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DE RUEHPG #0939/01 2251417
ZNR UUUUU ZZH
P 131417Z AUG 07
FM AMEMBASSY PRAGUE
TO RUEHC/SECSTATE WASHDC PRIORITY 9486
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 PRAGUE 000939 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV PREL EZ ECON EFIN
SUBJECT: Czech Public Finance Reform:  The Next Parliamentary 
Battle 
 
Ref: A. Prague 698,  B. Prague 359 
 
¶1. (SBU) Summary: PM Topolanek's government faces a key challenge 
this week, when its public finance reform bill undergoes second 
reading in the lower chamber of the parliament. Topolanek will have 
to bring order to his fractious coalition government and to his own 
party, the ODS, which remains split between supporters of the 
government reform proposal, and those pushing for more radical 
reforms. Since Topolanek has done little after the bill's first 
reading on June 7 to forge a consensus within his government, this 
week's negotiations in the parliament, and especially in the 
backrooms, will be decisive. Although Topolanek seems to have 
stepped back from an earlier pledge to tie his government's future 
to the reform bill's passage, the bill's failure would increase 
pressure on the fragile coalition and undermine Topolanek's hold on 
power. End Summary. 
 
¶2. (U) The government reform package as submitted to the Chamber of 
Deputies in late May and passed in the first reading is a 
comprehensive bill, which would modify 43 existing laws and abolish 
two. With its primary aim of balancing public finances, the reform 
package focuses on three main fields - taxes, social benefits and 
health care. Another big issue - the pension system - would be 
addressed in a separate bill, which the government promised to 
submit by the end of November. The specific contents of the reform 
package are significant on their own merits, but even more so when 
considered in the context of Czech aspirations to join the eurozone. 
The new public finance reform package seeks to reinstate fiscal 
discipline and push the deficit down to 2.9% in 2009 (ref A). 
 
¶3. (U) The reform bill passed in the parliament's first reading on 
June 7. On August 8, the Budget Committee met to discuss the reform 
bill. Due to the absence of one ODS MP, who was on vacation, the 
bill failed to win the committee's approval. The decision by the 
Budget Committee is not binding, but it strikes a psychological blow 
to the coalition and raises more questions about ODS party 
discipline. This is ironic, since the driving force behind the 
reform package is the right-wing ODS. Calls for tighter public 
spending and a thorough reform of the taxation, social and pension 
systems, as well as health care were core elements of the ODS 
program and election campaign before the 2006 parliamentary 
elections. However, having formed a coalition government with two 
junior parties of a more centrist orientation and relying on two 
votes of Social Democratic renegades, the ODS has had to compromise 
and make several concessions on its reform ideas. Led by the ODS MP 
Vlastimil Tlusty, former minister of finance, some of the ODS 
parliamentarians have rejected the concessions and have called for 
more radical changes which would be more in line with the party 
program. In June, they stated their disapproval with the government 
bill criticizing mainly the proposed tax reform. While they 
supported the government reform bill during the first reading in 
early June, they conditioned their support in the next two readings 
on the government's acceptance of their position. 
 
¶4. (U) While the ODS rebels criticize the reform package as too 
soft, some members of the junior coalition party KDU-CSL criticize 
it for being too harsh and insensitive to the needy. For example, 
some members of the party are pushing for an exemption from the 
proposed medical co-payments for children below 15 years and 
pregnant women, and change the structure of parental benefits. 
However, many observers speculate that KDU-CSL deputies will support 
the coalition and vote for the reform package now that the KDU-CSL 
chairman and DPM Jiri Cunek has been cleared of bribery charges. 
Opposition leaders and some political commentators allege that 
Topolanek secured KDU-CSL support by influencing the judicial 
process in Cunek's favor. 
 
¶5. (U) The only coalition partner without any substantial internal 
opposition to the government draft are the Greens, who are more or 
less satisfied with the reform bill. They would like to see 
ecological taxes in the draft, but this will not be a show-stopper 
for the party. Even if the government coalition gets the votes of 
all its deputies, it will still need at least one more vote from the 
opposite side since the coalition controls only 100 out of 200 seats 
in the lower chamber. It is widely assumed that both Social 
Democrats who have thus far enabled the government to remain in 
power, would vote for the reform bill provided that some of their 
suggestions were adopted. 
 
¶6. (SBU) Hence the main problem remains inside the ODS. PM Topolanek 
will not meet with the ODS parliamentary caucus, however, until 
August 13, the evening before the opening of the extraordinary 
plenary session of the parliament. ODS MP Jan Schwippel, who belongs 
to Tlusty's faction, told Emboffs that it might be Topolanek's 
intention to push the rebels into a corner and limit their 
maneuvering space. While its leader Vlastimil Tlusty has not 
revealed his intentions, others are seeking to hammer out a 
compromise. Last week, another member of the Tlusty group, MP Michal 
Doktor offered a proposal, which essentially splits the difference 
between the government and Tlusty's versions. According to the 
media, PM Topolanek supports Doktor's proposal and is trying to sell 
 
PRAGUE 00000939  002 OF 002 
 
 
it to coalition deputies, and especially the Tlusty faction within 
the ODS. Tlusty's own decision before the plenary will be vital 
because the group will very likely follow his lead in the voting. 
Many observers believe that Tlusty would vote for the compromise 
proposal, but only if he scores some victory to save face before the 
voters. 
 
¶7. (SBU) Comment:  The real battle will take place at the plenary 
session over the next two weeks and in the parliament's backrooms, 
as Topolanek works to hold off opposition attacks and to line up 
support for the reform bill and his government. If the reform 
package passes, the government would be able to submit a budget in 
September that meets its EU obligations and tackles the 
deteriorating public finance situation. More importantly, the 
government would score an important political victory, in what will 
be one of the first significant legislative fights it has faced 
since winning the vote of confidence in January. 
 
¶8.  (SBU) Comment Continued:  If it fails, the Topolanek government 
would face an uncertain future. While the original declaration that 
the government would resign if the package were not approved quietly 
disappeared in the course of time, opposition pressure on this 
government would no doubt increase. Although not fully ready for a 
political takeover, the CSSD has intensified lately its efforts to 
change its image and reform its structures with the aim to appeal to 
young and educated voters. Moreover, the ODS rebels would likely 
call for an extraordinary party congress, and the reelection of 
Mirek Topolanek as chair would be highly improbable. The possibility 
of a grand coalition could once again resurface. Many Czechs have 
bad memories of the last time the two largest parties cooperated. 
The opposition agreement of 1998-2002, during which ODS supported a 
CSSD-led minority government, was a time when many Czech voters lost 
trust in their political leaders, who were all too willing to engage 
in backroom deals and outright bribery. ODS MP Jan Schwippel told 
Emboffs that a grand coalition might not be such a bad thing because 
it would "assure the reelection of Vaclav Klaus as president and 
approval of the radar in the Czech Republic," two key priorities for 
many ODS members. Schwippel was therefore confirming, perhaps 
unwittingly, that backroom deals would also be at the foundation of 
any new grand coalition. 
 
THOMPSON-JONES