September 5, 2013 / 1:40 AM / in 4 years

Pentagon sees $20 billion hit in 2014 if budget cuts hold

WASHINGTON (Reuters) - The Pentagon would have to slash its budget by about $20 billion in fiscal 2014 from a year earlier if mandatory budget cuts remain in effect, the chief arms buyer for the U.S. military said on Wednesday, calling that an increasingly likely scenario.

Undersecretary of Defense for Acquisition, Technology and Logistics Frank Kendall speaks at the Reuters Aerospace and Defense Summit in Washington, September 4, 2013. REUTERS/Larry Downing

Frank Kendall, U.S. undersecretary of defense for acquisition, technology and logistics, said the cuts would fall disproportionately on the Pentagon’s procurement and research and development accounts, since it was difficult to harvest savings from personnel accounts on short order.

He told the Reuters Aerospace and Defense Summit that an “awful lot of smaller programs” faced delays, cuts and even cancellation if the cuts stayed in effect, while fewer of the big-ticket weapons programs would be affected.

He underscored the Pentagon’s support for its biggest weapons program, the $392 billion Lockheed Martin Corp (LMT.N) F-35 Joint Strike Fighter, calling it the military’s highest priority conventional warfare program.

The Pentagon must cut its base budget by $500 billion over the next decade from planned spending levels under the process called “sequestration” -- cuts that come on top of $487 billion in reductions already planned. Military leaders have urged Congress to reverse the cuts, but lawmakers have failed to reach agreement on alternative ways to reduce the federal deficit.

Kendall said he had experienced previous downturns in defense spending, but the current gridlock in Congress was unprecedented, and the resulting uncertainty was wreaking havoc on the ability of the military and industry to do any planning.

He declined comment on the possibility of U.S. strikes on Syria, but said the budget cuts would limit the military’s ability to respond to natural disasters like the 2010 earthquake in Haiti or the 2011 earthquake and tsunami in Japan.

“As we design our budgets to be tighter and tighter because of sequestration, we’ve given up our ability to absorb that type of thing,” he said.

He said big contractors like Lockheed, Boeing Co (BA.N) and General Dynamics Corp (GD.N) would weather the downturn, but he worried about smaller suppliers which are finding it difficult to secure capital for investments in the current market.

The Pentagon is keeping a close eye on the health of such smaller firms and has small pots of money available to help them with cash or programs under certain conditions, he said.

If the budget cuts stayed on the books, Kendall said the U.S. military would likely end up with tiered system that provided some military units with very good equipment, and others with older, less capable equipment.

Given the uncertainty about future budget levels, Kendall said he was deferring some commitments on acquisition programs. He declined to name specific programs, or estimate how many programs could face delays or cancellation.

“Depending upon how long this lasts, there’ll be more on the list as time goes on,” he said. “Until we can go through the fiscal year 2015 planning process and do some more detailed analysis on what long-term sequestration might look like, we don’t really want to make major commitments that we might have to defer.”

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Editing by Ros Krasny, Andre Grenon and Edwina Gibbs

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