Identifier
Created
Classification
Origin
09BRATISLAVA425
2009-10-02 06:28:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Bratislava
Cable title:
SLOVAKIA'S BUDGET SEASON BEGINS
how-toVZCZCXRO9795 PP RUEHSL DE RUEHSL #0425/01 2750628 ZNR UUUUU P R 020628Z OCT 09 FM AMEMBASSY BRATISLAVA TO RUEHC/SECSTATE WASHDC PRIORITY INFO RUEAIIA/CIA WASHINGTON DC RUEATRS/DEPT OF TREASURY WASHINGTON DC RHEHAAA/NSC WASHINGTON DC RHEFDIA/DIA WASHINGTON DC RUEHSL/AMEMBASSY BRATISLAVA
UNCLAS SECTION 01 OF 02 BRATISLAVA 000425
SENSITIVE
SIPDIS
STATE FOR EUR/CE J.MOORE
STATE PLEASE PASS TO TREASURY FOR P. MAIER AND L. NORTON
TAGS: EFIN ECON EINV PREL LO
SUBJECT: SLOVAKIA'S BUDGET SEASON BEGINS
REF: BRATISLAVA 316, BRATISLAVA 413
SUMMARY
-------
UNCLAS SECTION 01 OF 02 BRATISLAVA 000425
SENSITIVE
SIPDIS
STATE FOR EUR/CE J.MOORE
STATE PLEASE PASS TO TREASURY FOR P. MAIER AND L. NORTON
TAGS: EFIN ECON EINV PREL LO
SUBJECT: SLOVAKIA'S BUDGET SEASON BEGINS
REF: BRATISLAVA 316, BRATISLAVA 413
SUMMARY
--------------
1. (U) The draft 2010 budget was approved by the Slovak Cabinet
on 30 September; it now goes forward to further negotiation
before passage in final form at year end. The budget reduces
the deficit to 5.5% of GDP through a series of spending cuts
aimed at ministries that do not directly touch the public, most
notably the defense ministry. At the same time, social and
infrastructure spending increase, and overall spending increases
15%.
2. (SBU) We expect most of the real negotiation to occur among
the three coalition partners, despite the weak bargaining
position of the two junior partners. This means the final
budget will reflect political expediency--a division of spoils
among competing fiefdoms--more than government priorities.
Still, the deficit reduction ambitions appear to be real, and
the Ministry of Finance is preparing some revenue-side measures
to help bring the deficit down to 3% by 2012. End summary.
The Road of Blood and Sweat
--------------
3. (SBU) After months of hedging on a budget revision for 2009
(ref A),and unusual silence during the drafting of next year's
budget, Finance Minister Jan Pociatek finally submitted a draft
to the government on September 30. The Cabinet approved the
draft on the same day, and the bill now moves to
behind-the-scenes negotiations leading up to the required three
readings in Parliament. The budget delivers deep cuts in
virtually every ministry that does not directly touch the public
and hefty increases for those that do. Ministry of Finance State
Secretary Peter Kazimir described the budget as a "road of blood
and sweat," following on months of promises from Pociatek and
other senior officials that the budget would be ambitious on
consolidation.
4. (U) The big losers are the ministries of defense (down 21%
from 2009),foreign affairs (18%),interior (10%),and culture
(10%). The biggest loser proportionally is, interestingly, the
Constitutional Court, with a nearly lethal 49% reduction in its
meager EUR 5.7 million budget (ref B). The winners are the
ministries of agriculture (up 19%),construction (29%),health
(10%),and education (8%). Again, these priorities reflect PM
Robert Fico's long-standing pledge to cut the deficit
aggressively while augmenting--or at least not cutting--social
services. In addition to the ministry-by-ministry cuts, there
is rumored to be an across-the-board mandate to cut purchases of
outside goods and services by 20% and capital expenditures by
70%.
5. (U) If the bottom line holds through negotiations, the
deficit would drop from 2009's projected 6.3% of GDP (EUR 4
billion) to 5.5% (EUR 3.7 billion)--an ambitious cut indeed in
a year when unemployment is expected to creep up from today's
11% to 13.5%. The total budget is EUR 16.3 billion, a 15%
increase in spending over this year's EUR 14.1 billion.
A Serious Proposal?
--------------
6. (SBU) The main question now is whether the draft is a
realistic budget or simply an exaggerated opening position for
horse-trading to come. The way the Ministry of Finance (MoF)
has chosen to handle the political run-up to the formal budget
submission suggests the latter. Before the formal submission,
the government is supposed to consult in detail with the
"tripartite," a group comprising government, labor unions, and
employers. This year, the MoF circulated a single-page
spreadsheet to the tripartite a couple of hours before the
scheduled consultation. Both the employers and the unions (the
latter being a strong Fico constituency) complained bitterly
that negotiating was impossible given so little information so
late.
7. (SBU) Most of the battle over budget priorities--if there is
a battle--will not happen between the opposition and the
governing coalition. Once the coalition has agreed, party
discipline will prevail, and the vote will be a pro-forma
exercise. The real contest will be among coalition members, who
tend to view their ministries as fiefdoms to be run for
political and material profit. The minority SNS and HZDS, both
of which are unabashedly corrupt, know the coalition is drawing
BRATISLAVA 00000425 002 OF 002
to a close. (The final budget is due on the day the coalition
agreement expires, and passage of a pre-election budget is
usually seen as the last act of Slovak coalitions.) They will
certainly want to lock in their revenue opportunities by
fighting for the biggest possible slices of the budget pie. As
we understand it, the important conversations in budget
negotiations are among party leaders rather than Cabinet
ministers, so the final allocation of funds is likely to reflect
political expediency more than social priorities. Given the
recent public disagreements among the three coalition leaders,
there could be a fight.
Puzzling but Real Fiscal Conservatism
--------------
8. (SBU) Advisors in the MoF have told us that both Pociatek and
Fico really do want to drop the deficit now and in out-years,
with the goal being to achieve a 3.0% deficit in 2012. This
goal may seem strange coming from an emphatically "socially
oriented" Prime Minister. We understand that his fiscal
conservatism is based on the belief that, euro adoption
notwithstanding, financial markets will deal Slovakia swift and
severe punishment at the first sign of profligacy. This belief
is nearly universal in Bratislava, despite the fact that this
year's refinancing exercise produced the lowest rates in
Slovakia's brief history (less than 200 basis points above
Germany).
9. (SBU) The deficit reduction in the 2010 budget derives
entirely from reconfiguring expenses. The MoF is trying to
develop a couple of revenue aces in the hole for 2011, some of
which may be possible to achieve in 2010. One is a streamlining
of tax administration to a single agency and possibly pulling
some health insurance contributions into the tax system, which
would involve raising the flat tax from the current 19%. Another
measure may be to reduce the contribution ceiling to the second
(private) pension pillar, which would force more social
contributions into the money-losing first pillar. Finally, a
hike in property taxes is being considered, probably in the form
of a revised assessment basis.
COMMENT
--------------
10. (SBU) It is hard to know how the budget conversation will
proceed among the members of a distinctly cracked coalition.
Vladimir Meciar's HZDS is widely thought to be moribund already,
with little chance of breaking the 5% floor to win seats in
Parliament. Fico has openly broken with SNS, taking two senior
positions away from the party in recent months and saying that
he no longer cares whether the coalition agreement holds. This
leaves both minority partners with almost nothing to bargain
with and nothing to lose. Still, although Fico shows signs of
viewing his partners as disposable, he needs to keep his
government from blowing up as the 2010 election approaches, and
the partners know it. So deals will be struck, and the budget
will likely look less severe, though not necessarily more
rational, by the end of the year.
BALL
SENSITIVE
SIPDIS
STATE FOR EUR/CE J.MOORE
STATE PLEASE PASS TO TREASURY FOR P. MAIER AND L. NORTON
TAGS: EFIN ECON EINV PREL LO
SUBJECT: SLOVAKIA'S BUDGET SEASON BEGINS
REF: BRATISLAVA 316, BRATISLAVA 413
SUMMARY
--------------
1. (U) The draft 2010 budget was approved by the Slovak Cabinet
on 30 September; it now goes forward to further negotiation
before passage in final form at year end. The budget reduces
the deficit to 5.5% of GDP through a series of spending cuts
aimed at ministries that do not directly touch the public, most
notably the defense ministry. At the same time, social and
infrastructure spending increase, and overall spending increases
15%.
2. (SBU) We expect most of the real negotiation to occur among
the three coalition partners, despite the weak bargaining
position of the two junior partners. This means the final
budget will reflect political expediency--a division of spoils
among competing fiefdoms--more than government priorities.
Still, the deficit reduction ambitions appear to be real, and
the Ministry of Finance is preparing some revenue-side measures
to help bring the deficit down to 3% by 2012. End summary.
The Road of Blood and Sweat
--------------
3. (SBU) After months of hedging on a budget revision for 2009
(ref A),and unusual silence during the drafting of next year's
budget, Finance Minister Jan Pociatek finally submitted a draft
to the government on September 30. The Cabinet approved the
draft on the same day, and the bill now moves to
behind-the-scenes negotiations leading up to the required three
readings in Parliament. The budget delivers deep cuts in
virtually every ministry that does not directly touch the public
and hefty increases for those that do. Ministry of Finance State
Secretary Peter Kazimir described the budget as a "road of blood
and sweat," following on months of promises from Pociatek and
other senior officials that the budget would be ambitious on
consolidation.
4. (U) The big losers are the ministries of defense (down 21%
from 2009),foreign affairs (18%),interior (10%),and culture
(10%). The biggest loser proportionally is, interestingly, the
Constitutional Court, with a nearly lethal 49% reduction in its
meager EUR 5.7 million budget (ref B). The winners are the
ministries of agriculture (up 19%),construction (29%),health
(10%),and education (8%). Again, these priorities reflect PM
Robert Fico's long-standing pledge to cut the deficit
aggressively while augmenting--or at least not cutting--social
services. In addition to the ministry-by-ministry cuts, there
is rumored to be an across-the-board mandate to cut purchases of
outside goods and services by 20% and capital expenditures by
70%.
5. (U) If the bottom line holds through negotiations, the
deficit would drop from 2009's projected 6.3% of GDP (EUR 4
billion) to 5.5% (EUR 3.7 billion)--an ambitious cut indeed in
a year when unemployment is expected to creep up from today's
11% to 13.5%. The total budget is EUR 16.3 billion, a 15%
increase in spending over this year's EUR 14.1 billion.
A Serious Proposal?
--------------
6. (SBU) The main question now is whether the draft is a
realistic budget or simply an exaggerated opening position for
horse-trading to come. The way the Ministry of Finance (MoF)
has chosen to handle the political run-up to the formal budget
submission suggests the latter. Before the formal submission,
the government is supposed to consult in detail with the
"tripartite," a group comprising government, labor unions, and
employers. This year, the MoF circulated a single-page
spreadsheet to the tripartite a couple of hours before the
scheduled consultation. Both the employers and the unions (the
latter being a strong Fico constituency) complained bitterly
that negotiating was impossible given so little information so
late.
7. (SBU) Most of the battle over budget priorities--if there is
a battle--will not happen between the opposition and the
governing coalition. Once the coalition has agreed, party
discipline will prevail, and the vote will be a pro-forma
exercise. The real contest will be among coalition members, who
tend to view their ministries as fiefdoms to be run for
political and material profit. The minority SNS and HZDS, both
of which are unabashedly corrupt, know the coalition is drawing
BRATISLAVA 00000425 002 OF 002
to a close. (The final budget is due on the day the coalition
agreement expires, and passage of a pre-election budget is
usually seen as the last act of Slovak coalitions.) They will
certainly want to lock in their revenue opportunities by
fighting for the biggest possible slices of the budget pie. As
we understand it, the important conversations in budget
negotiations are among party leaders rather than Cabinet
ministers, so the final allocation of funds is likely to reflect
political expediency more than social priorities. Given the
recent public disagreements among the three coalition leaders,
there could be a fight.
Puzzling but Real Fiscal Conservatism
--------------
8. (SBU) Advisors in the MoF have told us that both Pociatek and
Fico really do want to drop the deficit now and in out-years,
with the goal being to achieve a 3.0% deficit in 2012. This
goal may seem strange coming from an emphatically "socially
oriented" Prime Minister. We understand that his fiscal
conservatism is based on the belief that, euro adoption
notwithstanding, financial markets will deal Slovakia swift and
severe punishment at the first sign of profligacy. This belief
is nearly universal in Bratislava, despite the fact that this
year's refinancing exercise produced the lowest rates in
Slovakia's brief history (less than 200 basis points above
Germany).
9. (SBU) The deficit reduction in the 2010 budget derives
entirely from reconfiguring expenses. The MoF is trying to
develop a couple of revenue aces in the hole for 2011, some of
which may be possible to achieve in 2010. One is a streamlining
of tax administration to a single agency and possibly pulling
some health insurance contributions into the tax system, which
would involve raising the flat tax from the current 19%. Another
measure may be to reduce the contribution ceiling to the second
(private) pension pillar, which would force more social
contributions into the money-losing first pillar. Finally, a
hike in property taxes is being considered, probably in the form
of a revised assessment basis.
COMMENT
--------------
10. (SBU) It is hard to know how the budget conversation will
proceed among the members of a distinctly cracked coalition.
Vladimir Meciar's HZDS is widely thought to be moribund already,
with little chance of breaking the 5% floor to win seats in
Parliament. Fico has openly broken with SNS, taking two senior
positions away from the party in recent months and saying that
he no longer cares whether the coalition agreement holds. This
leaves both minority partners with almost nothing to bargain
with and nothing to lose. Still, although Fico shows signs of
viewing his partners as disposable, he needs to keep his
government from blowing up as the 2010 election approaches, and
the partners know it. So deals will be struck, and the budget
will likely look less severe, though not necessarily more
rational, by the end of the year.
BALL