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Defense industry acknowledges likelihood of Pentagon budget cuts

By Marjorie Censer | Capital Business,

As negotiations to avoid a year-end “fiscal cliff” drag on, some defense industry executives have begun to acknowledge that avoiding significant cuts to weapons programs may be impossible over the long term.

Weapons makers have spent months fighting a $500 billion hit to the Pentagon’s budget that would go into effect if President Obama and Congress cannot come to an agreement to avoid a set of automatic spending cuts and tax increases. The Pentagon has said sequestration, as the budget cuts are known, would force them to buy fewer F-35 Joint Strike Fighter aircraft, Stryker vehicles and Army medium tactical vehicles as well as slow other programs and military construction projects.

The industry has argued that the cuts would force them to lay off workers and reduce spending on innovative research. But with less than a month to go, there is growing acceptance that even if the defense industry can avert the most severe form of cuts, contractors that provide weapons and services are unlikely to emerge unscathed.

David Langstaff, president and chief executive of Chantilly-based contractor TASC, has argued that defense executives should stop expecting “an indefinite extension of defense spending at current levels.”

“We need to stop believing — or pretending — that there is a scenario out there that offers no defense cuts,” Langstaff said at a National Press Club event Monday.

As part of a deal between Congress and the Obama administration, the industry will likely have to tolerate some level of cuts, Langstaff said. But instead of $500 billion over 10 years, $150 billion would be more reasonable, he said.

Rather than a “fiscal cliff,” Langstaff said Congress should consider a “stair-step” approach, under which the industry would see Pentagon spending shrink, but in a more orderly way.

The large national debt poses a threat to national security, so reductions in defense spending are likely, he said. But it’s important that any reductions take into account the national defense strategy, said Langstaff. (Langstaff’s firm TASC provides technical services such as systems engineering to the Pentagon and intelligence agencies.)

Defense industry executives are having “the wrong conversation,” he said. “We are talking a good game, but are still unwilling to park short-term self-interest.”

Executives from some of the larger defense contractors, including Northrop Grumman and Pratt & Whitney, also acknowledged the likelihood of cuts to the defense budget but argued that strategic trimming would make more sense than the sweeping cuts.

“If done in a pragmatic and managed way ... we all know that we can deal with tough challenges,” said Wes Bush, chairman, chief executive and president of Falls Church-based Northrop Grumman.

The uncertainty posed by the fiscal cliff has prompted some defense contractors to build their cash reserves and offer investors more dividends. The event Monday was one of many that defense executives have held to speak out against sequestration, including a rally in Crystal City this summer. At that rally, contractors donned red shirts and waved posters shaped like stop signs to spotlight the threat posed by the cuts.

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