Three Things to Expect from Pentagon Budget Preview

Panetta to Release Some Details Thursday

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Defense Secretary Leon Panetta will unveil some details of the Pentagon's 2013 spending plan Thursday, which will be delivered to Congress next month. The budget proposal will ask lawmakers for just under $525 billion for next year, according to a White House memo leaked to reporters in December.

Panetta is expected to reveal some of the major decisions made as Pentagon officials enacted the first round of a $350 billion reduction from planned spending mandated by a congressional-White House debt deal struck in August. Here are three things to expect from Panetta's announcement:

1. GOP Lawmakers Will React With Sounds of Fury

The defense secretary likely will still be briefing reporters at the Pentagon when email inboxes across Washington start being pelted with statements from congressional GOP hawks slamming the budget plan. Many Republicans on Capitol Hill want more defense spending-not $350 billion less over 10 years.

Many GOP lawmakers will almost certainly sound like Rep. Randy Forbes (R-Va.), a senior House Armed Services Committee member. He told U.S. News & World Report this week that President Obama's new national defense strategy and the coming cuts show Democrats are "dismantling [the] greatest military ever known." The new strategy and the budget proposal are "a blueprint for mediocrity," Forbes said.

The Obama administration and congressional Democrats will contend the Pentagon budget continues to grow, just at a slower rate than during the post-9/11 military spending spree.

Though a cut from planned spending, a $524 billion base budget could be an increase over what Congress may eventually get around to passing for this fiscal year. Senate appropriators have proposed a $513 billion military spending bill for 2012, while the House already approved a $530 billion Defense appropriations bill. Congressional sources and analysts expect the chambers' final version of that spending bill to split the difference.

Dov Zakheim, Pentagon comptroller under George W. Bush, said Obama's decision to keep 11 aircraft carrier strike groups "will not please" those who favor deeper defense cuts, such as liberal congressional Democrats. But Obama was thinking strategically when he opted against cutting a pricey carrier group, which would have produced big savings in the ledger book: "That is a message to China," Zakheim said.

The reactions from Capitol Hill will be the "opening show of the 2012 election-year circus," said Gordon Adams, who oversaw defense budgeting for the Clinton administration and now is at the Stimson Center in Washington. Lawmakers "are going to have some fun for the next 10 months, but getting anything done is on hold until the first Wednesday after the first Tuesday in November," he said..

2. Prized Weapon Programs Could Be Terminated

The defense business sector, Capitol Hill and Wall Street are itching to find out just which weapon programs might be placed under the budgetary chopping block.

Defense sources expect Navy shipbuilding and aviation programs, along with most Air Force programs, to remain intact as the administration pivots away from the Middle East and toward the vast Asia-Pacific realm. Insiders say that shift, which includes Pentagon officials' decision to stop making strategic and investment decisions to support protracted stability operations like the Iraq and Afghanistan conflicts could mean a dip in business for the makers of large combat vehicles.

But one prominent defense insider, Loren Thompson of the Lexington Institute, says one Air Force program did not make it though the Pentagon's 2013 budget build: the Global Hawk unmanned aircraft, being built by Northrop Grumman. The service has decided the Global Hawk, a long-range remotely piloted spy plane, is too expensive. Thompson wrote in a Tuesday blog post that the Air Force will keep its venerable Lockheed Martin-made U-2 manned spy aircraft in fleet beyond 2020 to make up for the Global Hawk's cancellation.

"The decision may be couched in a proposal to equip the Air Force with a naval version of the Global Hawk being separately developed at some later date, but ... that idea is unlikely to be implemented in the current fiscal environment," Thompson wrote. "Terminating the Air Force version now would also cause a big increase in the unit cost of the Navy variant."

Sources also expect the Defense Department will meet its budgetary targets by altering its plans for its largest weapons program in history, the F-35 fighter. Developing and buying over 2,400 of those Lockheed-made fighters is expected to cost the Pentagon over $300 billion. In DOD budgeting, the program with the biggest price tag also wears the biggest bulls-eye. Sources expect the Pentagon will delay buying some number of the F-35s until later in order to fit under congressionally mandated budget limits.

3. Wall Street Will React With Hesitation

Wall Street jumped aboard the wave of federal funding that poured into Pentagon accounts used to pay for its prized weapon programs. But "The Street" began to take its money elsewhere when the Obama administration began slowing the rate at which the annual defense budget has been growing. There is little reason to believe that will change after Panetta's Thursday briefing.

Why? "I expect procurement will carry the front end of the [budget cuts] load, and the reduction in troops will come at the back end," said Adams, who has helped build many Pentagon budgets.

Morgan Stanley analysts, for instance, remain only "neutral on defense given the budget downturn."

Morgan Stanley feels the "defense [budget] downturn trumps" any chances for an "election-year rally" for the sector, according to an investment note from the New York-based firm. "Defense remains heavily out of favor ... but it's too early to return to a more constructive view. Defense historically rallies in election years ... but we don't foresee the formula working in 2012." 

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