George Osborne says he has agreed a budget with the Defence Secretary Philip Hammond which will lead to a reduction in staff at the Ministry of Defence.
The government is understood to be keen to channel its resources into cyber defence which Mr Osborne described as "which is the new frontier in defence".
I have settled the Defence department, which people thought was going to be one of the biggest and most difficult challenges, so I have agreed with Philip Hammond a defence budget.
It's going to involve some tough choices. The civilian headcount is going to have to reduce in our defence department, we are going to have to renegotiate, with some of our big suppliers, the contracts.
But I can tell you there will not be a reduction in our military capability.
In fact we are going to be able to spend some more money on things like cyber, which is the new frontier in defence."
More top news
The racing driver beat Mercedes teammate Nico Rosberg to pole position.
Police fire tear gas on migrants as flames light up the 'jungle' camp on its final night before it is razed and its residents dispersed.
The charge comes after the badly burned corpse was discovered near Peak District National Park almost two weeks ago.