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Pentagon arms buyer sees deal by Congress to delay spending cuts

By Andrea Shalal-Esa

WASHINGTON (Reuters) - The Pentagon's top arms buyer on Monday said he expected U.S. lawmakers to agree in coming weeks to delay implementation of an additional $500 billion in automatic defense spending cuts that are due to start taking effect in January.

Undersecretary Frank Kendall said the Defense Department had begun early planning for the process known as sequestration, which would cut the military's budget by an extra $50 billion a year, on top of over $50 billion in annual cuts already on the books.

Planning was difficult because the Pentagon would not have much leeway to implement the cuts, Kendall said, noting that as written, the law would force the department to cut every budget account -- except military personnel costs -- and perhaps every single budget item, by just under 10 percent.

Calling sequestration "a singularly stupid way to take money out of the Defense Department," Kendall said no one in Congress wanted the cuts to kick in on January 2 as currently planned and President Barack Obama was determined to avert the reductions.

"There's some work to be done to get from here to there," Kendall told a conference hosted by the National Contract Management Association. He said the Pentagon had also looked carefully at discussions in Congress about imposing some additional cuts short of $50 billion as part of a compromise.

"A few billion dollars might be acceptable, but when you start talking about $10, $20, $30, $40 (billion), to say nothing of $50 billion, that really means we have to go fundamentally rethink what kind of Defense Department we have," Kendall said. Cuts of that magnitude would force tough choices about "what capabilities we would keep and what capabilities we would drop."

U.S. defense companies like Lockheed Martin Corp have been warning for over a year that uncertainty about future budget levels is depressing investment in facilities, hiring and mergers and acquisitions across the sector.

Lockheed, Northrop Grumman Corp, Boeing Co and Raytheon Co told investors last month that they were focused on cutting costs and drumming up foreign sales to maintain profits despite what they see as a long cycle of budget challenges after more than a decade of growth.

Kendall, who served at the Pentagon during the last big drop in defense spending after the end of the Cold War, said Defense Secretary Leon Panetta was determined to avoid what happened then, when troops lacked equipment and funds for training.

He said the Pentagon's fiscal 2013 budget proposal had already accepted some risks, but allowed the military to reach its newly revamped strategic goals. Large-scale additional spending cuts would make it impossible to achieve those goals and would be "very hard" to absorb, he added.

Kendall said he expected lawmakers to enact "some kind of deal that will delay sequestration during the "lame duck" session, when Congress meets after the election, that is due to begin the week after next.

Then Congress and the White House could together tackle a bigger budget deal in early 2013, he said, adding: "I'm an eternal optimist."

He said the Defense Department was also continuing its efforts to reform the way it buys goods and services, and make weapons systems more affordable. Kendall's office plans to unveil additional reform efforts next week, an aide said.

(Reporting By Andrea Shalal-Esa; Editing by Tim Dobbyn)

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