This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS  BRATISLAVA 000999 
 
SIPDIS 
 
 
DEPT PASS TO USTR FOR RDRISCOLL 
TREASURY FOR AALIKONIS 
USDOC FOR MROGERS 
 
E.O. 12958: N/A 
TAGS: ECON PGOV LO
SUBJECT: SLOVAKIA EASILY PASSES ELECTION YEAR BUDGET 
 
REFTEL: BRATISLAVA 952 
 
SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY 
 
¶1. (SBU) SUMMARY - On December 13, the three-party minority 
coalition government of Prime Minister Mikulas Dzurinda 
successfully pushed the 2006 budget through parliament, 
scoring an important victory ahead of next year's general 
elections.  Parliament voted 79:62 to approve country's 
spending plan for 2006 with an expected deficit of 2.9 
percent of GDP, which is well in line with the Maastrict 
Criterion.  The budget is realistic and contains very few 
pre-election sweeteners, though reportedly maintains some 
wiggle room for possible pre-election spending or tax cuts. 
END SUMMARY. 
 
¶2.  (U) On December 13, the Slovak parliament approved a 
2006 state budget law with a deficit target in line with the 
Cabinet proposal.  In the 150-seat assembly, a total of 79 
lawmakers voted in favor of the budget, while 62 were 
against.  One MP abstained and the others were absent.  The 
final result is a major victory for the ruling three-party 
coalition of Prime Minister Mikulas Dzurinda, which directly 
controls 58 seats (compared to 78 after the 2002 elections) 
and can fully rely only on ten more independents.  The rest 
of the votes were secured from the opposition party HZDS of 
ex-Prime Minister Vladimir Meciar, which has been providing 
continuous backing of GOS policy during the present election 
term and is widely viewed as a potential future coalition 
partner for Dzurinda's SDKU. 
 
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DEFICIT TARGET BELOW MAASTRICHT CEILING 
--------------------------------------- 
¶3.  (U) Slovakia's 2006 public finance deficit is planned at 
SKK 44.4 billion (USD 1.44 billion), or 2.9 percent of GDP 
without including pension reform costs, down from estimated 
3.4 percent this year (using ESA 95 accounting methodology). 
The gap conforms to Eurozone regulations, which require Euro 
candidates to maintain their fiscal deficits below 3.0 
percent of GDP. (NOTE: Slovakia has set a target date for 
introducing Europe's single currency on January 1, 2009). 
The costs related to the pension reform, which are a result 
of thousands of Slovaks shifting half of their pension 
premiums from the state system to a newly created private 
pillar, should equal 1.3 percent of GDP in 2006.  Pension- 
related spending will continue to be excluded from 
Slovakia's fiscal accounts until March 2007 (based on the 
decision of the Council of Economic and Financial Ministers 
(ECOFIN) in Brussels). 
 
¶4.  (U) In nominal terms the 2006 budget law calls for 
overall public sector revenues of SKK 703.6 billion (USD 
22.7 billion), up 14.7 percent from last year, and 
expenditures totaling SKK 717.5 billion (USD 23.2 billion), 
9.8 percent more than the 2005 budget. (NOTE: This includes 
the state budget, the budgets of the welfare insurers, state 
funds, the privatization agency and the city budgets).  The 
state budget itself expects a shortfall of SKK 57.468 
billion (USD 1.86 billion), with revenues of SKK 272.717 
billion (USD 8.8 billion), up 6 percent on the year, and 
expenditures at SKK 330.185 billion (USD 10.7 billion), an 
increase of 3.6 percent. 
 
¶5.  (U) The budget was prepared on assumption of a real 
annual GDP growth at 5.4 percent in 2006 (with nominal GDP 
of SKK 1,531 billion, i.e. USD 49.5 billion) compared with 
an estimated 5.1 percent in 2005. The average annual 
headline inflation is forecasted for 2.5 percent vs. 2.8 
percent this year.  The average disposable unemployment rate 
(referring to those in the jobless registrar immediately 
available to start work) is assumed to be 11.6 percent, down 
from 11.9 percent in 2005.  The plan also counts on real 
annual productivity growth of 4.4 percent, in comparison to 
an expected 3.3 percent this year, and actual productivity 
growth of 5.2 percent in 2004. 
 
------------------------------------- 
PRIORITIES: EDUCATION AND ENVIRONMENT 
------------------------------------- 
¶6. (U) The main winners in 2006 will be the Ministries of 
Education and Environment.  Keeping in line with the 
government's promise to focus on education, total spending 
in the sector is being boosted by 6.1 percent, including a 
12.63 percent yearly increase for elementary and secondary 
schools (despite a 3.19 percent drop in number of students) 
and 8 percent growth in university expenditures.  Moreover, 
the budget also sets aside funds to lift teacher's salaries 
up to the national monthly average of SKK 18,200 (USD 575). 
 
Environmental spending increased by a record 30.1 percent 
from 2005.  The majority of the funds cover projects aimed 
at improving water and sewage systems and building of anti- 
flood barriers.  Social assistance expenditures were 
increased by 13.3 percent over the previous budget, mainly 
to boost family allowances (esp. to support childcare) and 
measures to stimulate the labor market.  Military spending 
gained 4.0 percent on the year and now accounts for 1.86 
percent of GDP. 
 
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CONSERVATIVE BUDGET STILL HAS WIGGLE ROOM 
----------------------------------------- 
¶7.  (U) Analysts praised the GOS for preparing a 
conservative budget that follows the Stability and Growth 
Pact criteria with only minimal election-year pork.  Public 
finances remain on a sustained path of improvement and are 
on target to fulfill the Maastricht criteria.  A local bank 
analyst noted that opposition MPs in particular had come up 
with realistic amendment proposals that did not result in 
widening the deficit beyond the government draft.  The main 
drawback in the budget, according to economists, was the 
continued high expenditures on agriculture, which is 
nevertheless consistent with other EU countries.  In 
contrast, analysts praised the GOS decision to earmark more 
money for education and programs to promote the "knowledge 
economy." 
 
¶8. (SBU) Despite the apparent austerity of the budget, 
Deputy Central Bank Governor Elena Kohutikova told 
Ambassador December 16 that the budget is based on 
pessimistic revenue estimates allowing "space for a lower 
deficit."  Third quarter growth of 6.2 percent, which is 
already well above the 2005 budgetary assumptions, makes 
possible election year projects or tax reductions a real 
possibility. 
 
¶9. (SBU) COMMENT - There was surprisingly little 
parliamentary debate for an election-year budget proposed by 
a minority coalition.  The recent entry into the European 
Exchange Rate Mechanism II cemented the government's case 
for a sound budget with a reduced deficit and few pre- 
election sweeteners.  The opposition Smer (direction) party 
is currently more focused on their election platform than 
debates over the budget or other parliamentary issues. 
Although the ruling coalition is certain to maintain a 
deficit below three percent, they may be willing to take 
advantage of stronger-than-planned-for revenue growth to 
counter Smer's populist proposals with their own measures 
before the election. END COMMENT. 
 
SILVERMAN 
 
 
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