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Defense execs welcome Bush budget but warn of dip

NEW YORK (Reuters) - Top U.S. defense company executives welcomed President George W. Bush’s record-setting arms budget proposal on Tuesday, but warned of slower growth in military spending in coming years.

Defense firms like Lockheed Martin Corp and Raytheon Co have thrived -- and their share prices soared -- in almost five years since U.S.-led forces invaded Iraq on the back of ballooning defense spending, but both say the future is uncertain.

Bush on Monday proposed a $515.4 billion budget for the Defense Department’s 2009 fiscal year, up 7.5 percent from this year and setting a record in dollar terms. It was broadly in line with corporate and Wall Street assumptions.

The numbers came in “very close to our expectations,” said Robert Stevens, chief executive of Lockheed, the U.S. largest defense contractor, speaking at an investor conference on Tuesday.

The Pentagon’s proposed budget includes full funding for key Lockheed plane programs, such as the F-35 and F-22 fighter jets and the C-130J transport plane, quashing fears that high-profile, big-ticket programs might get pruned.

But Stevens warned that the overall rate of growth in military spending -- about 7.5 percent for fiscal 2009 compared with 11 percent for this year -- would slow.

“The overall rate of growth in defense will decline, and we’re watching that decline,” he said. “We’re watching that deceleration in the core budget.”

BILLIONS FOR IRAQ

On top of the Pentagon’s proposed $515.4 billion budget, Bush also set aside a supplemental $70 billion for operations in Iraq and Afghanistan, without giving any breakdown on how the money will be spent.

That figure, known as a placeholder, is expected by most to grow before being approved by Congress.

The core Pentagon budget proposal was “just as we expected,” Raytheon Chief Executive William Swanson said at the same investor conference. “The unknown size and content of the supplemental is the thing we are all going to sort out, that’s really the change.”

The next administration will have to make decisions on how to juggle spending on Iraq, homeland security and replacing worn out equipment, commonly referred to as ‘reset’ in military circles, said Swanson, who leads the No. 5 Pentagon supplier.

The upcoming presidential election did not necessarily threaten spending plans, said Lockheed’s Stevens.

“We don’t look at it at all as a threat,” said Stevens. “We pay lots of attention to the different philosophies that are being discussed by the candidates. All of them have a common sense that national security is an imperative.”

But Stevens acknowledged that an accelerated withdrawal of troops from Iraq, as proposed by leading Democratic presidential hopeful Barack Obama, “will impact funds flows” to military contractors.

Yet he stressed the next priority was replacing worn-out equipment: “The last number of years, at a very high operational tempo, really has used the useful life of a lot of systems. It’s time to replace those systems as well.”

Swanson was noncommittal about the outcome of the presidential election.

“We’ve been in business going on our 86th year, we’ve plotted out how we fared in both Democratic and Republican administrations, and actually we fare better on the Democratic side, which surprises most people,” Swanson said.

Editing by Braden Reddall

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