No one noticed. Or if they did, no one complained. The government didn't even bother to issue a press release. Last week the Ministry of Defence quietly secured a £1.7bn increase in its budget. The spending for 2006-7 was allocated months ago, which means that another fund must have been raided to find the extra money. It's the equivalent of half the annual budget for the Department for International Development. But another billion or two doesn't make much difference when we are already sloshing out £32bn a year on a programme whose purpose is a mystery.

On Friday, the National Audit Office published a report which appeared to congratulate the MoD for going only 11% over budget on 30 acquisitions, such as attack submarines, destroyers, Euro-fighter aircraft and anti-tank weapons. This overspending - a mere £3bn or so - is a heroic improvement on the ministry's usual efforts. The story was spoilt a little when we discovered that it would have looked much worse were it not for some creative manoeuvres by the 1st armoured accounts division, confounding the enemy by shifting money between different parts of the budget.

But what the audit report failed to answer, or even to ask, was why we need attack submarines, destroyers, Eurofighters and anti-tank weapons. Are the Russians coming? Is Angela Merkel preparing to mobilise a few Panzer divisions? It is preposterous to suggest that we face the threat of invasion, now or in the foreseeable future.

Even the MoD acknowledges this. In the white paper it published at the end of 2003, it admits that "there are currently no major conventional military threats to the UK or Nato ... it is now clear that we no longer need to retain a capability against the re-emergence of a direct conventional strategic threat".

Nato agrees. The leaked policy document it will discuss at its summit this week concedes that "large-scale conventional aggression against the alliance will be highly unlikely". No country that is capable of attacking Nato countries is willing to do so. No country that is willing is capable. Submarines, destroyers, Eurofighters and anti-tank rounds are of precious little use against people who plant bombs on trains.

Instead, the ministry redefines the purpose of the armed forces as "meeting a wider range of expeditionary tasks, at greater range from the UK and with ever-increasing strategic, operational and tactical tempo". It wants to be able to fight either three small foreign wars at the same time or one large one, which "could only conceivably be undertaken alongside the US".

In other words, our "defence" capability is now retained for the purpose of offence. Our armed forces no longer exist to protect us. They exist to go abroad and cause trouble.

But even such wars of choice can no longer be fought. The disaster in Iraq destroyed every pretence of benign or necessary intervention. It is hard to see how any British government, however powerful its case appears to be, could claim the moral authority to launch another adventure for at least a generation. Iraq disqualifies us from the role the ministry envisages as surely as Suez did. We can kiss goodbye to the idea of going into battle alongside the US as well.

This, then, grants us a marvellous opportunity: to pay ourselves a war dividend. If the war in Iraq means that the current era of invasion is over, there is no point in maintaining armed forces designed for this purpose. If we were to cut the military budget by 80 or 90%, we would do ourselves nothing but good.

But the danger and paradox of military spending is that the bigger the budget, the more powerful the lobby becomes which can fight for its own survival. As the Guardian's revelations about the corrupt relationships they have cultivated with Saudi princes show, the civil servants in the MoD write their own rules. Much of the time they seem to be defending not the realm but the arms companies. So does the prime minister. In his book Blair's Wars, John Kampfner records that "from his first day in office Blair was eager not to antagonise British arms companies, and BAE Systems in particular, which developed extremely close relationships with senior figures in Downing Street." A Downing Street aide reported that whenever the head of BAE encountered a problem, "he'd be straight on the phone to No 10 and it would get sorted".

Having obtained its stupendous budget - in cash terms, the second biggest defence allocation in the world - our military-industrial complex must justify it. It does so by producing ever more paranoid assessments of the capabilities of terrorists. Bin Laden might possess no submarines, but we must retain our anti-submarine aircraft in case he - or someone like him - acquires some. We don't know what Blair's proposed new nuclear missiles are for, but after the money has been spent a justification is bound to emerge. In the ministry's defence vision paper, I found this gobsmacking contradiction. "We face new challenges and unpredictable new conditions. Our strategy must evolve to reflect these new realities. For the future this means [among other positions] ... holding fast, in the face of change, to our underpinning military traditions." Was there ever a clearer sign that the tail is wagging the dog?

A report published by the Oxford Research Group this summer argues that our defence policies are self-defeating. They concentrate on the wrong threats and respond to them in a manner which is more likely to exacerbate than to defuse them. The real challenges, it contends, are presented by climate change, competition over resources, the marginalisation of the poor and our own military deployments.

By displacing people from their homes and exacerbating food shortages, climate change will cause social breakdown and mass migration. Competition for resources means that the regions which possess them - particularly the Middle East - will remain the focus of conflict. As improved education is not matched by better prospects for many of the world's poor, the resulting sense of marginalisation provides a more hospitable environment for insurrection. Aids leaves a generation of orphaned children vulnerable to recruitment by paramilitary groups and criminal gangs. The war on terror has created the threats it was supposed to defeat, by driving people to avenge the civilians it has killed. By developing new weapons of mass destruction, the rich nations challenge others to try to match them.

Military spending enhances all these threats. The jets and ships and tanks it buys make a large (though so far unquantified) contribution to climate change and the competition for resources. It diverts money from helping the poor; it generates a self-justifying momentum which stimulates conflict. The budget would contribute far more to our security, the report says, if it were spent on energy efficiency, foreign aid and arms control.

So what role remains for our armed forces? A small one. A shrunken army should concentrate on helping the civil authorities to catch terrorists and deal with epidemics, floods and power cuts; the navy should be deployed to protect fisheries and catch drugs smugglers; the airforce is largely redundant. Now that foreign adventures are no longer an option, it is time we turned our war spending into what it claims to be: a budget for our defence.

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