GOS PASSES 2005 BUDGET WITH INDEPENDENTS' SUPPORT

UNCLAS BRATISLAVA 001107

SIPDIS


DEPT PASS TO USTR FOR RDRISCOLL
TREASURY FOR CHGREWE
USDOC FOR MROGERS AND STIMMINS

E.O. 12958: N/A
TAGS: ECON PGOV LO
SUBJECT: GOS PASSES 2005 BUDGET WITH INDEPENDENTS' SUPPORT



1. Summary. The Slovak parliament voted 82-63 to approve
the 2005 GOS budget. The lawmakers also approved the
country's budget outline through 2007, the first multi-year
plan ever, a decisive step for Slovakia's ambition to adopt
the Euro by 2009. Once again, the ruling coalition relied
upon independent MPs to secure passage. The budget must
still be signed by the President to become law. End
summary.

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PARAMETERS
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2. On December 9, Slovak lawmakers approved the 2005 state
budget with an overall deficit of 3.8 percent of GDP, an
improvement compared to the 3.97 percent of GDP target for

2004. Costs related to pension reform, which starting
January 1, 2005 allows Slovaks to shift half of their
pension premiums from state-run to newly created private
accounts, will equal 0.4 percent of GDP.


3. In the 150-seat Parliament, a total of 82 deputies voted
for the bill, 63 against it, and five were absent. The
ruling coalition currently controls only 69 votes, and
secured 12 votes from independent MPs (including Ivan Simko,
formerly of the Free Forum caucus),and one renegade member
of the Free Forum, Alexej Ivanko. Following the ballot,
Finance Minister Ivan Miklos said the agreement was reached
at the last minute and "the budget talks had been the
toughest in Slovakia's history."


4. In nominal terms, the 2005 spending plan predicts
revenues of SKK 257.2 billion (USD 8.8 billion),up 10.8
percent from 2004, and expenditures of SKK 318.7 billion
(USD 10.9 billion),up 2.6 percent. This leaves a deficit
of SKK 61.5 billion (USD 2.1 billion),versus SKK 78.4
billion (USD 2.6 billion) in 2004. The budget assumes real
annual GDP growth of 4.5 percent compared to an estimated
4.7 percent in 2004, annual inflation of 3.3 percent versus
7.8 percent this year, and an unemployment rate of 14.4
percent, down from 14.6 percent in 2004. Analysts feel
these assumptions are conservative, and therefore expect the
GOS's performance to be even better than forecast.

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MULTI-YEAR PLAN
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5. For the first time in the Slovak history, lawmakers also
approved a multi-year spending plan, with 2006's budget
deficit set at 3.9 percent of GDP and 2007's at 3 percent.
(NOTE: Cutting the deficit below 3 percent of GDP is one of
the criteria to qualify for Euro adoption). The cost of
overhauling the pension system will equal 1 percent of GDP
in 2006 and 1.1 percent in 2007.


6. Comment. Public expenditures, which equaled 44 percent
of GDP in 2002, should account for 39.5 percent of GDP by

2006. In spite of a smaller role by the state in the
economy, the GOS was able to increase public expenditures by
10 percent in 2005 (in nominal terms). At the same time,
the GOS decreased the 2004 overall tax and payroll burden to
30.8 percent, third lowest in the EU (the EU average is 38.8
percent). Finally, total state debt should only rise from
44.4 percent of GDP in 2004 to 45 percent in 2007, well
below the 60 percent limit required for Euro adoption. In
its first year after adopting a 19 percent flat tax rate for
individuals and corporations, the GOS has greatly improved
its fiscal health.
WEISER


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