Dec. 11 (Bloomberg) -- The U.K. government delayed the purchase of aircraft carriers and other weapons systems to give spending priority to the war in Afghanistan, raising concern that Prime Minister Gordon Brown is sapping future capability.

The 3 billion-pound ($4.5 billion) ships made by BAE Systems Plc will enter service in 2018 instead of 2016, the Ministry of Defense said. It also delayed its FRES armored vehicle program and dropped General Dynamics Corp. from the bidding. Finmeccanica SpA won an order for 62 Lynx helicopters.

“Support to current operations remains our highest priority,” Defense Secretary John Hutton said in statement to Parliament in London today. Balancing the procurement budget “required a reprioritization of investment,” he said.

The decision is a blow for General Dynamics, which is still bidding for other work on U.K. contracts. For BAE, Europe’s biggest weapons maker, the move underpins jobs across the country for longer periods and makes workflows more manageable.

“The peaks of work that the two carriers brought will be flattened out,” said Bernie Hamilton, national officer for aerospace and shipbuilding at the Unite union representing BAE workers. “It will secure employment for workers in the sector for many more years with a stable workload.”

Budget Crunch

The statement follows a two-month review that Hutton ordered when he took up his post in October and is another step in the department’s effort to grapple with a budget that officers, lawmakers and industry executives say is stretched by years of spending restraint and wars in Afghanistan and Iraq.

The Conservative opposition said the moves will damage Britain’s ability to defend itself and put off more painful decisions about what programs are affordable given the need to keep a lid on the Treasury’s growing budget deficit.

“We’re mortgaging our future capability to support what we’re doing today,” Bernard Jenkin, a Conservative lawmaker who sits on Parliament’s defense committee, said in an interview. “Everyone knows the Ministry of Defence has run out of money.”

With 8,760 soldiers in Afghanistan and 4,100 in Iraq, Brown is funneling resources to maintain the troops at the front line. At the same time, Britain must retire a generation of ships, planes and vehicles ending their service life by 2020.

Hutton said the Treasury set aside an additional 635 million pounds for urgent operations next year, adding to 8.8 billion pounds spent on the wars in Iraq and Afghanistan since 2001. The U.K. plans to spend 35.4 billion pounds on defense in fiscal 2010 and 36.9 billion pounds in 2011.

Deficit Widening

Those funds are straining the Treasury’s budget, which clocked up the biggest deficit since World War II in the first six months of the fiscal year. Brown added to the burden last month by ordering a 20 billion-pound fiscal stimulus and 37 billion pounds to buy stakes in cash-strapped banks.

Even so, with real spending growth of 1.5 percent a year between 2008 and 2011, the Ministry of Defense has one of the tightest budgets of any department.

Industry executives and the Conservative opposition say the government isn’t keeping up with the inflating cost of defense technology. And they say today’s delays may ultimately cost the government more by requiring companies to keep on employees that would have finished work on projects earlier.

Higher Costs

“The downside to the delays will be an increase in the cost of these programs in the long run,” Rear Admiral Rees Ward, who is now director general of the Defence Manufacturers’ Association, said in an interview. “If you have a program that is supposed to run five years and you run it seven years, you have to pay the overhead for another two.”

BAE Systems and VT Group Plc are among the main contractors for the 65,000-ton aircraft carriers, the largest ever built for the Royal Navy. They said today’s announcement will have no impact on employment levels and that their business plan is on course, suggesting they had been planning for a delay.

“We have been aware of the significant budget pressures on the Ministry of Defense for some time,” said Nigel Whitehead, BAE managing director for programs. “We have planned our future U.K. business on robust assumptions.”

Hutton, whose electoral district is home to BAE shipyards in Barrow-in-Furness in Scotland, said the program “will still provide for stability for the core shipyard workforce, including 10,000 U.K. jobs.”

Armored Vehicles

On armored vehicles, Hutton said officials were redesigning the Future Rapid Effects System and would give priority to buying Scout vehicles rather than Utility</a> vehicles. Officials, he said, were unable to agree terms of a contract with General Dynamics, which was offering a version of the Piranha 5 vehicle used by American forces.

“It is of course important that the MOD now moves swiftly to outline the future and the next steps in a timely manner, so that industry can manage and retain its skills and the soldiers can get the best vehicle when they need it,” General Dynamics said in a statement.

BAE remains a bidder for work on the program, which also involves QinetiQ Group Plc and Thales SA. General Dynamics is still bidding for other work on armored vehicles, about which the Ministry of Defense will make a more detailed statement sometime next month.

“We are clearly disappointed that FRES Utility Vehicle will not be going ahead as planned,” said Lindsay Walls, a spokeswoman for BAE. “We will have to consider what this package of decisions included in today’s announcement means for the size and shape of the Land Systems business.”

British officials also set aside 70 million pounds pay for Finmeccanica SpA’s AgustaWestland unit to upgrade 12 existing Lynx helicopters. Deliveries of the new Lynx choppers will begin in 2011 and come into service from 2014.

‘Better Fit’

“This decision will bring a better fit between the in service dates of these carriers and the aircraft that will fly from them,” Hutton told BBC television. “There’s not a lot of point of having new aircraft carriers if you don’t have the aircraft to fly from them.”

The Ministry of Defense also said it will defer purchase of the Mars fleet auxiliary program while it reviews “scope for alternative approaches” to building the new tanker ships.

Ward from the industry’s lobby group said companies have less “wiggle room” in their manufacturing schedules than in previous decades since executives and government officials tightened procurement schedules and the fabrication process following the end of the Cold War.

Today’s statement leaves open the question about how many projects will be affordable in the years to come. The U.K. currently has 520 helicopters across the armed forces, a figure that will fall to 215 by 2020 on current plans, said Jenkin, the Conservative lawmaker.

“We are simply not going to be configured to do the kind of operations we have being doing,” he said. “What sort of country do we want to be? Do we want to go from having global reach to being a bit player? We need to decide which bits.”

To contact the reporter on this story: Mark Deen in Brussels at markdeen@bloomberg.netSabine Pirone in London at spirone@bloomberg.net

Last Updated: December 11, 2008 10:57 EST