Analysts: Defense industry will survive flatter budgets

Shifting budget priorities and an expected lack of real growth in the Pentagon's procurement accounts will not necessarily devastate the defense industry, analysts told the House Armed Services Committee on Wednesday.

For months, many industry watchers have made dire predictions that program cuts in the fiscal 2010 budget, combined with belt-tightening expected in future years, would wreak havoc on defense firms. The companies have benefited from the 60 percent spike in procurement and research and development accounts in the last eight years.

"The industrial base has had a lot of money flowing into it the last 10 years," David Berteau, a senior adviser at the Center for Strategic and International Studies, told the panel on Wednesday. "But the future doesn't look nearly as good."

Other analysts suggested that, while an era of historic growth in the defense budget is coming to an end, the Pentagon will continue to pour billions of dollars annually into developing and procuring weapons and other hardware.

Matthew Goldberg, CBO deputy assistant director, told the panel that many of the programs canceled this year, such as the VH-71 presidential helicopter and the Army's Future Combat Systems, ultimately would be replaced by new ones.

"It's not as though we're going to zero on all the programs that have been cut," Goldberg said.

Stephen Daggett, a defense budget analyst at the Congressional Research Service, conceded that the defense industry would struggle if the defense budget was "frozen" for the next 10 years.

But, he added: "I don't necessarily foresee that happening. Instead, we would look at, if necessary, cuts in the size of the force and certainly increases in the top line [of the budget] to sustain some level of defense acquisition."

With only two types of fighter jets in production for sale to the U.S. military, the industry is "understandably concerned" about its capability to develop combat aircraft, Daggett said. But other segments of the industry, such as the long-struggling shipbuilding sector, do not appear to be harmed by recent budget decisions.

Indeed, the Pentagon's fiscal 2010 budget request moves the Navy toward a smaller number of ship designs, which "could lead to some cooperative effort with the defense industry to improve the efficiency of shipbuilding production and maybe increase numbers [of ships] by doing it that way," Daggett said.

Meanwhile, expected growth in other technological areas aimed at dealing with threats from insurgents and other nonstate enemies -- such as requirements for communications, intelligence, surveillance, reconnaissance programs -- can help offset losses in other areas, he added.