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Defense CEOs say budget deal must address taxes

By Andrea Shalal-Esa

WASHINGTON (Reuters) - Weapons industry executives on Monday urged the White House and Congress to end what one CEO called "political theater" and act to avoid looming automatic budget reductions that will cut projected military spending by another 10 percent this year.

Executives from four companies told a news conference that piling an additional $500 billion in spending reductions on top of the $487 billion in cuts already being implemented by the Pentagon would harm their industry and national security. Both sets of cuts would be phased in over a decade.

They called for tax increases and spending cuts as part of a plan that will remove the uncertainty that has already sparked layoffs in their industry, slowed investment and made it harder to recruit top high-tech talent.

The executives conceded that some additional cuts to projected military spending levels were likely in coming years -- even if Congress acts to avert automatic cuts due to start taking effect on January 2 -- given the depth of the fiscal crisis facing the United States.

Monday's event, accompanied by a letter to President Barack Obama and Congress, was the latest effort by arms makers to reverse spending cuts triggered by the failure of Congress to find $1.2 trillion in other deficit-reducing measures.

Over the past year, there have been well-publicized rallies at weapons plants around the country. Executives, union members and local lawmakers repeatedly warned that the cuts could lead to nearly 1 million job losses in the defense sector and more than 2 million in the United States overall.

Critics say the arms industry is overdue for a correction after more than a decade of sharp gains and hundreds of billions of dollars of cost overruns on big weapons programs. They say the Pentagon's annual budget remains at historically high levels, and that other sectors create more jobs.

Heidi Wood, senior aerospace analyst with Morgan Stanley, said investors and companies expected Congress to ultimately avert the fiscal cliff through a temporary extension, but she was cautious since the two sides remained far apart. The Arca defense index closed 1.11 percent lower on Monday.

In their letter, the four executives and 126 others called pending sequestration cuts "a recipe for economic stagnation and the worst possible way to tackle America's long-term debt."

They said the indiscriminate nature of the cuts would undermine the U.S. manufacturing sector and choke off critical investments in future technologies.

Deputy Defense Secretary Ashton Carter, speaking at the National Defense University, said the cuts required under "sequestration" would be "chaotic, wasteful and damaging to every function of government and should not take place."

David Langstaff, chief executive of engineering services provider TASC Inc, urged lawmakers to work out a compromise.

"We are talking a good game, but are still unwilling to park short-term self-interest," Langstaff said. "Every trade group, special interest and corporate lobbyist is up on Capitol Hill clamoring that Congress solve the problem, avoid the fiscal cliff and not default to sequestration ... but, don't touch my budgets! We can't have it both ways."

Langstaff said the "heavy lifting" would need to come from other areas, but that additional cuts of $50 billion to $150 billion in defense spending were likely.

Wes Bush, chief executive of Northrop Grumman Corp, said failure to act could hurt the United States' standing in the global economy, while a speedy resolution would stimulate new global investment and growth.

"The world is watching ... to see can the United States can get its act together," he said. "Or do we have to have this political theater to cause us to actually figure out how we're going to take action."

David Hess, president of jet engine maker Pratt & Whitney, said his parent company, United Technologies Corp, believed comprehensive tax reform, including personal income tax rates, needed to be part of any fiscal compromise.

Dawne Hickton, chief executive of RTI International Metals Inc, said she would support an increase in the personal income tax rate for the wealthiest Americans if it would help avoid across-the-board cuts, which she said would be particularly hard on small and medium-sized businesses.

RTI, which makes titanium for fighter jets and other weapons systems, has already diversified into energy and medical devices, Hickton said. Military sales now account for 20 percent of revenues versus 40 percent three years ago, she said.

She said uncertainty about the budget outlook had prompted the company to scale back its investment in a new manufacturing plant in Virginia, reducing the projected number of jobs there to just 25 from 200 to 300 spots initially expected.

Ben Freeman, national security researcher at the non-profit Project on Government Oversight, told reporters in a teleconference that $487 billion in cuts already planned were from projected levels, not actual budget levels enacted.

"Calling them savings is like saying you can cut your credit card debt by a quarter million dollars by just not buying a Lamborghini. Unfortunately, you can't balance your checkbook like that, and neither can our government," Freeman said.

(Reporting by Andrea Shalal-Esa; Editing by Ros Krasny, David Gregorio and Chris Gallagher)

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