The announcement comes three days before the spending review for 2015-16.
Speaking on BBC One's Andrew Marr Show, Osborne said: "I've settled with the defence department. Many people thought that was going to be one of the biggest challenges."
He added that he and Defence Secretary Philip Hammond had come to agree on a "tough choice" where "The civilian [MoD staff] head count is going to be reduced. There will not be a reduction in military capability."
The civilian component of defence capability is critical to the support and functioning of the front line.
The loyalty and dedication of civil servants to their department and the armed forces have kept the MoD functioning.
Additional cuts will destroy the ability of civilians to support the front line, which in turn will reduce military capability.
In short, defence cuts cost.
The MOD has, for nearly ten years, merely employed Atkins and other contractors to do the work (at three times the cost, per head, of military and civilian people). I expect George Osborne and Phillip Hammond are continuing this policy. It costs the taxpayer far too much, money which could have gone to vital equipment, because they hide these costs in the Equipment Plan.
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