Foreign Relations of the United States, 1952–1954, Western Europe and Canada, Volume VI, Part 1

741.5 MSP/10–1653: Telegram

No. 424
The Ambassador in the United Kingdom (Aldrich) to the Department of State

secret

London, October 16, 1953—7 p.m.

1666. Cotel. Subject: 1955 MDAP programming. Department circular telegram 151 October 7.¹

1. As set forth 1953 NATO submission, British propose continue their defense program into 1957 at approximately current total expenditure levels, despite the reduction in US aid. We have been informed that the reservation on this point in the submission will be withdrawn. No change in the navy level of expenditure is foreseen. Provided certain international problems (notably the Egyptian situation) are satisfactorily settled, army expenditures might be slightly cut with probability any savings made there would be applied to RAF. There would, therefore, be no appreciable change in over-all expenditure. In making these plans, it has been assumed that the following elements of US support will be provided:

(a) Some mutual defense financing in 1954–55 (approximately $75 million to cover special aircraft program for RAF in accord with bilateral Cabinet level Paris talks of April 1953).

(b) Some MDAP support in fiscal year 1954–55.

(c) Sufficient further OSP contracts so that payments against such contracts would be maintained thru fiscal 1955 and taper off gradually thereafter.

2. It is judgment of Embassy and FOA mission that, if these assumptions prove correct, no further budget support aid would be needed to enable the UK to finance its present defense program. The UK, however, could not support a markedly enlarged program from either the economic or the political viewpoints, and it could not even support present program if there should be considerable downward adjustment in economic activities in UK, or US, accompanied by sharply adverse balance of payments position. Even assuming continuation current levels of economic activity, program places a serious burden on UK economy. Defense expenditures amount to over 12 percent of GNP. Among NATO countries this is exceeded only in US where the GNP per capita is about 3 times as large. The total tax burden in UK is substantially heavier than in any other NATO country (about 32 percent of GNP compared with less than 30 percent in US). At a time when other NATO countries are reducing expenditure on their defense program, maintenance of heavy program in UK coupled with very heavy tax burden creates obvious political as well as economic problems. Comparisons with US are of special importance politically in view of the many affirmations by US in NATO of importance of “equitable distribution of the burdens of defense”.

3. On political side, balance of parties is virtually even and could be altered suddenly by new developments. From beginning, British public has accepted defense burden as disagreeable necessity. At same time, there has been natural and strong desire ease pangs of austerity in daily living. But, although not popular present program was initiated by Labor Government and still has bipartisan support. Despite rather vague opposition from Bevanite wing of Labor Party, no reasons to doubt that this support will continue as long as present international tensions.

4. Therefore, given a favorable general economic climate, it is judgment of Embassy and FOA mission that UK can meet budget problems posed by defense program (this, of course, on basis that assumptions given above prove correct). There remains, however, problem of holding favorable or at least satisfactory balance of payments position, particularly vis-à-vis dollar area. While current position can be described as satisfactory, it is still a precarious one, and there are disturbing features in some of short-term indicators of future developments. Recent low rate of increase in gold and dollar reserve (a deficit before aid in September) and failure of exports to expand are not encouraging. Reserves today are still below November 1951 level, and more than $1 billion below June 1951 peak (from which they fell $2,200 million in 10 months).

5. Maintenance of OSP program is, therefore, of considerable importance as means of providing unusual source of dollars to supplement those earned in normal trade activities. In this connection it should be noted that in its NATO submission UK Government indicated that fulfillment of program therein presented presupposed that no further foreign exchange expense would be incurred in connection maintenance of troops in Germany. While not accepting this condition as absolute, Embassy and FOA mission consider it important to note that commencement of German rearmament program, which presumably cannot too long be postponed, even if EDC not ratified, would mean reduction and eventual elimination support cost payments. This would place further burdens on both UK budget position and on its foreign exchange resources, giving even greater importance to continuance OSP and opportunity it affords for unusual dollar earnings.

6. It is, therefore, politico-economic estimate of Embassy and FOA mission that, subject realization of assumptions described above, and subject continuation of substantial OSP program, satisfactory level of general economic activity in UK and especially in US, and satisfactory balance of payments position, UK can maintain from its own resources its current defense program, but not substantially increased program. It is further estimate of Embassy and FOA Mission that UK could not from its own resources procure those items already scheduled in existing MDAP and OSP programs or those items planned for inclusion in such programs in fiscal 1954–55 and at same time maintain defense program at current levels.

Aldrich

1. Not printed; it asked for an analysis of the economic situation in various NATO countries to help in developing the 1955 Mutual Defense Assistance Program. (700.5 MSP/10–753)