LONDON- In 1943, at the height of World War Two, Britain had little left in the bank but still spent 50 percent of gross domestic product on defense. To win the war, there was little other choice.

If only the sums were as straightforward for today's military planners and suppliers.

Amid the worst economic crisis in 80 years, the watchword for any government looking to keep its budget under control is austerity, meaning less spending on everything and a much tighter focus on what is critical for long-term defense.

But knowing what is critical in the 21st century is no easy task. And the recession could speed up a rethink about what threats the world is arming itself against.

Since 2001, global military spending has risen steadily and still rose last year despite economic problems, climbing 4 percent to $1.464 trillion, according to the Stockholm International Peace Research Institute. But the economic picture is shifting and spending priorities with it.

There's going to be tremendous pressure on budgets and the question is, where will the cuts come? said Alex Nicoll, a defense and economics expert at the International Institute for Strategic Studies in London.

We're still very much in an era where each country has a different view of what its security priorities are and what role it wants to play in the world.

CHANGING THREAT

While major powers still need big ticket items such as ships and aircraft to defend their territory and trade routes, the U.S. projection of its power globally means its military also needs a much greater airlift and logistics capability.

Since September 2001, the growing impact of terrorist groups and non-state actors has made defense priorities complex.

The attacks in Mumbai last November showed a small group of lightly men armed could have a impact far beyond their numbers.

The ongoing insurgencies in Afghanistan and Iraq also illustrates how a relatively small force can tie up large numbers of troops armed with billions of dollars worth of equipment in what has come to be known as asymmetric war.

While fighting for the credibility of the alliance in Afghanistan, NATO states are also worried about the impact of unrest everywhere from Georgia to Pakistan and then also have to strengthen security at home in case of terrorist attacks.

Latin America and Africa are also plagued by insurgencies, but states have border conflicts or heavily armed drug gangs to contend with as well.

In the Middle East, Israel frets about Iran's nuclear ambitions, while battling non-state actors such as Hamas and Hezbollah.

Each of these diverse threats means different spending priorities. As well as needing to maintain ships, helicopters, tanks and jets, nations need the latest non-conventional equipment for reconnaissance, surveillance, cybersecurity, biometrics and robotics. And all for less money.

FUTURE WAR

The head of Britain's army, General Sir Richard Dannatt, laid out his vision of the future in a speech last month, painting a world in which militant and non-state groups, operating from failed or collapsing nations like Somalia, would pose the greatest danger, from terrorism to acts of piracy.

When it comes to using military force, he said, its purpose will be to prevent or preempt instability or to restore stability. Stabilization operations will therefore be our most likely and most demanding task.

Without specifying programs, Dannatt went on to suggest that some of Britain's planned defense spending, including on aircraft carriers, nuclear submarines and the costly Eurofighter Typhoon jet, was misplaced.

His view chimes with that of U.S. Defense Secretary Robert Gates. In his 2010 budget plan, Gates proposed ending production of Lockheed Martin's F-22 fighter, trimming missile defense spending, cancelling other major weapons programs and spending more on material needed to fight insurgencies.

Our conventional modernization goals should be tied to the actual and prospective capabilities of known future ... adversaries, not by what might be technologically feasible, he said, calling for an overhaul of future combat systems.

Gates' budget would see a further $2 billion allocated to intelligence, surveillance and reconnaissance programs, such as the unmanned Predator drones now operating over Pakistan.

Predators are now an essential asset in the Pakistan border region, and are likely to be a major future defense priority, along with similar surveillance-and-attack technology.

In total, defense research firm Teal Group sees $55 billion of spending on unmanned aerial vehicles in the next 10 years.

But that is not to say spending on conventional weapons is over, it is just likely to be far more rigorously controlled.

The United States, China, Russia, Britain and France, five of the biggest defense spenders, will continue to pump money into major programs for transport and attack aircraft, warships and armor to support troops on the ground, providing steady business for major state-linked defense corporations.

But most of those nations will also be looking to cut costs around the margins, while investing more carefully and more heavily in the surveillance, anti-terrorism and cyber-defense technologies that will give them an edge in the future.

Some defense firms, such as General Dynamics, are already focusing their attention on those expanding niches and that trend is likely to continue, defense experts say.

But with budgets tight and security threats changing, nimble and far-sighted corporations with a specialist technology are likely to gain most, while largest companies consolidate.

It's all going to put pressure on the defense industry for further rationalization and restructuring, said Nicoll. But ultimately, he said, it might also produce better value for money for taxpayers when it comes to major defense spending.

(Additional reporting by Andrew Gray in Washington and Tim Hepher in Paris; Editing by Jon Hemming)

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