This chapter describes the evolution of economic policy in the face of a deteriorating situation. It shows how early in 1975 the Treasury came to recognize that a significant shift of policy was required involving a sharp break in hitherto established practice. It describes the important role which financial markets were now playing in the behaviour of the economic variables and shows that what was required was a big improvement in public finances, a determined attack on inflation, and suitable measures to restore equilibrium in the balance of payments. The chapter reveals growing tensions within the Cabinet over the course of policy and its relevance to the economic slump, which was now afflicting the economy. These tensions were acute in the area of policy to deal with wage inflation and the chapter goes into detail how this issue was eventually resolved in a vigorous reinforcement of the Social Contract. Public expenditure continued to be a dominant issue for the Treasury and this concern was reinforced at the end of 1975 when the UK sought a relatively small drawing from the IMF — a step which brought the public finances to the forefront.
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