OFF AND RUNNING ... IN CIRCLES: TAX REFORM DEBATE

C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 000876 SIPDIS DEPARTMENT FOR EUR/CE; PLEASE PASS TO NSC FOR ADAM STERLING E.O. 12958: DECL: 09/02/2013 TAGS: PGOV ECON HU SUBJECT: OFF AND RUNNING ... IN CIRCLES: TAX REFORM DEBATE PRECEDES PARLIAMENT'S RETURN REF: BUDAPEST 588 AND PREVIOUS Classified By: P/E COUNSELOR ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D) ¶1. (C) Although Parliament is not set to reconvene until September 15, Prime Minister Gyurcsany's tax reform proposal (SEPTEL) has already been criticized by the public, questioned by economic analysts, and rejected by his most important political constituency: his former coalition partners in the SzDSz party. HIS OWN SURVIVAL OR HUNGARY'S? ¶2. (C) In a series of unusually strong public comments, SzDSz Party President Gabor Fodor has dismissed the government's proposal, citing its unrealistic reliance on "whitening" the economy and its insufficient efforts to simplify Hungary's Byzantine tax system. Commenting that the plan had led him to believe that the Prime Minister "cares more about his own survival than Hungary's," Fodor went so far as to indicate his willingness to consider a government of experts as a replacement for the current minority government. (Note: this is an old idea that continues to resurface, with most advocates proposing a cabinet of technocrats empowered for a limited period to undertake reforms which have thus far eluded political consensus. End Note.) ¶3. (C) Others in his party have gone even further, hinting that "there are already candidates for Prime Minister who could win the support of all five parties." (Note: The latest press conjecture has revolved around National Bank Vice Presidents Karalits and Kiraly. As former Bank President Gyorgy Suranyi observes, "when you have economic problems, people turn to bankers." End Note.) SZDSZ: GYURCSANY MUST GO? ¶4. (C) Although analysts continue to predict that Fodor's hard line is in part calculated to secure the best possible compromise on a final tax reform proposal (as well as the 2009 budget),SzDSz insiders indicate that the party's resolve to remove PM Gyurcsany is hardening. MP Laszlo Csozik, a member of Fodor's inner circle, tells us candidly that the party regards the current tax proposal as inadequate but also recognizes the broader political imperative of wresting back the mantle of reform. "Gyurcsany is stealing our oxygen," Csozik concludes flatly, "and we don't care who replaces him." ¶5. (C) In response to the SzDSz's very public rejection, Minister of Economy and Development Gordon Bajnai has opened the door to detailed discussions with the SzDSz on tax reform. Cabinet Minister Kiss has called for inter-party consultations, and Prime Minister Gyurcsany has issued a personal invitation to Fodor to meet next week. TOWARD THE BRINK ¶6. (C) Although tempers are running high, both sides have left themselves a degree of latitude. For his part, Fodor has moved toward the brink but not over the edge. Despite a reportedly heated meeting with the Prime Minister last week, he has thus far avoided a definitive break with the MSzP. For his part, Gyurcsany has publicly tied his own future to tax reform legislation and the 2009 budget, commenting on September 2 that "no personal price is too high to pay to ensure Hungary's governability." Alluding to comments regarding his resignation, he added that even "personnel issues" could be placed on the table for discussion. ¶7. (C) While Kiss has explicitly ruled out an internal move by the MSzP to replace Gyurcsany, the MSzP is clearly less confident in its ability to secure even the handful of votes from individual opposition MP's necessary to pass the tax legislation (and budget) in Parliament. As Suranyi told the Ambassador September 3, the events of the past week have made him question PM Gyurcsany's ability to continue ruling without a Parliamentary majority. FIDESZ Parliamentary Faction Leader Tibor Navracsics has publicly called on the Prime Minister to "end Hungary's agony" by "being a man and signing your resignation letter." IT'S STILL EARLY ( BUT IT GETS LATE EARLY ¶8. (C) Comment: Parliament is not even in session and the debate risks running out of control. Although there is still time for the MSzP and the SzDSz to reach a compromise, this is shaping up as a confrontation the SzDSz may want but that neither party needs. Fodor is either trying his hand at brinksmanship or taking aim at Gyurcsany. His tough talk has BUDAPEST 00000876 002 OF 002 apparently played well within the SzDSz's (thin) ranks to date, but there are serious questions regarding his ability to contain the consequences of his hard-line position. Just months after miscalculation led to its withdrawal from the governing coalition, the SzDSz may be betting that it can press the MSzP to depose Gyurcsany without new elections (as they did with Prime Minister Medgyessey). Any such move would draw fire from the opposition and likely the Hungarian people. As FIDESZ leaders have warned, "the public will not accept another change of leadership without new elections." Even a government of technocrats, Navracsics cautions, should only be seen as a "temporary measure" to prepare for new elections ) new elections which would likely vote the SzDSz out of Parliament. End Comment. Foley