The first few months of the new Labour government soon proved a disappointment for the SD. On the eve of the British general election of 15 October 1964 it had been confidently expected that a Labour victory would see the pace of EFTA reform increase dramatically. And as Wilson settled into Downing Street the SD foreign minister still felt able to tell his colleagues that, EEC membership aside, the incoming Labour administration ‘could be considered an improvement with regard to international questions’. Such sentiments quickly fell by the wayside, however, when on 26 October Wilson took to the airwaves to announce the introduction of the 15 per cent import surcharge. In Number 10 as in Whitehall more generally it was perhaps understandably felt that a levy on all manufactured and semi-manufactured goods except foodstuffs, tobacco and raw materials was a legitimate response to a grave economic problem. After all, Britain's balance of payments deficit, known to have ballooned under the Conservatives, was now forecast to be as high as £800 million for 1964 alone. Intervention, however drastic, thus seemed justified. Labour ministers likewise decided that, while not without problems, a surcharge was a far preferable alternative to deflation and devaluation. But in Copenhagen and other, similarly irate EFTA capitals, the surcharge was immediately interpreted as a sign that Labour did not intend to take the Seven seriously. The opening section of this chapter must therefore examine the fallout of the surcharge decision and the implications of the policy for Labour and the SD. It then goes on to look at how throughout 1965 the SD attempted to tie the surcharge question to the broader issues of EFTA reform and EEC membership in order to modify Labour's position, before finally explaining how a shift in Labour policy in the first half 1966 set the scene for fresh applications to join the Community a year later.

Responding to the surcharge

Harold Wilson had barely been in Downing Street an hour when he was told of the state of Britain's finances. During the election campaign the Labour leader had claimed the Conservatives were running a payments deficit of around £400 million a year.