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.

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DEFICIT TARGET BELOW MAASTRICHT CEILING
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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.

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PRIORITIES: EDUCATION AND ENVIRONMENT
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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.

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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


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