How Blair can save billions on defence

The Swedish academics who collate statistics on conflict say there have never been so few wars waged in the world as today. In theory there has never been a better time for an incoming Labour government to slash the defence budget and use the savings to pay for improvements to health, education and social services.

In theory. Chechnya, Bosnia, Afghanistan, Sri Lanka and Sudan may show that the world has become a messier place, but the Cold War is behind us. Since the fall of the Berlin Wall the Conservative government has cut the British defence budget by a fifth - to pounds 21bn. Two of our three armoured divisions have gone. And by 2002 the RAF will have pulled out of Germany. But the Tory defence review, Options for Change, for all its strategic rhetoric of a switch from "threat-based" to "capability based" was Treasury-driven, as were the tawdry cash-saving proposals that the Army could go into battle with tanks leased from Cowies or that the Ministry of Defence's Whitehall headquarters could be sold to a foreign developer and leased back.

Despite the size of the cut, however, the essential structure of our armed forces is unchanged. "We still have a little but of everything we've always had. Everything has been pared right down into little penny packets," says one former defence chief. The strain shows in everything from troops forced into more frequent tours in Northern Ireland to RAF fighters grounded because of a shortage of spare engines. "We are in danger of becoming a cardboard cut-out army: we are in the field but unable to operate because of a shortage of ammo, fuel and transport. We couldn't do a Falklands operation any longer."

Across the board cuts will no longer do. Strategic priorities must be re-established. Labour has promised such a review if it wins the election. But can it deliver?

The British armed forces traditionally have three functions. To protect the realm (which covers everything from its role in Northern Ireland to defence of the Falklands). To help maintain stability by peace-keeping. And to insure against a major external threat - which means membership of Nato.

There are not many more efficiency savings to be made. In any case, making economies in defence is a long, slow process. And Labour will surely not make the mistake it made in the Seventies, when it retained major hardware acquisitions but cut pay and training in a move which proved counter-productive. The key question is: will Labour have the courage to lop off one of the three strategic roles? And will it have the confidence to know which one?

The issue centres on the divide between high- and low-intensity warfare. Should defence be predicated on the threat of a major war with a major industrial power? Or can we be sure that our troops will henceforth be required for peace-keeping where British interests are threatened?

At the heart of the matter are our relationships with the United States and Europe. The US defence paradigm is still based on the notion of high- intensity warfare. Its contingency planning centres on the possibility of simultaneous war with Iraq and North Korea and it has the "pig-iron" to cope - tanks, transport planes, attack submarines, missiles and intelligence systems.

The fact is that the UK is dependent on the Americans for most of this already. That was evident in the Falklands, where the Americans had promised us a Guam aircraft carrier in the event that one of ours was sunk. But it was most clear in the Gulf war. "We wouldn't get involved in such a war without the US, who would play the dominant role and in which we would really just be giving moral support for symbolic and political reasons," says Malcolm Chalmers of Bradford University.

The logic of this dictates that the Army should now follow the RAF out of Germany. It costs us pounds 1.35bn a year to keep our remaining armoured division in Germany. The argument against withdrawal usually insists that we have no barracks for its 26,000 men and no land for tank manoeuvres. Serious fighting skills degrade quickly if training isn't kept up, and once skills or capacities are lost it can take a decade to rebuild them. Mark Almond of the Institute of European Defence and Strategic Studies is sanguine about this. "We don't need to scrap armour entirely," he says, "but we could put a lot of it on a very low state of readiness. It would take years for Russians to rebuild their tank force."

But this begs the question: do we need tanks at all? A few are necessary for convoy protection, but not the squadrons to take part in full-scale land battles if our role in high-intensity conflict is henceforth to be ancillary to US forces. If so, Continental commitment cannot be part of Britain's long-term strategy. As well as saving money, axing our mainstream tank capacity would return huge tracts of land in Dorset and Wiltshire to agriculture and tourism.

There would be a downside. The Germans and Americans would not be best pleased. But the French army has announced its withdrawal and the judgement might be made that the political fall-out would be tolerable, especially as the shift would allow us to build on our strengths in low-intensity warfare, which is one of America's weak spots, as Somalia, and Vietnam before it, bear out. A peace-keeping emphasis would fit in with both the internationalism of old Labour and the domestic calculus that, when the economy turns tricky, new Labour might find it cheaper to launch an expeditionary peace-keeping mission to save Rwandans than to find the wherewithal to knock half a million Britons off the dole.

There is, however, no sign that new Labour is making such a calculation. Ask Labour's defence spokesman, David Clark, about the parameters of the promised defence review and he pronounces certain areas as not negotiable: Nato, Trident, the Eurofighter, the UK's seat on the UN Security Council and Britain's continued aspiration to "punch above our weight". The trouble is, Mr Clark seems keen on everything: soldiers trained for high-intensity war and good peace-keeping, economic efficiency and massive subsidy for the defence industry as "the last large reservoir of skill in British manufacturing industry". Ask how can all this be done and he defers to the vaunted strategic review as if it were a magician's hat from which limitless rabbits can be produced.

Undoubtedly some of the usually proposed cuts make little sense. The Trident nuclear missile programme is almost paid for; there is nothing to be saved by axing it, as there might have been at the last election. The same is almost true of the development costs of the new Eurofighter, and cutting back substantially on the number we order would raise unit costs unacceptably. But there are other big cuts which could be made if radical questions were asked. The Royal Marines might merge with the Army. The RAF could be scrapped as a separate force, and replaced by Army and Navy air arms. Our amphibious landing capability could go (we didn't dare use it in the Gulf - hand-held missiles make it too dangerous). Similar arguments can be made against tanks; attack helicopters can largely perform their role. No replacement for the Tornado bomber need be sought; their job is done by Tomahawk cruise missiles in submarines. The number of frigates and destroyers could be cut from 35 to 25 - the rationale for the marginal 10 is slight.

The reality is that hard decisions will have to be made. World-wide risk assessments are of limited help. Analysts vary in their judgements. Some predict war between Pakistan and India, or Greece and Turkey. Others warn of less-focused dangers - a harsh military clampdown against the people of Hong Kong or the increase in international piracy. Pentagon analysts apparently name the top three threats - inside Russia, China and, surprisingly enough, inside Germany.

But the key strategic judgement which must be made centres on the principal partner in our defence alliance. No one seriously argues that we can stand alone. So should we simply face up to our dependence on the United States? The pragmatic arguments here are potent - the maintenance of Trident depends on the goodwill of the US. So did our expedition to the Falklands. In the Gulf we relied on the US for both intelligence and heavy transport.

One option is to face the consequences of this dependence. We would then not need, says Philip Sabin of the department of war studies at King's College, London, nuclear submarines, aircraft carriers, anti-ballistic missile systems and our own high-capacity combat aircraft. "We wouldn't then break the bank providing the support capability which the US is happy to give us without risk so long as their troops don't have to go in on the ground and get killed," says John Reed, editor of the influential newsletter Defence Industry.

Instead we would provide what we are already best at: command and communications structures, logistics, electronic warfare, medical support, special services SAS skills with more flexible naval forces for moving these more highly- trained or evacuating Britons from foreign trouble spots.

But if the pivotal judgement is that Britain should not be beholden to an increasingly isolationist US, then focus should switch to Europe. This is an area beset with political problems. A military division of labour - with us providing ships and submarines, the French the aircraft carriers and the Germans the tanks and infantry - is not realistic without a common European defence policy, which would only come with greater political union. Without it the British might veto a French desire to intervene in Algeria or an Italian urge for action to maintain stability in Albania - just as the French might object to a Falklands expedition or the Germans to certain interventions in Bosnia.

The only option at present here seems to be to edge towards greater integration of European defence industries, both military and civilian, though in practice collaboration sometimes increases costs rather than cutting them. It is an uphill task; the American defence industry is already double the size of all Europe's put together. But to move that way would enable savings to be made on those elements in the forces which serve our role in policy areas outside Europe: tanks, amphibious forces and much of our navy.

Were Labour to take a step in either direction the savings could be considerable. Defence analysts estimate the European option could knock pounds 3bn to 4bn off the budget over the lifetime of a parliament. The US option would be considerably more. It would pay for a lot of schools and hospitals.

All the signs are, however, that Labour will not have the nerve to take such a decision. The back-room lobbying of manufacturers and trade unions is potent. And what politician wants to throw half of a marginal seat like Preston out of work? "The risk," says John Reed of Defence Industry, "is that in trying to get the best of both worlds they will end up with the worst of both, and that the real day of decision will be postponed."