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Colin Powell's endorsement of Barack Obama may well be the final nail in the coffin of John McCain's presidential bid. Gen Powell, formerly Secretary of State under the current Republican administration described Sen Obama as the, "transformational figure" necessary for America.

When it comes to foreign policy, it is this notion of the Democratic contender representing a fresh start that counts for far more than the detail of his platform. His pledge, for example, to get American combat troops out of Iraq swiftly will in my view count for far less in determining the actual timetable than what the Iraqi government wants or the military advice the new President receives.

Instead Sen Obama, as the choice of so many foreigners, will provide the necessary break with an administration that could hardly have been less popular globally. In part this is about discarding some of the more extreme ideological positions of the Bush White House and in part it is about allowing those who habitually criticise the USA with an excuse to re-visit their anti-Americanism or at least park it for a while.

Gen Powell's endorsement is all the more remarkable given his professed deep friendship for John McCain. Few who have watched Sen McCain in recent years can fail to have been impressed by his sound judgement in foreign affairs: he favoured radical action on climate change years ago; he became an outspoken critic of Guantanamo Bay and the torture of Al Qaeda suspects long before most senators had the courage to do so; he backed the troop surge in Iraq when most were ready to concede defeat; and he started asking questions about whether the behaviour of the Russian government meant it should be excluded from the G8 economic forum months before this summer's war in Georgia put the issue centre stage.

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People in Whitehall are expecting the financial crisis to produce spending cuts in several departments. For the Ministry of Defence this promises to be another difficult episode in which prestigious projects may be axed or delayed and critics denounce it as a 'Treasury-led' exercise, i.e. one designed to produce savings rather than to re-think Britain's military needs.

Even before the recent stock market rollercoaster, many people at the MoD were expecting a bloody spending round. Projected equipment costs for the next ten years are said to be something like £35bn over the available budget, creating a huge gap that must be addressed.

Add to this that many senior officers are intensely frustrated that they have been operating for years outside the department's Defence Planning Assumptions - the tasks set out by the last major defence review ten years ago which the forces were financed to perform - and it is clear that some of the top brass would even welcome the chance to cut back commitments or equipment projects as part of a coherent rethink of what missions the forces are required to perform.

Now though the Government is girding itself for recession, with its plunging tax revenues and for a huge rise in its borrowing, these arguments have become more pointed in the corridors of MoD.

"All options are now on the table", reports one senior insider, meaning that prestige projects previously thought safe (such as the Royal Navy's aircraft carriers, future batches of the RAF's Typhoon fighter or the Army's plan for a future family of armoured vehicles) may now be cut back.

Those who would prefer the axe to fall upon the Royal Navy's Trident submarine replacement plan note ruefully that their new boss, Defence Secretary John Hutton, represents Barrow in Furness where Britain's nuclear subs are built.

In fact, the problems are so profound that constituency interest is hardly likely to prove decisive, and indeed that axing the Trident replacement plan would not in itself be enough.

Many Whitehall defence policy types would like there to be a full blown review in which the Defence Planning Assumptions are rewritten and the forces' duties redefined in keeping with these cash starved times.

People close to this debate tell me, however, that this type of exercise is not likely to happen. Both because the amount of MoD staff work required to do this could take anything up to 18 months, and the Government does not wish to cut defence in this way as it runs towards a general election. Many had hoped indeed to postpone a defence review until after the election (which must happen by June 2010).

Now the signs are that the public spending position is too desperate and the MoD too over-committed to leave things for that long. So stand by for a 'rethink' in the first half of next year.

The withdrawal of British combat troops from Iraq (expected in May-June next year) will allow commitments to be trimmed a little. At the same time something will have to give on the equipment budget leading to the inevitable 'hard choices' between future projects.

Some think this may have to be given a philosophical or policy gloss of a shift away from preparing for high intensity, inter-state conflict with its expensive weapon systems - and acceptance that 'stability operations' such as the Afghanistan deployment will define future equipment needs for many years to come.

The thinking therefore is moving towards a defence review by another name, something that will most likely produce howls of outrage from Conservative politicians because, they might argue, it has been based on the need to save money rather than on the right kind of military rethink.

In truth though, cutbacks in defence now seem inevitable, with all of the bad political waves that could create when the forces are fighting and dying overseas.