* Officials say White House to seek $526.6 billion for defense
* Proposal would be $51 billion over budget caps, analyst says
By David Alexander
WASHINGTON, April 9 (Reuters) - The Obama administration is poised to roll out a 2014 defense budget that is billions of dollars higher than legally mandated spending caps, setting the stage for another year of financial uncertainty and turmoil at the Pentagon, defense analysts say.
The White House will propose a $526.6 billion defense budget on Wednesday when it unveils its spending plan for the fiscal year beginning Oct. 1, U.S. officials say. That is $51 billion above the spending caps set by a 2011 law aimed at controlling government deficits.
The White House budget plan proposes spending reductions and revenue increases that officials say would make defense cuts under a process known as sequestration unnecessary.
But a deal on taxes and spending with the Congress seems unlikely, given that President Barack Obama, a Democrat, and the Republican-controlled House of Representatives have been trying for two years to achieve one.
As a result, the Pentagon appears to be headed toward another round of forced budget cuts in October with no plan in place for absorbing the reductions, even as it struggles to implement a $41 billion budget cut for which it was ill-prepared.
"By ignoring sequester and hoping for a grand bargain that has remained elusive Pentagon leaders are in for another year that looks like the one before it and the one before that, with no clarity in the short- or the long-term on budget or strategic matters," said Mackenzie Eaglen, a defense analyst at the conservative American Enterprise Institute think tank.
The White House, which opposes the sequester cuts, is not alone in proposing defense spending above the budget caps. The Senate and House of Representatives have passed 2014 budget resolutions calling for defense spending in the range of $550 billion.
"It's a very irresponsible thing," said Charles Knight, a senior fellow at the liberal think tank Project on Defense Alternatives. "Both Congress and the White House are in denial about the law of the land, which is the Budget Control Act. It's now in effect and they're acting as though it doesn't exist."
The 2011 Budget Control Act called for $487 billion in cuts to projected defense spending over a decade, reductions the Pentagon began implementing in 2012. It also called for another $500 billion in automatic across-the-board defense cuts unless Congress could reach a deal on alternative reductions.
A congressional panel failed to reach a compromise in 2011. Many officials in Congress, the White House and the Pentagon were holding out hope that a deal could be reached to avert the second round of cuts, which amount to $50 billion a year, even as they went into force on March 1.
"The effect of the denial at the political level of the reality of the Budget Control Act, I think, allows people in the Pentagon to hold out hope that they're going to get out from under sequester in a way that's probably not realistic," Knight said. "Therefore they don't make the adjustments that they probably need to make to try to save pennies."
Defense Secretary Chuck Hagel has initiated a review to look at how the military's strategy may need to be adjusted in response to the new budget cuts and has warned of further belt-tightening ahead. But it is not yet clear how quickly the review might affect 2014 defense budget planning.
Todd Harrison, a defense budget analyst at the Center for Strategic and Budgetary Assessments, said the Pentagon's spending cap for 2014 under the Budget Control Act would be about $475 billion.
Congress has generally rejected President Barack Obama's budgets. But if it accepted his 2014 proposal, it would trigger a $51 billion across-the-board cut in defense spending in October, Harrison said at a briefing last week.
Under a more plausible scenario, if Congress is unable to reach a budget accord and passes a resolution - as it did in 2012 - to extend government funding at the current levels, that would still trigger the sequester, requiring a smaller cut of $9 billion, he said.
"They've got to get ahead of this curve," Harrison said, otherwise it's going to "fundamentally undermine any kind of long-range planning that they've got to do for the future."
He said the department needed to get spending on personnel and maintenance under control and to convince Congress of the need to get ride of excess facilities.