SLOVAKIA: DESPITE CRISIS, NO BUDGET REVISION IN SIGHT

UNCLAS SECTION 01 OF 02 BRATISLAVA 000316

SENSITIVE
SIPDIS

STATE FOR EUR/CE J. LAMORE
STATE FOR EEB/IDF/OMA J. KELLEY
STATE PLEASE PASS TO TREASURY
TREASURY FOR INTERNATIONAL AFFAIRS P. MAIER

E.O. 12958: N/A
TAGS: EFIN ECON LO
SUBJECT: SLOVAKIA: DESPITE CRISIS, NO BUDGET REVISION IN SIGHT

REF: BRATISLAVA 165

SUMMARY
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1. (SBU) Though there has been no formal budget revision since
the scale of the economic crisis became clear some six months
ago, senior government officials are beginning to admit that
Slovakia's budget deficit is likely to reach at least 6 percent
this year. Revenues are sharply down, and despite a raft of
announcements about specific cuts (reftel),we have seen no
solid indication of a comprehensive plan and only slight
anecdotal evidence of promised cuts actually being implemented.
By the same token, there has been some recent discussion of
revenue enhancements but no real plan so far. If oft-repeated
statements by PM Robert Fico and his Finance Minister about the
importance of a balanced budget are to be believed, it appears
that painful cuts may be in store for 2010, an election year,
which makes little political sense. It may also be that PM
Robert Fico plans simply to defer any serious fiscal planning
until after next summer's election and blame the results on the
global recession. End summary.


WEAK REVENUES DRIVING 6 PERCENT DEFICIT
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2. (U) In the face of sharply declining revenues and generally
steady expenditures, the GoS appears to be approaching an
admission that its deficit for 2009 will substantially exceed
the Maastricht ceiling of 3% of GDP. The exact picture is
anything but clear, since the government has steadily delayed
revising the budget, despite calls from the opposition and at
least one coalition partner for a formally presented revision
for Parliamentary vote. However, Finance Minister Jan Pociatek
recently admitted publicly that analyst estimates of around 6%
deficit are realistic. The official budget, which is still
based on 6.5% positive growth, forecasts a deficit 1.7%.


3. (U) The causes of the higher deficits are routine news in
this crisis year: GDP fell at an annual rate of 11.4% in the
first quarter of the year, industrial production in May was down
nearly 24% year on year, and unemployment has reached a 3-year
high of 11%. The slowdown has dramatically lowered government
revenues at the same time that it has pushed up social spending.
Compared with the same period last year, estimated revenues as
of June were down 11.19%, tax revenues were down 13.35%, and VAT
revenues were down an astonishing 18% (a drop caused partly by
shoppers going to neighboring countries to take advantage of
their recently weakened currencies).


SPENDING: "THEY'VE CLOSED THEIR EYES"
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4. (SBU) On the spending side, the budget contains a 7.35%
increase over last year (June to June),though the government
has announced since late 2008 a mish-mash of cuts: on local
governments, on defense procurements and staffing, on capital
spending, and even, most recently, on government purchases of
paper. The announcements have been pointedly vague, however,
and no comprehensive view of how spending might be cut across
the various ministries has been presented. There are rumors of
across-the-board cuts of 10-15%, though whether this could be
achieved in the one quarter remaining is doubtful at best. In
response to our question of how the government is managing
spending for the balance of this year, one person close to the
Ministry of Finance said simply, "They've closed their eyes."
Other sources have told us that line ministries are ramping up
spending now in anticipation of cuts in the fourth quarter.


5. (SBU) Pociatek has begun speculating publicly about tax hikes
to limit the deficit. Again, though, specifics are lacking. He
has mentioned raising taxes on gambling and alcohol, and Prime
Minister Robert Fico has talked about raising taxes on banks
(mainly as a threat against bankers reluctant to cooperate in
proposed consumer loan programs). Perhaps the most credible
talk-- confined for the moment to the sub-political level of
technical experts in the Finance Ministry--is of unifying
collections to streamline the administration of personal income
taxes and health and social contributions. Such a measure would
be a welcome and long overdue broadening of Slovakia's markedly
narrow tax and contributions base, and a simplification of a
thicket of different assessment bases, ceilings, exclusions,
etc. But it can hardly be done overnight, and probably not in
time to affect 2010 revenues.

BRATISLAVA 00000316 002 OF 002




COMMENT: PUZZLING POLITICS
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6. (SBU) Behind the opacity in the budget situation is the
interesting question of why Fico's government is being so cagey.
Politically, Fico is on top of the world now. He could easily
get Parliament to swallow a revised 2009 budget showing a
monstrous deficit--not that 6% is monstrous these days--and
simply ignore any criticism from the opposition or the press.
He could start the inevitable cuts in government spending now
(though that would certainly be procyclical) in order to
minimize the pain in 2010, an election year. (Note: Though the
GoS has held internal budget cut talks and announced various
cuts, both public documents and our sources within government
have indicated that very few cuts have been implemented. End
note.) He is taking none of these options, and in doing so will
make 2010 fiscally more precarious. His finance minister has
made a dogma of the notion that tiny Slovakia cannot afford to
signal the market that it has lost control over its spending
(otherwise markets will demand higher return for the higher
risk),and Fico--so far--has consistently preached the doctrine
of limited deficits. Pociatek has described the cuts that will
be necessary in 2010 as "drastic."


7. (SBU) Fico may be planning to hunker down until after the
elections, talking as little as possible about budget issues and
simply hoping that the average voter won't care about the
country's fiscal condition, which he will likely blame on the
global recession. He is adamant in declaring that he will not
touch social spending, yet he has so far been nearly as
insistent on moving toward a balanced budget. The arithmetic
doesn't square, but it seems that admitting this, and working
on it, is to concede points to the opposition, which owns the
fiscal-responsibility message.
BALL