SLOVAKIA READIES CONSTITUTIONAL LAW CAPPING NATIONAL DEBT

C O N F I D E N T I A L BRATISLAVA 000048

SIPDIS

STATE FOR EUR/CE J. MOORE AND M. LIBBY
STATE PLEASE PASS TO TREASURY FOR P. MAIER AND L. NORTON

E.O. 12958: DECL: 2/1/2020
TAGS: EFIN ECON EINV PREL LO
SUBJECT: SLOVAKIA READIES CONSTITUTIONAL LAW CAPPING NATIONAL DEBT

REF: 09 BRATISLAVA 425

CLASSIFIED BY: Keith Eddins, Charge d'Affaires, a.i..
REASON: 1.4 (d)

1. (C) SUMMARY: The Slovak cabinet is poised to approve a
constitutional law capping the public debt at 50% of GDP and
reforming government accounting in order to limit the ability of
future administrations to "cook the books." The proposals are
an effort by Finance Minister Jan Pociatek to box-in the Slovak
parliament and force it to confront the country's structural
budget deficit following elections in June. A senior Finance
Ministry adviser tells us that the ministry has already prepared
a set of tax increases that it hopes will be adopted by the next
government. END SUMMARY.


2. (C) Pociatek announced his proposals on January 27, and an
adviser told us that they will be "fast-tracked" and taken
directly to cabinet without the typical interministerial review
process. The adviser told us that he expects both the cabinet
and parliament to approve the proposals quickly, commenting that
opposition parties have little choice but to support the
legislation since they have strongly criticized the Fico
government for its large budget deficit, which rose to 6.3% of
GDP in 2009. The proposals include a number of accounting
changes in an effort to limit the ability of future governments
to disguise the full extent of their budget deficits, including
a shift from a three-year non-binding to a four-year binding
budget.


3. (C) With the public debt having risen dramatically in the
last two years--from 27% of GDP before the financial crisis to
an expected 41% by the end of 2010--this amendment will leave
relatively little room for the next government to maneuver.
According to the adviser, this is part of the plan--Pociatek,
and presumably Fico, has little confidence in Parliament's
willingness to approve difficult spending cuts or tax hikes in
the absence of such a hard limit.


4. (C) The adviser further told us that the Finance Ministry has
already prepared a proposal for closing the structural budget
deficit, which he said is about 4% of GDP. Commenting that the
state pension plan and healthcare system, which together make up
the bulk of the budget, are politically off-limits, he told us
that the proposal will instead focus on increasing state
revenues. The proposal would dramatically broaden the tax base
by moving sole proprietorships (said to number 800,000 in a
country with only about 3 million working age citizens) into the
social tax system and extending the VAT to books and medicine,
which are currently exempted. The VAT would also be raised by a
percentage point to 20%.


COMMENT


5. (C) Pociatek's tactical approach to the deficit is
politically revealing. Until now, Fico has been able to impose
slashing cuts on his ministers with barely a whimper of protest,
and he is more broadly seen as enjoying a dominant political
position. Why, then, would he feel the need to corral
Parliament with a constitutional debt ceiling? It could be that
he is looking to make cuts in social programs--although doing so
would be to cut to the core of his populist "socially
responsible" ideology. More likely he is looking for political
cover for a higher tax rate and possibly for a more radical
restructuring of taxes and tax collection (reftel). Certainly
he will need the cover if he intends to go after the popular
exemptions for sole proprietorships, which constitute perhaps
the biggest--and certainly the most widespread--tax dodge in the
country.

EDDINS