Gen. Thomas Lawson told the Senate security and defence committee Monday he understands that militaries around the world are being forced to operate with less money. (Chris Wattie/Reuters)

Canada's top soldier says the armed forces have no fat left to cut ahead of this week's austerity budget.

But Gen. Thomas Lawson told the Senate security and defence committee he understands that militaries around the world are being forced to operate with less money.

Finance Minister Jim Flaherty's budget on Thursday is widely expected to make substantial cuts across government, and the Defence Department and Canadian Forces won't escape unscathed.

Lawson, who took over last year as chief of defence staff, said the military already runs a lean operation.

"I would like to think that there was fat in the armed forces," he said Monday. "I don't think there is."

"What we find as we squeeze (is) that there is very little fat," he added later.

Still, the governing Conservatives will be looking to shave off a little more.

A leaked army planning document, obtained by The Canadian Press, says land forces are bracing for a big hit on operating and maintenance on top of existing budget cuts.

Those cuts will slice into the army's ability to train for operations in the jungle, desert and mountains.

Return to 'more traditional' part-time reserve

The document, dated Jan. 31 and written by Lt.-Gen. Peter Devlin, says funding for full-time reservists will have to be further reduced, and unused cash in the budget for part-time soldiers may have to be raided in order to keep full-timers.

Lawson acknowledged more reservists — many of whom signed up for full-time service during the Afghanistan mission — will likely go from being full-time to part-time soldiers.

"Really, we relied on them to keep the home fires burning within the headquarters as we had more and more head off into operational service," he said.

"The numbers will remain the same. ... What we'll see is that we'll have far fewer full-time members of the reserve, and back to a more traditional ... part-time reserve."

He also says he expects fewer outside companies will be contracted as more jobs are brought back in-house.

Prime Minister Stephen Harper warned Defence Minister Peter MacKay last June that initial budget cut proposals did not go deep enough on the administrative side of the department.

Lawson's remarks came on the heels of a paper that says the Defence Department has struggled to spend billions of dollars allocated to it in past budgets.

The Conference of Defence Associations Institute puts unspent and carried-over funding over the last six years at nearly $8 billion — mostly in the areas of capital equipment and infrastructure.

But the problem, as defence analyst David Perry sees it, is that sections of the department that seem to find themselves with more budget dollars than they can spend are not the ones facing reductions.

Instead, he says it is areas such as operations and maintenance — which have no trouble spending their allocated money — that will feel the brunt of the budget cuts.

"It is therefore not the case that the funds being cut would not have been spent in any event," Perry writes.

"Rather, DND faces the dual pressures of funding reductions in some budget areas, and a loss of purchasing power in others."

Not enough funding to implement plan

DND could lose more than $500 million worth of purchasing power, he estimates. Perry based that calculation on what he says is nearly $8 billion in unspent and carried-over budget money over the last six years.

"As Defence Specific Inflation (DSI) averages seven per cent annually, the cumulative impact of under-spending capital funds is consequential," the report says.

"Assuming that these measures represent only a series of financial shifts from one fiscal year to the next, the impact of the annual seven per cent DSI applied to a total of $7.94 billion not spent in the year intended could mean a loss of $556 million worth of purchasing power."

Perry also notes that while defence funding has steadily increased since 2004, there's still a big gap between the Canada First Defence Strategy's investment plan and the money allocated to implement it.

The department faces a "significant fiscal challenge," he concludes.

"The existing (Canada First Defence Strategy) plan was insufficiently resourced to finance its planned capital acquisitions, and an inability to spend money on capital acquisition in the year intended, will reduce DND's purchasing power as a result of inflation," the report says.

"Both of these measures mean that not all of the CFDS acquisitions are affordable. Three successive budgets have reduced DND's funding allocations, largely directed towards (operations and maintenance) spending.

"As a result, the Canadian Forces' readiness has been reduced significantly."