess the priorities which were proposed or being followed; 
b. 

that continuing public discussion about what is inevitably seen as a precious national asset will be facilitated; 
c. 

that it will demonstrate the Government's determination to use the revenues wisely and well and will be a protection against accusations that they have been wasted. 

2 5 . 

The arguments against hypothecating oil revenues in a special fund are ­
a. 

that it might provoke disputes on special claims; 
b. 

that the establishment of a fund could not in itself show how the revenues were being used on the grounds that there would be no way of demonstrating that the expenditure or tax reductions which the 

fund financed w 
               e 
                r 
                 e a 
                    dditional to what would have been 

done in any case. For example it means little to say that the oil revenues are directed exclusively to financing one particular activity if that activity 

would otherwise have been financed out of general 

revenues and the hypothecation of oil revenue to it 

made it possible to spend the same amount of general 

revenues on other activiti.es. 

c. 
     that a fund would increase pressures to use all 

the revenue on extra spending, as against using some 

for a reduction of taxes which might have a higher 

priority; d. 
     that it would reduce the flexibility a 

government needs in managing the economy and divert 

attention from the thrust of economic policy as 

a whole on which political opinion should concentrate. 

5. 
Plow should the revenue be allocated? 
26. 

Whether or not the revenues are allocated through an Oil Fund, they will constitute a substantial extra source of finance. 

Choices must be made about how they are to be spent and about how to take advantage of the related balance of payments savings. 

Public discussion is already focussing on this issue. 

27. 

The broad options for allocation include: 

a. 
overseas investment, 
b. 
repayment of foreign debt, 
c. 
tax reductions, 
d. 
public services and social infrastructure, 
e. 
investment in manufacturing industry, 
f. 
investment in energy. 
The revenues are by no means large enough to have a significant impact on all of these simultaneously, although the hypothecation of revenue to any one option would leave more money available from general revenues to finance other options. 

28. 

But there are two broad views on how we should proceed. 

One is that the relative priority attached to each option may alter through time, will depend on the economic and policy environment and hence cannot be foreseen in detail now; it would therefore not be wise to narrow down the options at this stage. On this view some options are linked (eg manufacturing investment can be encouraged by increased consumption following tax reductions, and by public expenditure on infrastructure). The other views is that the revenues, which at their maximum will probably amount to only £
3
1 billion per year, are not large enough to finance more than two of-these options on a significant scale, that commitment to any two would necessarily preclude spending on others, and that the choice of options, once made, should be expected to endure. 

2 9 . 

Although the first two options have to be paid for our of balance of payments savings, these balance of payments savings from oil may, other things being equal, only be available for these purposes if oil revenues are not spent, but are used to reduce the PSBR. 

In other words, oil revenues may have to be allocated to these options. 

It may therefore be necessary to choose between these and other options as ways of spending the oil revenue. 

In the same way, to provide resources for extra private investment, whether at home or overseas, would require allocating oil revenue for that purpose and would mean that less was available for the public sector to spend. 

## 6. What Are The Options? A. Overseas Investment

30. 

It would be possible to use the oil revenues to reduce Government borrowing and thereby secure a larger balance of payments surplus. Exchange controls could then be relaxed or abolished so that private individuals, companies and financial institutions could buy foreign bonds, shares, property or other overseas assets. Some would argue that investment abroad would provide Britain with a continuing income after the oil runs out, and might reduce upward pressure on the exchange rate which makes British industry less competitive. 

31. 

Others argue that using the oil benefits for overseas investment would pre-empt using them to expand the economy more quickly, reducing unemployment and encouraging investment at home. It is debateable how far investment by UK forms overseas is a substitute for investment in the UK, but with unemployment high the relevant test of which we should prefer is not simply relative profitability to the firm, but total value added in the UK versus post-tax profits overseas. If we were trying to run a high current account surplus, simply to finance overseas investment on capital account, this might also tend to make sterli overvalued, thus damaging the competitiveness of British industry. 

## B. Repayment Of Foreign Debt

32. 

Britain has $22 billion of external debts of which $20 
billion are due for repayment between now and 1984. 

The choice is not whether to repay the outstanding loans on the due dates ­
there is of course a legal obligation to do so - but how far to finance these arrangements by new overseas borrowing. 

33. 

There are three potential sources from which the repayment of foreign debt might come: 
the foreign currency reserves, a surplus on the balance of payments or further loans from abroad. 

The question is whether part of this debt should be repaid from the oil revenues. 

34. 

The arguments in favour of making a start with reducing the total of our outstanding debts are that at a time of economic weakness the UK was able to borrow money on the strength of expected revenues from North Sea oil. It would be unwise to rely on the reserves to repay debt as in the past inadequate reserves made us too vulnerable to events outside our control. 

Moreover some of the reserves are short-term funds which it would be imprudent to use to repay long-term debt. 

35. 

If we are to spread the burden of debt repayment by^aising new loans, this will require a satisfactory overall balance of payments. 

As Britain's economic performance strengthens there should be scope for raising new loans in this way. 

Potential creditors will be interested in the prospects for the yeild of North Sea oil because it is this source of income in particular which provides assurances that loans will eventually be repaid. 

We should ensure that we do not put of international credit worthiness at risk: 
a Government forced to concentrate on remedying financial difficutlies is unlikely to be able at the same time to give priority to domestic policies to restructure industry. 

36. 

In order to decide how much of the debt repayment should be financed from new overseas borrowing, and how much from balance of Payments surpluses, consideration would have to be given to the pattern of debt repayment over the whole period. 

This would have to be calculated to leave maximum scope for domestic growth and industrial competitiveness. 

37. 

It is argued, on the other hand, that we should not use oil Revenue to repay debt on the grounds that it would diminish the Revenue available for expansion of our own economy, that net repayment may not be necessary since the funds of OPEC and other surplus countries will have to be recycled for many years to come, and that if some net repayment of debt should prove necessary after all, room for this should be found by general economies, not by cutting down on uses planned for oil funds. 

## 0 ' Tax Reductions

38. 

The Government's immediate policy of reducing the burden of taxation on working people, before the oil revenues have built U P , has already been noted. 

There is a longer-term question Whether oil revenues should be used to finance a significant further reduction in taxation. 

It is argued on the one hand that following a period when living standards have had to be squeezed there are great pressures to improve take hone pay by increasing money Wages. 

North Sea oil provides some scope for reducing the burden of taxation so that the real take home pay of working people can be increased without inflationary rises in money wages which raise inudstry's unit costs and are Inevitably reflected in higher Prices and fewer jobs. 

39. 

Other reasons are also suggested for reducing direct taxation with the help of oil revenues. 

In 1960/61 .a married man has to be earning 40 per cent of the average wage before paying tax, the same man now has to earn only 35 per cent before paying tax. 

The Government has taken steps to raise tax thresholds and the TUC 
has indicated it seeks further progress on this front as well as giving a priority to the introduction of a reduced rate band. 

Such measures are costly and unless a proportion of the benefits from North Sea oil are used are likely to be unattainable. 

40. 

Against, it is argued that using oil revenues for long-term tax cuts would pre-empt funds for public services and benefits, creating a divided and unequal society with poverty for the unemployed, elderly and sick and great wealth for successful businessmen and managers; that it would do little for declining regions; and that it would provide a consumer-led boom for German and Japanese suppliers without providing much help to hard-pressed British industries. On the other hand any attempt to reduce inequality by increasing social payments would have much the same effect on imports and the regions as cuts in income tax. 

4l. 

But the restructuring of benefits and taxation would be an important consequence and benefits if the oil revenues themselves were used for economic recovery. 

## D. Public Services And Social Infrastructure

42. 

Oil revenues could be used to finance substantial new public spending, restoring services and construction which have had to be cut in the recession. 

This would provide extra employment; it may therefore be an essential counterpart of industrial investment and reorganisation which might not itself substantially increase jobs in manufacturing. 

Using oil revenues for public expenditure Will also expand the economy and raise consumption by providing extra employment. 

43. 

As the economy expands and ordinary tax revenues increase, a Portion of the oil revenue might be set aside to initiate new 

   ^
    L
    L
     : 
        -
OiM t' 
   IljE IN 11A 

programmes will need'to keep pace with the expansion of the economy. 

## F. Investment In Energy

^9. 

Major efforts will be needed to secure Britain's energy position after the oil runs out, including conservation measures, more efficient conversions of primary fuels into usable forms of energy, and Development of new sources of primary fuel supply. 

At present substantial research and public investment is already being undertaken in all these fields. Although the overall build-up of investment expenditure may be gradual, it is likely that after the mid-1980s a high level of expenditure will be needed to meet growth of the economy and to adapt to the post-oil era. 

50. 

Investment in the North Sea itself is already funded through allowances deducted before the main oil taxes are charged. 

There may be a case for allocating some of the oil revenue to finance other forms of energy investment;, particularly if the investment programme has to be accelerated in the late 1980s. 

## Securing The Maximum Benefits From Ukcs Oil

1. 

Since 1974 the Government has carried through a comprehensive programme of measures designed to maximise the benefits accruing to the state from UKCS oil. This has involved a judicious mix of new controls, taxation and stimuli. A balance has been achieved which encourages further investment - there were 
133 applicants for 51 blocks in the 5th licensing round and a series of companies successfully concluded new field financing arrangements in 1975/76 - while substantially increasing direct state involvement, the state share of the financial benefits and the extent of state authority over offshore and onshore operations and the oil produced. 

## 2. Taxation

Government take from offshore oil is made up of 

1.) 
royalty at 12JJK of the value of the oil; 
2) 
Petroleum Revenue Tax (PRT) at *^5%* on profits before 
Corporation tax; 
3) 
Corporation tax on net revenue after deduction of 
royalty, PRT and expenses. 
The Oil Taxation Act 1975 introduced PRT. 

PRT applies to each field separately so that the tax on the profits on one field cannot be deferred by offsetting against it the costs of another field. 

Safeguards are incorporated to provide for an adequate return on Marginal fields. 

The Corporation tax yield from the North Sea is Protected by the erection of a "ring fence" round UKCS activities for tax purposes. 

Together these three taxes should secure on average some 70$ of the profits derived from UKCS operations: 
where BNOC has a *51%* equity interest the overall return to the state should e to some 85%. 

## 3 - Direct State Involvement

A further financial return to the state is provided for by the creation of the British National Oil Corporation (BNOC) with a right to a *31%* equity stake in all licenses from the 5th Round onwards. 

The Corporation raised $825m in 1976 by the forward sale of oil without prejudicing control over the disposal of that oil. 

BNOC is also involved, through negotiated participation agreements, in the operation of commercial oilfields licenced under previous rounds. 

The Corporation is building up knowledge of UKCS operations at first hand in support of its advisory role to Government. 

## K. Direct Access To Oil

The Petroleum and Submarine Pipelines Act 1975 (PSPA) provided the Secretary of State with a right to take in kind the *121%* royalty on production. 

Together with BNOC's substantial equity and participation rights, this will provide the state with direct access to some 40-^l5m tons of oil in 1980 and hence with control over its disposal not available by other means because of international obligations. 

## 5. Regulations

The PSPA tightened controls over exploration and over the manner and timing of development and production of discoveries. 

It provided the Government with the means to implement policy on the rate at which reserves should be depleted. 

Government consent is required for gas flaring and for the construction and operation of submarine pipelines. 

The construction and extension of refineries also requires Government consent, apart from normal planning procedures. 

## 6. Guidance -

A Government statement in 197
;4 said that up to two-thirds of the oil UKCS produced could be expected to be refined in the UK, subject to the level of production and the way in which world markets developed. 

Participation agreements provide for wide-ranging consultation between producers and the Department of Energy, advised by BNOC, permitting, amongst other things, the monitoring of disposal policies and pricing. 

## 7. Stimuli

The Offshore Supplies Office has been created to stimulate the maximum UK industrial contribution to offshore activities. 

A 
memorandum of understanding, securing for UK industry a full and fair opportunity to compete for offshore business, was concluded with the Offshore operators in 1975- The UK share of the offshore supplies market has increased from l\0% in 297^ to *57%* in 1976. 

The Government has been prepared to give assurances about the manner in which its regulatory powers will be used, in order to ensure confidence in investment in UKCS operations. 

Assurances about use of the new powers to control rates of depletion were given in 197^ and contractual undertakings have been given to certain banks. 

Power has been taken to refund royalties in order to stimulate or sustain production from a field which would not otherwise satisfy normal commercial criteria. 

The Government has been instrumental in the creation of a joint public sector/private sector study company, Gas Gathering Pipelines (North Sea) Ltd, to finance and execute detailed evaluation of the economic case for a gas gathering system in the Northern North Sea. 

## 8. Possible Hazards To Realisation Of Fuel Benefits

The timing of the realisation of UKCS oil benefits could be affected by many factors including, notably, a fall in the world oil price but also the imposition of restrictions following a major pollution disaster or a sudden and differential surge in the costs of exploitation of the UKCS. 

But the forecast increase in the real cost of oil In the long term, if right, means that such benefits will be deferred rather than lost. 

There is a constant balance to be struck between, on the one harid, maintaining sufficient incentive to the private sector to ensure an adequate scale of exploration and of commitments by oil companies and financial institutions to new developments at the controlled rate calculated to maximise benefits and, on the other, increasing progressively the direct state share in the benefits, for example through an enhanced role for BNOC in future licensing and through tax changes. 

20 December 1977 

## The P A Y Scene Memorandum By The Chancellor Of The Exchequer

1. 
          This is an appropriate moment to take stock of our pay policy in the 
current round. 
                        By taking f i r m action from August to October on proposals 
for excessive settlements, mainly in the private sector, we removed the 
immediate prospect of a wage explosion. 
                                                           A s a result, with the help of the 
T r a d e s Union Congress' ( T U C s ) agreement on the 12 month rule and self­
financing productivity deals, almost all Stage 2 settlements have now been 
satisfactorily concluded. 
                                     The 12 month rule is holding. 
                                                                                 Since October, we 
have successfully completed the critical negotiation with the local authority 
manuals, which is likely to set the pattern for many settlements in the 
public sector, and have faced the special cases of the police and firemen. 
The settlement with the local authority manuals will greatly reinforce the 
authority of the policy for the present round. 

2. 
          There is growing evidence that the Government 1 s pay policy has 
overwhelming public support. 
                                          But there are some large and important 
negotiations ahead f r o m February to April. 
                                                            M o r e o v e r , we must begin to 
think about the longer t e r m . 
                                        In particular, some aspects of current 
negotiations may compel us to formulate an agreed policy for the public 
sector in the next round well before the end of the current round. 

## T H E Shape Of The C U R R E N T Round

3. 
The main features of the round so far are as follows: 
a. 
There has been much less flexibility between settlements than 
originally hoped. 
Because v e r y few groups have been prepared to 
settle for an earnings increase significantly below 10 per cent the 
Government has been compelled to oppose settlements significantly 
above 10 per cent. 
Nevertheless opportunities are being taken to 
widen differentials within settlements by giving unskilled w o r k e r s a 
little l e s s than 10 per cent and the minority of skilled workers a few 
percentage points m o r e . 
b. 
Productivity deals are adding perhaps 1 per cent or 2 per cent to 
the average l e v e l of settlements. 
They are providing a useful 
flexibility in many cases. 
Although they may not all be genuinely 
self-financing, they are probably generating some genuine i m p r o v e ­
ments in productivity. 
It is proving very difficult for us to discover, 
evaluate and monitor all such deals although we must continue to do 
our best to do so. 
4. 
The prospects for the rest of the round include the following features: 
a. 
An appraisal by officials of the 50 or so main negotiations over 
the next four months concludes that there is a real chance of settling 
e v e r y individual case at or around 10 per cent, provided that the line can be held generally elsewhere, but that any major breach of the 
guidelines would have a disastrous domino effect. 
b. 
F o r w a r d commitments are a potential source of trouble; 
they 
have been accepted explicitly for firemen and implicitly for the police. 
Officials are preparing a study of cases where forward commitments 
may be demanded and will make recommendations on handling the 
problem. 
Such demands may arise from the recommendations of the 
R e v i e w Boards for the A r m e d F o r c e s , doctors and dentists and top 
salaries, as well as from claims by university teachers and from the 
analogous pay research problem of the non-industrial Civil Service. 
It will be necessary to limit forward commitments to the absolute 
minimum unless they are to create formidable difficulties for policy 
in the public sector as a whole during the next round. 
This is perhaps 
the main factor which may compel us to formulat a comprehensive 
policy for the public sector in the next round by early summer next 
year. 
c. 
Wage drift may be somewhat less this round partly because of 
the greater flexibility and partly because in areas of the public sector 
overtime is as likely to fall as to increase, and many private 
employers cannot afford to fiddle on a large scale. 

## T H E N E X T F E W M O N T H S

5. 
           In the immediate future we still risk serious trouble over oil tanker 
d r i v e r s , and there could be others. 
                                                        Following the settlement of local 
authority manuals, we must get the same pattern adopted in the related cases 
of National Health Service ancillaries, water and gas manuals, and clinch 
the deal with firemen without fuither concessions. 
                                                                             But two groups of future 
settlements stand out in importance:­

a. 
Power workers in the gas, electricity and coal industries could 
quickly bring the economy to a halt. 
It is particularly difficult to 
assess the prospects, timing and interrelationships of their negotia­
tions. 
Much will depend on the climate which i s built up before any 
crunch c o m e s . 
b. 
Public s e r v i c e s : A large proportion of white-collar public 
services is due to settle in A p r i l , with some v e r y strong linkages 
between different groups within the total. 
These include most of the 
candidates for forward commitments. 
Quite apart f r o m any damage 
which could be done through failure to reach agreement in individual 
negotiations, if we show weakness in managing these groups we 
would risk reopening satisfactory settlements achieved in e a r l i e r 
months. 
By the same token, if we are successful in settlements 
with e a r l i e r groups, particularly the power workers, we will find it 
much easier to settle with the white-collar public services. 

6. 
           There are three areas of action to which the Ministerial Committee 
on Economic Strategy Sub-Committee on Pay Negotiations ( E Y ( P ) ) attaches 
particular importance: 

a. 
         Although public opinion is solidly behind the Government there 
is still the impression in some quarters that the current round 
represents another year of sacrifice. 
                                                          In fact, living standards have 
been increasing since the summer and will continue to increase 
throughout the round if settlements are within the guidelines, even 
without further tax cuts in the spring Budget. 
                                                                      This fact should be 
rammed home in speeches by Ministers and general Government 
publicity. 

b. 
       Contingency plans for dealing with industrial action have been 
prepared, and are being implemented where appropriate (for 
example adequate stocks are being built up at the right locations). 
There are however limitations on the ability of the A r m e d F o r c e s to 
handle two or m o r e contingencies at the same time. 
                                                                   This makes it 
particularly important not to use the A r m e d F o r c e s except where the 
risk to life or national interest plainly requires it. 

c. 
        A d hoc official groups are being set up to keep track of the 
prospects and developments on the power groups - and later the 
public s e r v i c e s . 
                            Ministers will be advised on steps which might be 
taken - o . should be avoided - before and during negotiations. 

## A F T E R Phase T H R E E

7. 
           If we p e r s e v e r e in seeking to influence individual settlements there 
i s now a good chance that the current policy will not only avoid a wage 
explosion but also achieve an earnings outturn compatible with single figure 
inflation in 1978. 
                           But this will be at the cost of greater rigidity than we 
would have wished and of at least a few damaging forward commitments. 
                                                                                                             It 
is difficult to feel confident that we could return to full freedom of collective 
bargaining in the next round without risking an increase in wage costs which 

would raise both prices and unemployment 
                                           M o r e o v e r there is a growing 

feeling in the Labour movement itself that total freedom in collective 
bargaining is incompatible with both social justice and economic efficiency. 

8. 
          There are special reasons for believing that we are moving into a 

period in which some sort of pay policy will be not only m o r e necessary than 
at most times in the past but also more feasible. 

9. 
         The central problem of our economy for m o r e than a generation has 
been that, although our productivity has grown more slowly than that of our 
competitors, we have seen annual wage increases of the same order as theirs. 
So our inflation has risen faster than in other countries and we have been able 
to maintain price competitiveness and full employment only by a series of 
devaluations which have further added to inflation and increased the 
pressure for excessive wage increases. 
                                                     In the era of North Sea oil it will be 
m o r e difficult to devalue our currency to maintain price competitiveness. 
So unless we can keep wage increases close to the level of productivity 
increase we shall face rising unemployment and a further erosion of our 
industrial base. 

10. 
        It is the aim of our industrial strategy to increase the trend ingrowth 
of productivity. 
                    But we are likely also to need a policy which will help to 
keep the increase in our wage costs close to whatever growth in productivity 
we do achieve. 
                    Otherwise we risk finding that North Sea oil simply produces 
rising living standards allied to rising unemployment, followed by a major 
political and economic c r i s i s when the oil runs out, because we have lost the 
industrial capacity to earn such high living standards without the oil. 
                                                                                  This 
is why pay policy is likely to be more and not less necessary in the period 
ahead. 

11. 
          On the other hand there is now a better understanding than e v e r before 
among all sections of our people that high inflation is not only a major social 
evil but is also incompatible with high employment. 
                                                                        Trade unionists are 
tired of being paid in confetti money. 
                                                    The current dramatic fall in our 
inflation rate is rightly seen as mainly due to moderation in pay settlements. 
So there is a better chance than ever before of getting support for a 
continuing policy to discourage excessive pay increases. 

12. 
         The need for such a policy in the public sector is inescapable and has 
been recognised recently by the leaders of public sector unions like 
M r David Basnett and M r Geoffrey Drain. 
                                                    Forw ard commitments already 
accepted in the public sector make this m o r e necessary still. 
                                                                            But it would 
be difficult to operate a pay policy successfully in the public sector if f r e e ­
dom is exercised irresponsibly in the private sector. 
                                                                  In the private sector, 
however, and to a l e s s e r degree in the public sector too the rigidity of pay 
policy over the last three years has produced damaging distortions. 
                                                                                   The 
problem is not only the excessive compression of existing differentials but 
also the difficulty of changing differentials which are incompatible with 

economic need. 
                 F o r example, the widespread shortage of skilled labour 
at present seems due less to the absence of the necessary skills than to the 
unwillingness of those with the skills to accept jobs which pay them less than 
they can earn elsewhere. 

P 

13. 
         It is not too early for us to consider finding an answer to these 
problems. 
               The remaining seven months of the current pay round will not be 
too long. 
             We already know that if we are to get our inflation rate down to 
that Of our international competitors and keep it there we shall have to 
achieve an earnings outturn in the next round which is not significantly higher 
than our trend growth in productivity which is still well below 5 per cent. 

14. 
        It would be worth exploring with Mr Basnett and other leaders of 
unions in the public sector how we could hope to achieve such an outturn in 
the public sector as a whole, and how to approach demands for forward 
commitments in the light of this. 

15. 
        At the appropriate time we should also approach the TUC more 
generally about the role of pay policy in the strategy on which we fight the 
next Election, and about the contribution they might be prepared to make. 
We should seek to persuade them, for example, to reaffirm the 12 month rule 
while making some provision for synchro-pay in areas like British Leyland 
where this is likely to conduce to better industrial relations and to accept the 
inevitability of some forward commitments without treating them as a general 
base for all new claims. 

16. 
         I put these ideas forward for discussion in a tentative spirit, since I 
am unclear myself about how best to proceed. 
                                                         But I am convinced by our 
experience over the last three y e a r s that a more rational approach to pay 
policy is both necessary and possible in the longer run, and that we must 
begin to face the implications of this now. 

T r e a s u r y Chambers 
20 December 1977 

CP(77) 117 
                                                        C O P Y NO 
                                                                     . . 
                                                                    81 

20 December 1977 

C A B I N E T 

## A N A T I O N A L D E V E L O P M E N T P R O G R A M M E Memorandum By The Secretary Of State For Energy

1. 

This paper argues that it should now be our objective to re-examine with the Trades Union Congress ( T U C ) a wide range of policies that go beyond the 12 month rule and pay. 

If the Government has to rely on the control of pay as its central policy, it will be consistently weakened in the run-up to the Election. 

## T H E B Ac Kg Ro U N D

2. 
         The Government faces two threats to its support. 
                                                                           One arises f r o m 
continuing unemployment and public sector pay restraints, the other f r o m 
the risk that the Government may progressively lose its ability to hold the 
loyalty of the unions and their m e m b e r s without confrontation. 

3. 
          The greatest weakness facing both the Government and trade union 
leaders is that now, after two-and-a-half years of wage restraint, cuts in 
living standards, cuts in public expenditure and high unemployment cannot be 
quickly r e v e r s e d . 
                          The prolonged world slump, industrial closures, lack of 
investment, and continuing cutbacks in public services have combined to 
r em ove the credibility of our pledge of a phased return to full employment. 
Those who have accepted real cuts in living standards are now faced with 
further wage res'raint, plus long dole queues and public services under 
strain. 
            A long slump of this magnitude damages the social fabric and 
cannot in the end be accepted by trade unions and the Labour movement. 

## P A Y P R O B L E M S

4. 
          The risk of confrontation over pay is growing because our c o m m i t ­
ment last July to "an o r d e r l y return to collective bargaining" and a policy 
based on "good sense and r e a l i s m " has become transformed into a rigid 
10 per cent policy in the public sector and an ineffective attempt to use 
sanctions to prevent higher settlements in the private sector. 
                                                                                           A s private 
sector earnings move ahead, workers in the public sector feel that they are 
being discriminated against. 
                                           In seeking to hold the line against firemen or 

other groups in the public sector we are faced with a choice of e v i l s . 
                                                                              If we 
enforce the ceiling strictly, we do so at the cost of alienating those who 
looked to a Labour Government to defend them; the tactics for winning each 
10 per cent battle force us to mobilise public opinion against successive 
groups of public employees which must embitter those against whom we are 
in conflict. 
              But if we seek to win by gentler persuasion, public opinion 
may side with the w o r k e r s concerned, against the Government. 

5. 
          If we w e r e to slip into a head-on clash with a powerful section of 

workers we could find ourselves saddled with the "Who Governs B r i t a i n ? " 
dilemma which brought Heath down. 
                                         Since the Labour Government's 

strongest point with the public was - and remains - our claim that we could 

work with the unions and their m e m b e r s , a collapse of that approach would 

prove to be our downfall and pave the way for electoral defeat and a 

Conservative Government. 

## T H E Need F O R A New P R O G R A M M E

6. 
           It must be our prime objective to restore our relationship with the 
Labour movement by re-examining, with the T U C , a wide range of present 
policies that go far beyond pay. 
                                                 The new context for these policies is the 
run-up to an Election and the opportunities provided for the 1980s by North 
Sea oil. 

7. 
           The new p r o g r a m m e must help us and trade union leaders to 
resolve the outstanding problems over public sector pay. 
                                                                                      It must provide 
real hope for national r e c o v e r y . 
                                                  And it must provide a new orientation 
towards international problems so that we can gain acceptance for measures 
we need to take. 

## T H E I N T E R N A T I O N A L C O N T E X T

8. 
          We must press e x t r e m e l y hard for constructive and definitive 
international measures to deal with the slump, if for no other reason than to 
justify continuing or new defensive measures that we may have to take 
unilaterally if the international context does not i m p r o v e . 
                                                                                    In particular we 
should u r g e : ­

a. 
Trade guidelines with an element of restraint on imports f r o m 
Japan, Germany and any other industrial country with a chronic 
surplus. 
b. 
Acceptance by the European Economic Community that Britain, 
Italy and the three candidate m e m b e r s have l o n g - t e r m industrial problems which require special m e a s u r e s . 
c. 

L a r g e and repeated issues of Special Drawing Rights to ease debt problems until the world recession abates. 

d. 
        Funds for commodity stabilisation, bringing world p r i c e s for 
food and raw materials to levels which are sustainable in the long 
term. 

## The M A I N T E N A N C E Of Living Standards

9. 
         To assist living standards, we should pledge to the TUC that we shall 
continue to use tax measures to help with the short-term pay problem and 
hold down basic elements in the cost of living by:­

a. 
refusing to accept increase a in food prices under the Common 
Agricultural Policy; 
b. 
freezing mortgage payments and public sector rents; 
and 
c. 
freezing fuel p r i c e s . 

10. 
        In addition to this we should discuss proposals tc resolve the impasse 
on public sector pay. 
                           One approach would be to offer a fund worth 3 per 
cent of public sector pay (about £700 million) on top of the 10 per cent guide­
line, to compensate for the comparative inflexibility of public sector pay 
bargaining. 
                Another would be to accept indexation for public sector pay if 
p r i c e s rise about 10 per cent in the current pay round. 
                                                                  A third would be to 
look again at low pay generally as constituting a special category. 

## A P R O G R A M M E Fop. N A T I O N A L D E V E L O P M E N T

11. 
          A National Development Fund should be established into which oil 
revenue? would be channelled together with a fixed proportion of pension 
funds and other financial resources - to be underwritten by the Government 
on a financially "no better, no w o r e e " basis. 
                                                               This fund should be 
available for the following purposes: 

a. 
The National Enterprise Board, the Scottish Development 
Agency, the Welsh Development Agency and the Industry A c t . 
b. 
Investment in manufacturing industry by public enterprises. 
c. 
Support for small businesses. 
d. 
Expanded public service expenditure in health, housing, 
education and welfare, which will create jobs. 

12. 
         Major companies should be told that all discretionary Government 
assistance will in future only be available through planning agreements 
which will become virtually obligatory - as with North Sea Participation 
A g r e e m e n t s which were pushed through without statutory backing. 
                                                                                 Small 
businesses should qualify for special assistance on the presentation of plans 
discuseed with and acceptable to their workforce in the form of a joint 
declaration. 
                 Industrial democracy should be accelerated through planning 
agreements and joint declarations for smaller businesses. 

13. 
        A National Development Commission should be set up to supervise 

the formulation and execution of policy on the same basis as the Energy 
Commission. 
               A Minister of State should be appointed to co-ordinate the 

work for each English Region, covering both industrial expansion and public 

s e r v i c e s , as already happens in Scotland and Wales under the Development 

Agencie s. 

14. 
         These proposals for a National Development P r o g r a m m e should first 
be discussed with the TUC informally then at the TUC-Labour Party 
Liaison Committee and finally published as a White Paper. 
                                                                        This should then 
f o r m the basis for future Government policy on industry, public s e r v i c e s and 
employment. 

## The C A M P A I G N F O R S U P P O R T

15. 
        We have to seek public support on the basis of policies which 
measure up to the problems which confront the electorate as w o r k e r s , 
families and as a nation. 
                                The proposals outlined above therefore include 
four essential elements. 

i. 
An approach to resolution of the impasse on public sector pay. 
ii. 
A continuing programme to assist living standards by tax 
measures and action on basic items in the ccst of living. 
iii. 
A p r o g r a m m e for r e c o v e r y of industry, public s e r v i c e s and 
employment. 
iv. 
A new orientation to international problems. 

16. 
        On the basis of a p r o g r a m m e of this kind we could consolidate our 
relationship with trade unions and campaign with confidence for public 
support. 

A W B 

Department of Energy 

20 December 1977