Pentagon cautiously optimistic Congress will avert January 2 cuts

A top Pentagon official said on Thursday he is "cautiously optimistic" that Congress will avert automatic budget cuts that are due to kick in on January 2, citing some increased willingness among Republicans to consider additional revenue now that the presidential election is over.

Pentagon Comptroller Robert Hale said the tone of discussions between Republicans and Democrats had improved and neither side wanted to see the additional cuts to military spending, which would total $52 billion in fiscal 2013 alone, take effect.

"Winston Churchill once said you can always trust Americans to do the right thing, after they've tried everything else first," Hale told an investor conference hosted by Credit Suisse. "I think we've tried about everything else first."

U.S. stocks moved higher on Thursday amid signs of progress toward a deficit-reducing agreement that would avoid big spending cuts and tax hikes dubbed the "fiscal cliff."

Lockheed Martin Corp, Boeing Co, Northrop Grumman Corp, General Dynamics Corp, Raytheon Co and other defense companies are anxiously watching congressional negotiations, but say they are bracing for some additional cuts to defense spending, regardless of what happens.

President Barack Obama and Congress agreed last year to cut projected national security spending by $487 billion over the next decade. The Pentagon faces another $500 billion in across-the-board cuts beginning in January unless Congress reaches a deal on other spending cuts or revenue increases.

Hale reiterated that the cuts required under sequestration would have a devastating effect on the Defense Department, if Congress were unable to reach agreement on other deficit-reducing measures, but said the effects would likely be phased in over a period of months, not days.

He said the department would "almost certainly" be forced to implement unpaid furloughs for civilian workers. The cuts would also result in fewer purchases of weapons, delays in programs and higher unit costs, as well as decreased services for military families and retirees, he said.

Hale told industry executives and Wall Street analysts that the Pentagon was finalizing its budget plan for fiscal 2014, based on the assumption that the sequestration would not occur. If it did, he said, the department would first have to revamp its budget plan for fiscal 2013, then adjust the plan for 2014.

While no detailed planning was under way for how to implement the automatic budget cuts, Hale said the Pentagon would act to protect war-related spending and safeguard multiyear contracts signed with industry to avoid penalties.

"You will not see cataclysmic changes," Hale told the conference.

He also appealed to weapons makers to continue efforts to reduce overhead costs, noting that labor costs had risen more sharply in the defense business than the commercial sector.

(Editing by Matthew Lewis)