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

UNCLAS SECTION 01 OF 03 SAN SALVADOR 000252 
 
SIPDIS 
 
STATE PASS AID/LAC 
USDOC FOR 4332/ITA/MAC/MSIEGELMAN 
USDOC FOR 3134/ITA/USFCS/OIO/MKESHISHIAN/BARTHUR 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV ES
SUBJECT: SACA'S 2006 BUDGET APPROVED ON TIME 
 
 
¶1.  (U) Summary.  On December 21, 2005, the Legislative 
Assembly approved President Saca's $3.3 billion budget 
proposal for 2006--an 11.6 percent increase over the 
previous year--to cover higher spending on health and 
education, pensions, public-sector salaries, and debt 
payment.  The fiscal deficit for 2006 will reach $458.1 
million, 2.7 percent of GDP, and public debt will rise 
slightly to $7,198.2, 40.8 percent of GDP, as spending 
increases slightly outpace projected increases in tax 
collection.  The budget was approved with the support of 
ARENA, the PCN, and the G-14--a new coalition of left 
leaning deputies--after the government agreed to G-14 
demands on pension funding, municipal debt, and mechanisms 
to prevent evasion of local taxes.  Legislative approval 
prior to the start of the January-December fiscal year will 
help avoid detrimental delays in expenditure as in previous 
years.  End summary. 
 
¶2.  (U) On December 21, 2005, the Legislative Assembly 
approved President Saca's $3.3 billion budget proposal for 
2006, an 11.6 percent increase over the previous year.  The 
Ministry of Education's budget increases by 5.6 percent over 
the 2004 budget to $510.7 million (2.9 percent of GDP).  The 
government will continue strengthening the quality and scope 
of the education system through the implementation of Plan 
2021, as well as increase teacher salaries (see para. 7). 
Spending on grades 1-6 increases by 12.1 percent, and at 
$309 million, spending for these grades is 60.1 percent of 
the Ministry's budget.  Two World Bank loans used to fund 
construction of new school buildings were almost completely 
disbursed in 2005, and investment in educational 
infrastructure will fall from $48.3 in 2005 to $21.8 million 
in 2006. 
 
¶3.  (U) The budget for the Ministry of Public Health 
increases by nearly 13.6 percent to $313.1 million (1.8 
percent of GDP).  Healthcare spending goes toward improving 
the free care provided at national hospitals and toward 
continued efforts to rebuild hospitals and other healthcare 
infrastructure damaged by the earthquakes in 2001. 
Meanwhile, the Solidarity Fund for Health (FOSALUD) a $20 
million off-budget program funded by a tax on alcohol, 
fireworks, and firearms--supports local health clinics in 
underserved areas. 
 
¶4.  (U) The Ministry of Tourism sees its budget increase 
from $0.2 million in 2005 to $5.8 million in 2006.  The 
increase includes support for the Salvadoran Tourism 
Institute ($2.4 million) and the Salvadoran Tourism 
Corporation ($3.2 million), both of which were previously 
funded through the ministry of Economy.  Tourism Minister 
Ruben Rochi plans to finish the reconstruction of two 
popular tourism centers damaged during the earthquakes and 
plans to revitalize the Port of La Libertad.  The Ministry 
of Economy budget is $46.1 million, a 12.7 percent increase 
over 2004.  Efforts to establish a new Consumer Protection 
Office receive $1.3 million in funding, while $6.5 million 
is devoted to update economic and social statistics at the 
Census and Statistics Office (DIGESTYC).  The budget 
increase will also support the creation of the new 
Superintendency of Competition and a special trust fund for 
the creation of employment in strategic productive sectors. 
The Ministries of Finance, Defense, and Labor also 
experience slight budget increases. 
 
¶5.  (U) The Ministry of Agriculture's budget holds steady at 
$35.6 million, while the Ministries of Environment, Foreign 
Affairs, and Public Works experience cuts of $5.9 million, 
$12.4 million, and $14.6 million, respectively.  The 
Governance Ministry, which runs the country's police force, 
has capital expenditure cut by $10.3 million, falling to 
only $5.5 million, and overall spending cut by 8.9 percent 
to $187.3 million.  The budgets of the Human Rights Offices 
and the Attorney General remain unchanged.  The Judiciary 
sees a $16.7 million increase in funding for capital 
projects--including the construction of several courthouses 
and prisons--and an overall budget increase of 18.5 percent 
to $160.9 million. 
 
¶6.  (U) Transportation infrastructure, such as road 
maintenance and construction, is allocated $126.3 million. 
A separate Fund for Road Construction and Maintenance 
(FOVIAL), funded by a gas tax, contributes $67.5 million to 
this total, down 7.8 percent from 2005 thanks to higher fuel 
prices (and less driving).  The government is also funding 
reconstruction and mitigation works to rebuild from 
Hurricane Stan and the Llamatepec volcano eruption, but 
budget figures for this effort are not yet available. 
Transfers to municipalities, by law fixed at 7 percent of 
the total budget, grow by 12.7 percent or $18.2 million, to 
reach $161.5 million. 
 
¶7.  (U) The budget includes a salary increase for public 
sector employees that costs the government $40 million. 
After 8 years without a raise, those employees who earn 
$400/month or less get a 10 percent raise; between $401 and 
$700, 8 percent; between $701 and $1,000, 7 percent; and for 
those earning above $1,000/month, 3 percent.  Teachers hired 
on an hourly basis see their rate increase by 9 percent. 
The President, Ministers, and agency heads receive no raise. 
Pension costs for 2006 reach $400 million, a 13.3 percent 
increase over 2004, for pensions of employees under the 
previous public pensions system. 
 
¶8.  (U) Tax revenues jumped from $1.857 billion in 2004 to 
$2.162 billion in 2005, a 16.4 percent increase over 2004 
collections.  It also represents a 5.5 percent increase over 
what the government projected in the 2005 budget ($111.8 
million above projections).  Gross tax collections were 
approximately 13.2 percent of GDP.  Some tax reforms passed 
in 2005, including measures aimed at reducing tax evasion, 
went into effect January 1, 2006, and tax collection for 
2006 is forecast at $2.3 billion, a 10.3 percent increase 
over the 2005 budget.  For 2006, taxes finance 68 percent of 
the budget.  The largest source of revenue is the 13 percent 
value-added tax (VAT), which provides $1,244.2 million, 55.1 
percent of all taxes collected.  Income tax is the second- 
largest source of tax revenue, providing $734.1 million, or 
32.5 percent of the total.  With CAFTA implementation, 
import duties fall by 15.5 percent to $177 million, 
contributing only 7.8 percent of total tax revenues.  Other 
taxes contribute $100.8, 4.5 percent of the total. 
 
¶9.  (U) The fiscal deficit for 2006 is forecast at $458.1 
million, 2.5 percent of GDP; in 2005, the deficit was 4.7 
percent of GDP. The deficit will be financed with the sale 
of $663.7 in bonds and $183.1 million in loans from the 
Inter-American Development Bank, World Bank, Central 
American Bank for Reconstruction, and Government of Taiwan 
($600,000).  The cost of the privatization of the pensions 
system is included as a separate category in the budget and 
will grow from 2.1 percent of GDP in 2005 to 2.3 percent of 
GDP in 2006, reaching $400 million, $46.9 million above the 
2005 outlay.  Consolidated public debt in 2006 will increase 
by $458.1 million to $6,990.3 million, or 39.6 percent of 
GDP.  The nonfinancial public sector debt will rise to 
$7,198.2, 40.8 percent of GDP, up from $6,721.7 million in 
2005, a $476.5 million increase.  The budget is based on a 
real GDP growth rate of 3-4 percent, at the high end of most 
forecasts for 2006, and an inflation rate of 2.5 percent. 
[Comment: If growth does not meet expectations, additional 
debt issuance (rather than spending cuts) is likely.  End 
comment.] 
 
¶10.  (U) The budget was approved with the support of ARENA, 
the PCN, and the G-14; the left-leaning deputies of the 
Revolutionary Democratic Front (FDR), Democratic Change 
(CD), and the Christian Popular Social Party (PPSC) comprise 
the G-14, while the FDR includes several former FMLN 
deputies who last year voted for the budget and were 
expelled as a result.  The FMLN did not vote in favor of the 
budget--the party's leadership had conditioned budget 
approval on the return to the colon (currency) and a 30 
percent salary increase for government employees, among 
other things. 
 
¶11.  (U) In exchange for approval of the budget (simple 
majority) and related financing (super majority), the G-14 
requested and received a pension increase for retired 
workers not covered by the new private system and increased 
municipal control of tax revenues and local debt.  On 
pension funding, the Legislative Assembly sent a letter to 
the Ministry of Finance recommending that the 2007 budget 
increase pensions by 6 percent for those who receive $114 or 
less and 3 percent for those who receive more.  The Ministry 
of Finance also agreed to establish a nonpartisan technical 
commission on pension funding and government debt. 
 
¶12.  (U) The G-14 also pushed through a law allowing 
municipalities to borrow on their own behalf using central 
government transfers as collateral.  The law limits the 
municipalities' debt to less than 1.7 percent of their 
operational revenues. 
 
¶13.  (SBU) Comment: The 2006 budget is the first in three 
years to be approved by January 1, the start of the fiscal 
year.  The 2005 and 2004 budgets were delayed because the 
FMLN had made unrealistic demands in exchange for support, 
similar to those made this year.  In both cases, FMLN 
defectors broke the stalemate, and the budget went through. 
This year, with the FMLN having made itself irrelevant by 
kicking moderates out of the party, the GOES found itself 
negotiating with the G-14 for budget approval (support from 
the conservative PCN is a given).  Negotiations were civil 
and for the most part conducted behind closed doors, but one 
senior GOES official told emboffs that dealing with the FDR 
was more difficult than with the FMLN.  The rub for this 
GOES official may have been unfamiliarity in participating 
in actual give-and-take negotiations, rather than the all-or- 
nothing approach used with the FMLN. 
 
¶14.   (U) Comment Continued: Despite real progress on tax 
collection, the government is still borrowing heavily. 
Higher oil prices have no doubt had a significant impact. 
We are impressed the government has again followed through 
on its commitment to increase spending on health and 
education, no doubt influenced by a desire to remain 
eligible for MCC funding.  If implemented, and in previous 
years that has been an issue, this is a pro-growth budget. 
End comment. 
 
¶15.  Table I. Government Budgeted Expenditures (millions of 
dollars) 
 
                             2005      2006    % change 
 
Legislative Branch           22.8      23.8       4.4 
 
Judicial Branch             135.8     160.9      18.5 
 
Executive Branch          1,466.6   1,504.3       2.6 
President's Office           61.5      62.7       2.0 
Ministries                1,405.1   1,441.6       2.6 
   Finance                   48.5      49.6       2.3 
   Foreign Affairs           43.6      31.2     -28.4 
   Governance               196.2     187.3      -4.5 
   Defense                  106.0     106.4       0.4 
   Education                483.4     510.7       5.6 
   Public Health            275.5     313.1      13.6 
   Labor                      7.0       8.6      22.9 
   Economy                   36.9      41.6      12.7 
   Agriculture               35.6      35.6       0.0 
   Public Works             158.6     144.0      -9.2 
   Environment               13.6       7.7     -43.4 
   Tourism                    0.2       5.8   2,800.0 
 
Other Institutions 
  Comptroller                20.3      24.2      19.2 
  Elections Council          11.1       9.8     -11.7 
  Civil Service               0.2       0.3      50.0 
  National Judicial Council   3.9       3.9       0.0 
  Human Rights Office         4.2       4.2       0.0 
  Attorney General           19.4      19.4       0.0 
  Public Defenders Office    17.1      15.5      -9.4 
 
Public Debt                 587.3     779.9      32.8 
 
State General Obligations   474.5     483.5       1.9 
 
Various Transfers           228.8     308.3      34.7 
 
FOVIAL: Road construction/   73.2      67.5      -7.8 
        maintenance 
 
FOSALUD: Health care           NA     20.00        NA 
 
Total                     2,992.0   3,338.0      11.6 
 
 
¶16.  Table II.  Government Anticipated Tax Revenue (millions 
of dollars) 
 
                             2005      2006   % change 
 
¶A.  Income tax              640.1     734.1      14.7 
¶B.  VAT                   1,093.1   1,224.2      13.8 
¶C.  Import duties           209.4     177.0     -15.5 
¶D.  Other                   105.0     100.8      -4.0 
 
Total tax revenue         2,047.6   2,256.1      10.2 
 
Source: Ministry of Finance 
 
Barclay