Government reveals it has balanced the defence budget – but at what cost to Britain?

Britain will no longer be able to fight and project power overseas in ways that military commanders had hoped to do, it was admitted yesterday, as the Government outlined plans to eliminate a £38bn hole in the defence budget.

Philip Hammond, the Defence Secretary, said the MoD had now scaled back spending across a range of defence equipment projects and could balance his department's books over the next 10 years.

But standing alongside him, Britain's most senior military commander, General Sir David Richards, admitted the cuts could affect future capabilities. "It could be that some of the methods that we'd rather hoped or aspired to do in the future are no longer obtainable," he said.

Under the plans outlined by Mr Hammond, the MoD has committed to spend £152bn over the next decade on new military equipment. This will include two new aircraft carriers, six destroyers, 14 Chinook helicopters and a range of other projects.

But other programmes have been extensively cut back. There will be no replacement for the early warning Nimrod surveillance aircraft, significantly fewer armoured fighting vehicles and no plans to equip the armed forces with new remotely operated drones, which have become a key part of US defence capabilities.

In an attempt to address concerns that the MoD will be unable to stay within its new equipment budget, Mr Hammond announced that £4bn will be set aside for project overruns. He also announced the creation of an £8bn fund to finance potential needs, so far unidentified.

No detailed figures on specific equipment spending were released yesterday, which Mr Hammond said was due to "commercial and military" reasons. All the costings will be made available for scrutiny by the National Audit Office, he added.

He also confirmed that there will be no stop to the significant cuts planned in armed forces personnel as a result of the new budgets. Army numbers will still fall from 102,000 troops to 82,000 – while RAF numbers will fall from 44,000 to 39,000.

In a statement to the Commons, Mr Hammond, pictured below, said there had been a "woeful" lack of spending restraint in the MoD in the past. "After two years' work, the black hole in the defence budget has finally been eliminated and the budget is now in balance, with a small annual reserve built in as a prudent measure to make sure we are not blown off course by unforeseen events," he said.

He insisted he had been assured the "prize for good behaviour" would not be a "Treasury raid" on the department's budget. It has guaranteed a real-terms rise of 1 per cent a year in defence equipment spending from 2015. "We will manage these budgets to the wire," he added.

General Richards admitted that in the past the military, bureaucrats and politicians had "worked in a spirit of optimism rather than realism", adding: "We were all guilty to a degree."

However, he also hinted at unhappiness within military circles about some of the programmes which have not been funded – but suggested they might still be possible to achieve using the £8bn equipment slush fund. "There is no doubt the area where we all want to spend more – and which the process now offers the potential that we will be able to – is things like cyber warfare, unmanned aircraft and those sorts of things. We've got a good chunk of investment but we instinctively feel that's where we want to put more effort."

Shadow Defence Secretary Jim Murphy said there was "little detail to support grand claims" that the MoD's budget had now been balanced.

What the forces will get and what they won't

14 New Chinooks. Apache and Puma fleets upgraded.

Unknown number of A400M transporters

No replacement for the early warning Nimrod surveillance aircraft, fewer armoured fighting vehicles and no plans to equip the armed forces with new remotely operated drones.

20,000 Fewer troops, taking the total down to 82,000. Raf numbers will also be cut by nearly 10%.

In

* 14 new Chinooks, a life-extension to the Apache helicopters and Puma upgrade

* New armoured fighting vehicles worth around £4.5bn over 10 years, and a £1bn upgrade of the Warrior vehicle

* The building of two QE-class aircraft carriers and six Type 45 destroyers

* 28 new Wildcat helicopters, unknown number of Type 26 frigates

* 14 Voyager air-to-air refuellers & troop transporters

* Unknown numbers of A400M air transporters and the Air Seeker surveillance aircraft

* One C17 strategic airlifter

n £7bn for "complex weapons" such as smart missiles and torpedoes

Out

* Six fewer Type 45 destroyers and one aircraft carrier fewer

* Aircraft carrier-specific joint striker fighters will be scrapped and replaced with limited-capability vertical take-off because it would cost too much to fit the "cats and traps" system on the new aircraft carriers to allow them to take off and land in conventional way

* Significantly fewer armoured fighting vehicles, which the MOD claims will be made up for by retrofitting the Warriors used in Iraq

nC uts in army numbers from 102,000 troops to 82,000 with much greater use of reservists. RAF numbers to fall from 44,000 to 39,000

* No go-ahead for more remotely activated drone aircraft and no replacement for Nimrod surveillance aircraft