U.S. arms buyer foresees more program terminations

Reuters News
Posted: Sep 05, 2012 1:12 PM
U.S. arms buyer foresees more program terminations

By Jim Wolf and David Alexander

WASHINGTON (Reuters) - The Pentagon may have to kill or cut some arms programs and slow spending on research and development even if Congress delays automatic budget cuts due to take effect in January, the top U.S. arms buyer said on Wednesday.

Chief executives of major U.S. arms makers told Reuters this week that they are preparing for a significant decline in Pentagon spending even if the nearly $500 billion across-the-board cuts are averted.

The automatic cuts, called sequestration, are set to kick in on January 2 unless Congress acts to delay or repeal a mandated $1.2 trillion in federal deficit-reduction measures by then.

The sequester would trim about 11 percent uniformly from each of the Defense Department's 2,500 or so budget items other than military pay, which has been shielded by President Barack Obama, the Pentagon's acquisition chief, Frank Kendall, told an industry conference.

These automatic reductions would be on top of another $487 billion in Pentagon budget cuts already mandated that would come over a decade from the growth the administration previously had planned.

If January's cuts are held off, the Defense Department could manage any subsequently required budget cuts more efficiently than the pending meat-ax approach, the arms buyer said.

In this case, "we will probably end up with a mix" of reduced arms production, slowed research and development spending and "maybe some cuts, kills of programs as well" - assuming required spending cuts similar to the looming 11 percent but not uniform across all accounts, Kendall said.

He said any such additional budget cuts, if in fact required, likely would come largely from the Pentagon's so-called investment accounts - the arms purchases and research and development contracts that fuel earnings of contractors such as Lockheed Martin Corp, Boeing Co, Northrop Grumman Corp, Raytheon Co and General Dynamics.


"We're counting on Congress to avoid" sequestration, Kendall told the conference known as ComDef. "It doesn't allow us to prioritize is the problem."

"It doesn't allow us to find the things that are least important to us," he added. "It doesn't allow us to avoid some of the damage that would be done by this kind of a mechanism."

The likelihood is that Congress will agree to a continuing resolution, probably for six months, Kendall said. Such a measure is used to fund the government if a formal appropriations bill has not been signed into law by the end of the fiscal year.

The top Republican and top Democrat in Congress struck a tentative deal in July to extend funding for federal agencies through March 2013, calling a truce in at least part of Washington's multi-front battle over taxes and spending.

Separately, talks are under way among lawmakers aimed at postponing the January 2 automatic spending cuts, or at least the defense half of them. Some have said a six-month delay would give Congress time to sort out a deficit-reduction approach that is more strategic and targeted.

The Defense Department has cancelled about 50 significant weapons programs since 2008, saving more than $300 billion in projected costs over what would have been their useful lives, Brett Lambert, a deputy secretary of defense for manufacturing, told Reuters later on Wednesday.

Kendall did not specify which programs he thought might be vulnerable to termination as part of further belt-tightening.

"There really aren't many (programs) left to go after" that are not essential, he said.

Wes Bush, Northrop Grumman's chief executive, said it would be tough for lawmakers to reach a deal to avert sequestration before the November 6 presidential election but "we should all have the expectation that Congress can come together to act" between the election and the end of the year.

Even if sequestration is averted, he made clear that he expected further Pentagon budget cuts.

"The reality is the magnitude of the federal budget challenge that the nation faces is going to demand that every component of the budget play a part," he told Reuters Wednesday.

Mike Petters, chief executive of warship-builder Huntington Ingalls Industries, told Reuters he expects sequestration to kick in as scheduled, forcing "the right debate, which is how are we going to allocate our resources here?"

(Additional reporting by Karen Jacobs and Andrea Shalal-Esa, Editing by Tim Dobbyn and Jackie Frank)