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Defense budget changes raise questions and concerns

By Andrea Shalal-Esa

WASHINGTON (Reuters) - Lawmakers and industry executives began raising concerns this week about new Pentagon cost-cutting measures, saying the moves could have unintended consequences and might prove difficult to implement.

Defense Secretary Robert Gates delivered "a brilliant preemptive strike that kind of frames the whole defense budget debate for Congress and for industry for fiscal 2012," said Byron Callan, sell-side analyst with Capital Alpha Partners.

"But there's not a lot of detail on the cost savings and efficiencies, and Gates most likely won't be around when those efficiencies have to be delivered," Callan said.

Gates last week outlined plans to cut the nation's defense spending from projected levels by $78 billion over five years, including moves to cancel several big-ticket weapons programs and restructure the $382 billion F-35 fighter program built by Lockheed Martin Corp.

Many of the changes must be approved by Congress and some lawmakers have already objected to the cuts, some arguing they go too far, while others are seeking even bigger changes.

Callan said there were many unanswered questions about the plan. For instance, about $14 billion of the savings generated by the Pentagon were linked to revamped economic adjustments, but fuel prices and commodities prices could change again.

Other savings such as the Pentagon's plan to cancel the Expeditionary Fighting Vehicle being developed by General Dynamics Corp have already drawn fire from U.S. lawmakers concerned about future equipment for the Marines -- which means those savings may not materialize after all.

Representative Todd Akin, a Missouri Republican who heads the seapower subcommittee of the House Armed Services Committee, said he was convinced that top Marine Corps leaders "obviously don't like" the decision to cancel the program, and were hoping Congress funded the program anyway.

"I don't think anybody on the committee is going to say that we're going to give up that capability," Akin told reporters after a speech at the Surface Navy Association. "I'm not going to surrender the ground that says we're ... going to have Marines going from the ocean to the shore."

Akin criticized the overall Pentagon budget moves, saying the Obama administration should target spending for the arts, not military spending, to cut the yawning federal deficit.

He predicted two years of gridlock in which the House of Representatives, controlled by Republicans after the November elections, would try to cut federal spending and repeal a sweeping healthcare measure, only to have those moves blocked by the Senate, which remains under Democratic control.

He said Congress also needed a major overhaul since under the current rules federal spending was authorized and overseen by certain committees, but actually controlled or appropriated by other committees. "Congress is structurally broken," he said, calling the current committee structure "messed up."

"LOT OF UNCERTAINTY"

Jim Albaugh, commercial aircraft chief of Boeing Co and chairman of the board of the Aerospace Industries Association, told reporters at a separate event that there was "a lot of uncertainty" among defense companies at the moment.

He said he worried that corporate investments could shift toward commercial areas, where quantities were more stable and companies had more control. Companies like Boeing "will take a real hard look at where they want to make their investment," he said, adding, "Without investment, over time, your capabilities atrophy, your technologies atrophy."

Albaugh said top Pentagon officials had tried to reassure defense company executives that their cost-cutting drive was not intended to wipe out industry profits, but said it remained unclear if that view was shared fully throughout the military.

He said firms also remained concerned about the unintended consequences of some of the measures being touted by the Pentagon, including moves to adopt fixed price contracts for development programs, revamp award fees, and new restrictions on how prime contractors treat work done by subcontractors.

"Let's go through and really understand how these changes in contracting will drive companies," Albaugh told reporters at a separate briefing.

He said Boeing had fared fairly well in the latest round of Pentagon cuts after being hit hard in 2009 and 2010, but the moves would clearly hit many other companies, and could hamper development of new weapons in the future.

Defense companies were also worried about the lack of development programs for new weapons, noting that there were no design teams working on new military airplanes, helicopters, defense communications satellites, spacecraft built to carry humans, or even transport planes.

Many Pentagon officials have urged firms to spend their own money to develop new innovative products, but Albaugh said it was tough to get such programs included in the defense budget.

"The hardest thing to do in this town is get a program that's not a program of record into the record," he said.

(Editing by Sanjeev Miglani)

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