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Pentagon official hopeful Congress will stop January 2 cuts

By Andrea Shalal-Esa

WASHINGTON (Reuters) - A top Pentagon official said on Thursday he is "cautiously optimistic" that Congress will avert automatic budget cuts that are due to kick in on January 2, citing some increased willingness among Republicans to consider additional revenue now that the presidential election is over.

Pentagon Comptroller Robert Hale said the tone of discussions between Republicans and Democrats had improved and neither side wanted to see the additional cuts to military spending, which would total $52 billion in fiscal 2013 alone, take effect.

"Winston Churchill once said you can always trust Americans to do the right thing, after they've tried everything else first," Hale told an investor conference hosted by Credit Suisse. "I think we've tried about everything else first."

The U.S. stock market finished higher on Thursday after a series of conflicting statements from Washington about negotiations on a deficit-reducing agreement that would avoid big spending cuts and tax hikes dubbed the "fiscal cliff.

Lockheed Martin Corp, Boeing Co, Northrop Grumman Corp, General Dynamics Corp, Raytheon Co and other defense companies are anxiously watching the negotiations, but say they are bracing for some additional cuts to defense spending, regardless of what happens.

President Barack Obama and Congress agreed last year to cut projected national security spending by $487 billion over the next decade. The Pentagon faces another $500 billion in across-the-board cuts beginning in January unless Congress reaches a deal on other spending cuts or revenue increases.

Hale reiterated that the cuts required under sequestration would have a devastating effect on the Defense Department, if Congress were unable to reach agreement on other deficit-reducing measures, but said the effects would likely be phased in over a period of months, not days.

He said the department would "almost certainly" be forced to implement unpaid furloughs for civilian workers. The cuts would also result in fewer purchases of weapons, delays in programs and higher unit costs, as well as decreased services for military families and retirees, he said.

Hale told industry executives and Wall Street analysts that the Pentagon was finalizing its budget plan for fiscal 2014, based on the assumption that the sequestration would not occur. If it did, he said, the department would first have to revamp its budget plan for fiscal 2013, then adjust the plan for 2014.

While no detailed planning was under way for how to implement the automatic budget cuts, Hale said the Pentagon would act to protect war-related spending and safeguard multiyear contracts signed with industry to avoid penalties.

"You will not see cataclysmic changes," Hale said.

He also appealed to weapons makers to continue efforts to reduce overhead costs, noting that labor costs had risen more sharply in the defense business than the commercial sector.

Chief executives from Northrop, Lockheed, Boeing and others told investors they were working hard to consolidate facilities, reduce their workforces and cut other overhead costs as they prepared for leaner times.

The Air Force is already facing difficult challenges in modernizing its aging fighter jets, bombers, helicopters, satellites and other equipment -- but those problems will get worse if Congress cuts the Pentagon budget further, Air Force Secretary Michael Donley told the conference.

He said the Air Force was already making tough choices about which programs to fund, while leaving some needed programs - such as new training aircraft, more modern nuclear equipment and updated surveillance radar planes -- unfunded for the moment.

"We'll need to be careful -- and in some cases skeptical -- about adding more programs than we can afford," Donley said.

He declined comment when asked whether further budget cuts would force the Air Force to abandon its plan to buy new combat search and rescue helicopters, saying only that current aircraft were 22 years old on average.

Boeing's defense chief Dennis Muilenburg told the conference that his company had based its strategic plans on a worst case scenario that assumed that sequestration would occur.

"We try to be very realistic about those risks," he said, adding that Boeing believed it was well-positioned for long-term growth despite mounting pressure on the U.S. defense budget.

Over the next 10 years, he said, the company forecast the overall market for military services, aircraft, satellites and other equipment would be worth $2.9 trillion.

"This is a long-term enduring market with a lot of opportunities," he said.

(Editing by Matthew Lewis and Bob Burgdorfer)

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