PRIME Minister Margaret Thatcher is being urged to take advantage of a substantial ``peace dividend.'' The reduction of tensions in Europe appears to hold out the prospect for Britain and its allies to maintain smaller defense forces in the future.
The resultant savings could be used to fund Britain's flagging social-welfare services, meet some of the costs of local government, and pump more cash into protecting the environment.
But proposals circulated by Alan Clark, No. 2 at the Ministry of Defense and one of Mrs. Thatcher's favorite ministers, are provoking a determined behind-the-scenes rear-guard action by armed service chiefs and Mr. Clark's own boss, Defense Secretary Tom King.
Meanwhile, the British Treasury, eagerly looking for any way of reducing spiraling public expenditures, is demanding defense cuts. A senior Treasury official said his department wanted an initial 1 billion ($1.7 billion) cut in the Defense Ministry's projected 22 billion budget for next year.
One Defense Ministry adviser describes the situation as ``the most savage internal defense debate for a decade.''
Mr. King is currently pushing through a major review of defense priorities, due to be completed in June, and is known to accept the broad argument that the collapse of Moscow's East European empire should yield a peace dividend of some kind.
The argument is about how large the dividend should be and where the knife should fall.
Most of the fury of the argument has been contained by orders from King that there should be no public disagreement until his defense review is complete.
In the United States, Defense Secretary Richard Cheney is contemplating a 25 percent cut in the Pentagon's budget over five years. King takes the view that until more time passes, any slices made in defense spending should be modest. In this he has strong backing from the services.
Particularly powerful resistance is being put up by Royal Navy officers.
Richard Sharpe, a former naval captain who is now editor of the authoritative Jane's Fighting Ships, reflects the views of many serving senior sailors.
He says: ``The Navy is already suffering a death of a thousand delays. Wherever you look there are bureaucratic mechanisms to delay planned naval programs in the 1990s.
``It seems extraordinary that Britain, a maritime nation, continues to place its navy last in defense priorities.''
Clark, the minister for defense procurement, who was appointed to his post by Thatcher last July, disagrees with the service commanders.
He faced the passions underlying the disagreement when a paper on proposed defense cuts he had prepared for private study by Thatcher and other senior ministers was leaked to the influential British weekly, The Economist.
The study, according to The Economist (May 19), proposed cutting the Royal Navy's fleet of frigates from 48 to 32 and reducing the number of infantry battalions in the British Army from 55 to 32.
For many years the 55,000-strong Rhine Army has been a key element in the defense of NATO's central front. Clark would like to see its strength halved.
Clark's paper recommended canceling a number of new missile projects and the halving of the 140,000 civilian staff at the Defense Ministry. Officials at the Defense Ministry say they fear that Britain will pull out of the 22 billion NATO project for a new European fighter aircraft.
When news of the Clark proposals began to circulate, it appeared that much deeper defense reductions than the 5 percent a year being demanded by the Treasury might be likely.
If the Clark plan is put into effect, Defense Ministry officials unsympathetic to it say, it could yield savings of 17 billion to 20 billion ($29 billion to $34 billion) over 10 years - roughly twice what the Treasury is seeking, but at the risk of weakening British defenses unduly.
There are plenty of potential beneficiaries of large-scale defense savings. Officials at the Ministry of Health, under pressure to spend more on the National Health Service, were reported to be hopeful that they would get their share of any ``peace dividend.''
Chris Patten, the environment secretary, who is currently looking for about 3 billion extra government cash, was said to be urging Thatcher to divert some of the peace dividend to his department.
Britain's opposition Labour Party then entered the debate. A new defense policy document issued on May 24 spoke approvingly of the easing of tension in Europe and proposed the creation of a ``defense diversification agency'' to assist companies making weapons to switch to manufacturing peaceful products.
Labour has been careful however not to call too openly for defense economies, lest it be attacked by the Conservatives for seeking to place British security in jeopardy. One Labour official said: ``We lost the last general election because too many voters saw us as soft on defense. We shall not make the same mistake again.''
On May 25, the Friends of the Earth published a paper entitled ``The 50 Percent Initiative.'' It recommended that Western governments should halve their military budgets by the year 2000 and spend instead on on programs to combat global warming.
How influential Clark's recommendations will be in determining the future pattern of British defense spending is being briskly debated in the news media. Clark is a fervent Thatcherite and gave the prime minister strong support in the early 1980s when she decided to oppose Argentina's invasion of the Falkland Islands. Service officers have privately dismissed Clark as a maverick who is being used by Thatcher to stir debate within the Defense Ministry.
His confidence that Britain can afford to make deep defense cuts was indirectly endorsed however on May 16 when three former British service chiefs and a former top civil servant at the Ministry of Defense testified to the House of Commons Defense Committee.
The four agreed that the threat of a surprise attack by Soviet forces in Central Europe had all but disappeared.