By David Alexander and Andrea Shalal-Esa
WASHINGTON (Reuters) - Defense Secretary Chuck Hagel on Wednesday pledged $40 billion in new Pentagon spending reductions over the next decade, but warned that additional cuts required by law posed stark choices that could bend or break the president's defense strategy.
Hagel, unveiling his four-month Strategic Choices and Management Review, said the Pentagon would cut $40 billion in overhead from its agencies and headquarters units over the next decade.
He said the review concluded the Army could be cut further, reductions that would trim it to its smallest size since the start of World War Two. Hagel said the Air Force could be slimmed further as well, and the Pentagon would work on compensation reforms to save $50 billion.
But the defense secretary said eliminating duplication and waste could save nowhere near enough to reach the budget cuts required by law - $500 billion in across-the-board reductions over a decade on top of the $487 billion already begun.
The deeper reductions, under a mechanism known as sequestration, would inevitably force the Pentagon to further shrink the size of the military, deal with the unaffordable growth in pay and benefits and make difficult trade-offs between force size and weapons programs, Hagel said.
"The inescapable conclusion is that letting the (additional $500 billion in cuts) persist would be a huge strategic miscalculation that would not be in our country's best interests," Hagel told a Pentagon news conference.
The Pentagon has long been resistant to budget cuts beyond the initial $487 billion required by the Budget Control Act of 2011. Analysts have criticized the nature of the additional sequestration cuts - which are made without regard to strategic importance - but have been skeptical about the Pentagon's dire warnings about additional reductions.
Hagel said the Pentagon went out of its way to avoid "crying wolf" in the review.
Loren Thompson, an analyst at the Lexington Institute think tank, said Hagel actually understated Pentagon concerns, adding that a decline in readiness and equipment essentially meant "war fighters are going to die for lack of equipment and training."
The defense secretary said the Pentagon analysis found that cuts to overhead and compensation would still leave the Pentagon $350 billion to $400 billion shy of the $500 billion in reductions required under sequestration.
He said deeper cuts would require hard trade-offs between force size and developing high-end weapons.
After growing for a decade because of the wars in Iraq and Afghanistan, the Army is reducing its force to 490,000 soldiers from a high of 570,000. Hagel said the review found the Army could cut up to 70,000 more troops and still conduct "priority missions."
Cuts of that size could cause the Army to hit a post-Second World War low.
Hagel said five Air Force fighter squadrons, which typically have 18 to 24 planes apiece, could be eliminated and that the size of the C-130 transport fleet also could be reduced from the current 358.
A modest reduction in force structure would enable the Pentagon to achieve the $150 billion in cuts over a decade that President Barack Obama has proposed as an alternative to the sequestration cuts, Hagel said.
"Significant reductions beyond the president's plan would require many more dramatic cuts to force structure," he said.
In addition to the president's proposals, the strategic choices review looked at a scenario that would include about $250 billion in defense cuts over a decade, plus the $500 billion in cuts required under sequestration.
"The 'in-between' budget scenario we evaluated would 'bend' our defense strategy in important ways, and sequester-level cuts would 'break' some parts of the strategy no matter how the cuts were made," Hagel said.
He said the review looked at whether it would be better to pursue a smaller force with higher-end capabilities, or a larger force with fewer high-end weapons systems. Pursuing advanced systems would require a still-smaller Army, as well as reducing the number of aircraft carriers to eight or nine from 11.
Fielding a larger force at the expense of more advanced weapons systems would essentially lead to a "decade-long modernization holiday," Hagel said.
Hagel did not identify any specific weapons programs to be cut, but vowed to protect certain programs, including the Lockheed Martin Corp F-35 Joint Strike Fighter, a new bomber and submarine cruise-missile upgrades, if the military opted to preserve high-end capabilities over size.
If size were deemed more important, the military would have to cancel or curtail many weapons programs, slow growth in cyber spending and cut back special operations forces, he said.
Hagel said decisions on how to balance the two stark options would be made in coming months. He said the final decision would be up to Obama.
"Before this review, like many Americans, I wondered why a 10 percent budget cut was in fact so destructive," Hagel said in prepared remarks. "This analysis showed in the starkest terms how a 10 percent defense spending reduction causes in reality a much higher reduction in military readiness and capability."
(Reporting by David Alexander and Andrea Shalal-Esa)