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

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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