Analysis: Panetta would apply sharper knife to Pentagon budget

WASHINGTON Wed Apr 27, 2011 5:10pm EDT

Leon Panetta speaks at a National Italian American Foundation policy luncheon on Capitol Hill in Washington in this June 11, 2009 file photo. REUTERS/Jonathan Ernst

Leon Panetta speaks at a National Italian American Foundation policy luncheon on Capitol Hill in Washington in this June 11, 2009 file photo.

Credit: Reuters/Jonathan Ernst

WASHINGTON (Reuters) - Leon Panetta, a Democratic party insider with budgets as his background, would oversee steady declines in Pentagon spending and divert weapons dollars to the Treasury Department to help reduce the U.S. deficit.

President Barack Obama on Thursday will nominate Panetta to replace Robert Gates as U.S. defense secretary, and that spells a heightened focus on military costs and cuts at the White House, according to administration officials and analysts.

A senior Obama administration official said that finding more places to cut the budget would be one of the top items on Panetta's agenda when he arrives at the Pentagon on July 1 after expected Senate confirmation.

Loren Thompson, a prominent industry consultant with close ties to the Pentagon, said substituting Panetta "would undoubtedly result in a faster pace of cuts to the defense budget in future years."

Outgoing Pentagon chief Gates, the sole cabinet holdover from the Republican Bush administration, has seen through Obama's first effort to rein in core Pentagon budgets that have nearly doubled since the September 11, 2001, attacks on New York and Washington. But Gates resisted deep cuts and argued for letting the armed services keep their savings from an "efficiency" drive for re-investment in arms programs and forces in the field.

Panetta -- former House of Representatives' budget committee chairman, White House budget director and chief of staff to former President Bill Clinton -- is being asked to undertake broader cuts.

For U.S. arms makers, this could mean, among other things, a stepped-up focus on foreign sales.

The Pentagon's top suppliers -- including Lockheed Martin Corp (LMT.N), Boeing Co (BA.N), Northrop Grumman Corp (NOC.N) and General Dynamics Corp (GD.N) -- already have begun adjusting their plans for tighter profit margins, slower weapons-buying and greater reliance on sales to the Middle East and Asia and the Pacific.

Boeing's military arm, for instance, expects its overseas revenues "to climb toward" 25 percent over the next five years from about 17 percent now, Dennis Muilenburg, who heads the company's military arm, told Reuters in a telephone interview Wednesday.

Boeing has been taking "firm and quick action on reducing overhead costs and reducing cost structure, consolidating facilities," to prepare for a more austere Pentagon budget, he said.

Obama called on April 13 for squeezing projected national security spending $400 billion, or about 4 percent, through 2023 as part of a deficit reduction push. He ordered a review of U.S. military roles and missions before making any cuts. The Pentagon accounts for about 20 percent of U.S. federal spending and half of non-mandated, discretionary spending.

Panetta is expected by analysts to be more receptive than Gates to finding funds in the Pentagon's core $530 billion budget that could be put toward deficit trimming.

Gates said earlier this year that the Defense Department needed a minimum of $540 billion in fiscal 2011, about $10 billion more than was ultimately approved by Congress and signed into law by Obama.

Panetta has relationships and a public service record that could help him surmount Capitol Hill's reluctance to cut arms programs, which would mean less jobs in some congressional districts, said Michael Lewis, an aerospace and defense analyst at Lazard Capital Markets.

FLIR Systems (FLIR.O) and L-3 Communications (LLL.N) could benefit from overseas sales pushes, Lewis said. FLIR provides infrared sensors to military customers used during surveillance missions. L-3 can sell stripped-down versions of its Project Liberty intelligence collection aircraft.

(Editing by )