SLOVAKIA EASILY PASSES ELECTION YEAR BUDGET

UNCLAS BRATISLAVA 000999 SIPDIS DEPT PASS TO USTR FOR RDRISCOLL TREASURY FOR AALIKONIS USDOC FOR MROGERS E.O. 12958: N/A TAGS: ECON PGOV LO SUBJECT: SLOVAKIA EASILY PASSES ELECTION YEAR BUDGET REFTEL: BRATISLAVA 952 SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY ¶1. (SBU) SUMMARY - On December 13, the three-party minority coalition government of Prime Minister Mikulas Dzurinda successfully pushed the 2006 budget through parliament, scoring an important victory ahead of next year's general elections. Parliament voted 79:62 to approve country's spending plan for 2006 with an expected deficit of 2.9 percent of GDP, which is well in line with the Maastrict Criterion. The budget is realistic and contains very few pre-election sweeteners, though reportedly maintains some wiggle room for possible pre-election spending or tax cuts. END SUMMARY. ¶2. (U) On December 13, the Slovak parliament approved a 2006 state budget law with a deficit target in line with the Cabinet proposal. In the 150-seat assembly, a total of 79 lawmakers voted in favor of the budget, while 62 were against. One MP abstained and the others were absent. The final result is a major victory for the ruling three-party coalition of Prime Minister Mikulas Dzurinda, which directly controls 58 seats (compared to 78 after the 2002 elections) and can fully rely only on ten more independents. The rest of the votes were secured from the opposition party HZDS of ex-Prime Minister Vladimir Meciar, which has been providing continuous backing of GOS policy during the present election term and is widely viewed as a potential future coalition partner for Dzurinda's SDKU. -------------- DEFICIT TARGET BELOW MAASTRICHT CEILING -------------- ¶3. (U) Slovakia's 2006 public finance deficit is planned at SKK 44.4 billion (USD 1.44 billion),or 2.9 percent of GDP without including pension reform costs, down from estimated 3.4 percent this year (using ESA 95 accounting methodology). The gap conforms to Eurozone regulations, which require Euro candidates to maintain their fiscal deficits below 3.0 percent of GDP. (NOTE: Slovakia has set a target date for introducing Europe's single currency on January 1, 2009). The costs related to the pension reform, which are a result of thousands of Slovaks shifting half of their pension premiums from the state system to a newly created private pillar, should equal 1.3 percent of GDP in 2006. Pension- related spending will continue to be excluded from Slovakia's fiscal accounts until March 2007 (based on the decision of the Council of Economic and Financial Ministers (ECOFIN) in Brussels). ¶4. (U) In nominal terms the 2006 budget law calls for overall public sector revenues of SKK 703.6 billion (USD 22.7 billion),up 14.7 percent from last year, and expenditures totaling SKK 717.5 billion (USD 23.2 billion), 9.8 percent more than the 2005 budget. (NOTE: This includes the state budget, the budgets of the welfare insurers, state funds, the privatization agency and the city budgets). The state budget itself expects a shortfall of SKK 57.468 billion (USD 1.86 billion),with revenues of SKK 272.717 billion (USD 8.8 billion),up 6 percent on the year, and expenditures at SKK 330.185 billion (USD 10.7 billion),an increase of 3.6 percent. ¶5. (U) The budget was prepared on assumption of a real annual GDP growth at 5.4 percent in 2006 (with nominal GDP of SKK 1,531 billion, i.e. USD 49.5 billion) compared with an estimated 5.1 percent in 2005. The average annual headline inflation is forecasted for 2.5 percent vs. 2.8 percent this year. The average disposable unemployment rate (referring to those in the jobless registrar immediately available to start work) is assumed to be 11.6 percent, down from 11.9 percent in 2005. The plan also counts on real annual productivity growth of 4.4 percent, in comparison to an expected 3.3 percent this year, and actual productivity growth of 5.2 percent in 2004. -------------- PRIORITIES: EDUCATION AND ENVIRONMENT -------------- ¶6. (U) The main winners in 2006 will be the Ministries of Education and Environment. Keeping in line with the government's promise to focus on education, total spending in the sector is being boosted by 6.1 percent, including a 12.63 percent yearly increase for elementary and secondary schools (despite a 3.19 percent drop in number of students) and 8 percent growth in university expenditures. Moreover, the budget also sets aside funds to lift teacher's salaries up to the national monthly average of SKK 18,200 (USD 575). Environmental spending increased by a record 30.1 percent from 2005. The majority of the funds cover projects aimed at improving water and sewage systems and building of anti- flood barriers. Social assistance expenditures were increased by 13.3 percent over the previous budget, mainly to boost family allowances (esp. to support childcare) and measures to stimulate the labor market. Military spending gained 4.0 percent on the year and now accounts for 1.86 percent of GDP. -------------- CONSERVATIVE BUDGET STILL HAS WIGGLE ROOM -------------- ¶7. (U) Analysts praised the GOS for preparing a conservative budget that follows the Stability and Growth Pact criteria with only minimal election-year pork. Public finances remain on a sustained path of improvement and are on target to fulfill the Maastricht criteria. A local bank analyst noted that opposition MPs in particular had come up with realistic amendment proposals that did not result in widening the deficit beyond the government draft. The main drawback in the budget, according to economists, was the continued high expenditures on agriculture, which is nevertheless consistent with other EU countries. In contrast, analysts praised the GOS decision to earmark more money for education and programs to promote the "knowledge economy." ¶8. (SBU) Despite the apparent austerity of the budget, Deputy Central Bank Governor Elena Kohutikova told Ambassador December 16 that the budget is based on pessimistic revenue estimates allowing "space for a lower deficit." Third quarter growth of 6.2 percent, which is already well above the 2005 budgetary assumptions, makes possible election year projects or tax reductions a real possibility. ¶9. (SBU) COMMENT - There was surprisingly little parliamentary debate for an election-year budget proposed by a minority coalition. The recent entry into the European Exchange Rate Mechanism II cemented the government's case for a sound budget with a reduced deficit and few pre- election sweeteners. The opposition Smer (direction) party is currently more focused on their election platform than debates over the budget or other parliamentary issues. Although the ruling coalition is certain to maintain a deficit below three percent, they may be willing to take advantage of stronger-than-planned-for revenue growth to counter Smer's populist proposals with their own measures before the election. END COMMENT. SILVERMAN NNNN