Automatic budget cuts due to take effect in January will drive up the cost of weapons systems and cut revenues for arms makers in the longer term, but the full brunt of the cuts will not be felt for several years, a top budget analyst said Friday.
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"There's actually some cushion here for the defense industry," Todd Harrison of the Center for Strategic and Budgetary Assessments told reporters as he unveiled a report by the independent think tank. The cuts triggered under a process known as "sequestration" apply to funds authorized for spending, not outlays, which are often staggered over several years.
Harrison said he estimated that the Pentagon faced $56.5 billion in additional cuts in fiscal 2013, if U.S. lawmakers did not act to avert the automatic cuts triggered by Congress' failure to find $1.2 trillion in deficit-cutting measures.
The Obama administration has already said it will exempt military personnel accounts, which means the mandatory cuts will hit the Pentagon's other accounts -- such as procurement, research and development, operations and maintenance and military construction -- that much harder, he said.
Harrison's report comes against the backdrop of mounting frustration among U.S. weapons makers about the lack of guidance they have received from the Obama administration and the Pentagon over how the automatic budget cuts will be implemented.
Industry executives have staged rallies at factories around the country, and are meeting regularly with Defense Secretary Leon Panetta to get more clarity about the cuts. They say the current budget climate has slowed their ability to invest in new technologies, and is prompting them to lay off workers while dampening interest in acquisitions and mergers.
The Aerospace Industries Association estimates that the industry stands to lose 1 million direct and supporting jobs over the next decade if Congress does not avert the cuts.
Excluding military personnel costs, Harrison said overall Pentagon spending would decline 10.3 percent in fiscal 2013, but the initial impact on procurement and research spending would be less since only 22 percent of procurement funds and half of research funds become outlays the year they are approved.
As a result, procurement outlays would only drop 3.5 percent in fiscal 2013, with research and development funding set to drop 5.9 percent, in the coming fiscal year, which begins October 1, Harrison said.
He said he did not expect large-scale industry layoffs in January, but noted that the cuts would force companies to downsize in the coming months and years.
Service providers that handle maintenance, logistics and other support functions for the U.S. military would be harder hit than weapons manufacturers because their contracts are funded by the Pentagon's operations and maintenance accounts. Those accounts generate a higher percentage of outlays in the year funds are approved by Congress.
Harrison said the Pentagon would also have to cut its civilian workforce of 791,000 people by about 14 percent, or 108,000 full-time positions, which are largely paid in the year the funds are approved by Congress.
Sequestration would not affect pay for military personnel, and will not result in base closures or even program terminations, Harrison said.
But across-the-board reductions will force the Defense Department to renegotiate many contracts to buy in smaller quantities, which will likely drive up unit costs for programs like the Lockheed Martin Corp <LMT.N> F-35 fighter.
Higher prices, in turn, could prompt the Pentagon to reconsider some future acquisition programs, he said, particularly if additional mandatory budget cuts remain in effect through fiscal year 2021, as planned.
"This is a messy ... clumsy, completely non-strategic approach to cutting the defense budget," Harrison said. "This is not good policy."
He said the Pentagon needed to begin analyzing how it would implement the cuts, and how it could use reprogramming requests to avoid putting additional pressure on programs like the Lockheed F-35 Joint Strike Fighter that have already been delayed and seen costs increase in recent years.
But he said Pentagon officials were reluctant to identify any lower priority areas since those programs would clearly become "real targets" in coming years, even if the automatic budget cuts could be averted.