A Ministry of Defence spokesman said the underspend reflected better control of equipment projects and a conscious decision not to spend money on contracts until needed.
Rather than rushing money out of the door for the sake of it within a financial year, we are committing money as and when projects require it.
We make no apologies for having a proper grip on the equipment plan and running a tight ship with a cautious approach that, with the support of the Treasury, allows us to roll forward cash to next year, thereby ensuring the money will still be spent on equipment.
The Defence Secretary has hit back at critics who claim the armed forces are suffering unnecessary cuts because of his "overzealous" austerity drive.
Senior defence sources quoted by the Daily Telegraph complained that Philip Hammond's cautious approach meant the defence budget was underspent by almost £2 billion at a time when thousands of military personnel are losing their jobs.
But in a strongly worded statement Philip Hammond said his critics had no idea how the defence budget worked, while the Ministry of Defence described the complaints as "financially illiterate".
In his statement, Mr Hammond retorted: "These retired 'senior military figures' are presumably the same people who presided over an out of control defence budget that led to the previous government sending troops into battle without the proper equipment needed to protect them.
"They clearly have no idea how the defence budget now works. Instead of having to delay and cancel programmes as in the past, we now budget prudently and then roll forward any underspend to future years, allowing us to place new equipment orders."