By David Alexander
WASHINGTON (Reuters) - The threat of new U.S. defense spending cuts next year is creating uncertainty in the economy, and Congress should take steps this summer to reassure industry it is capable of "avoiding that train wreck," a top senator on defense issues said on Tuesday.
"Uncertainty which is created by the threat, the prospect, the specter, of sequestration, I believe, is a real threat to this economy," said Senator Carl Levin, referring to $500 billion in automatic cuts that will kick in unless Congress acts to stop them.
"Not only must we avoid sequestration - in my judgment we will - but we must do it in time to avoid a severe weakening to this economy. That's the greater challenge that we face," Levin, the Democratic chairman of the Senate Armed Services Committee, said at the National Press Club.
The Pentagon, which is already implementing $487 billion in cuts to projected defense spending over the next decade, faces another half a trillion dollars in automatic reductions over 10 years unless Congress acts.
The second round of defense cuts was included in a budget deal last year between Congress and President Barack Obama. The cuts were believed to be so extreme they would encourage rival Republicans and Democrats to compromise on alternative ways to reduce the country's trillion-dollar budget deficits.
But lawmakers failed to reach a compromise late last year, so the across-the-board cuts are scheduled to go into effect after the beginning of the year under a process known as sequestration.
The Pentagon has requested $525 billion in defense spending for the 2013 fiscal year beginning in October. The request was about $6 billion less than 2012, a drop for the first time after a decade of rising military spending. The budget was the first to reflect the initial round of spending reductions.
Levin said he was confident that lawmakers would ultimately act to avert the next round of budget cuts, but waiting until the so-called lame duck session of Congress after the November 6 presidential election would be too late.
"If it comes in the lame duck or thereafter it could come too late ... to avoid a severe weakening of the economy which results from the prospect of sequestration," Levin said. "Business folks have got to plan. Families have got to plan."
He said some businesses had already begun giving workers their layoff notices, and the issue would become more acute toward the end of the fiscal year in September.
"That kind of instability and uncertainty is what is going to drive us hopefully to finding a path, if not to a full solution ... at least to take some steps down the path of avoiding that train wreck," Levin said.
The senator said he expected any deal to resolve the budget impasse would probably require some additional reductions in defense spending over the next decade
"My best guess is it would be about $10 billion more a year, tops, which would be $100 billion over a 10-year period," Levin said.
He said raising revenues would have to be part of the solution, despite Republican resistance. He said government revenues historically had been about 19 percent to 20 percent of gross domestic product but had now fallen to about 15 percent.
"Every president that has achieved significant deficit reduction has made revenue part of the equation," Levin said.
(Editing by Doina Chiacu)