VZCZCXRO0184
PP RUEHSL
DE RUEHSL #0316/01 1981347
ZNR UUUUU ZZH
P R 171347Z JUL 09
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC PRIORITY 0043
INFO RHEFDIA/DIA WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHSL/AMEMBASSY BRATISLAVA 0067

UNCLAS SECTION 01 OF 02 BRATISLAVA 000316 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/CE J. LAMORE 
STATE FOR EEB/IDF/OMA J. KELLEY 
STATE PLEASE PASS TO TREASURY 
TREASURY FOR INTERNATIONAL AFFAIRS P. MAIER 
 
E.O. 12958: N/A 
TAGS: EFIN ECON LO
SUBJECT: SLOVAKIA: DESPITE CRISIS, NO BUDGET REVISION IN SIGHT 
 
REF: BRATISLAVA 165 
 
SUMMARY 
------- 
 
¶1. (SBU) Though there has been no formal budget revision since 
the scale of the economic crisis became clear some six months 
ago, senior government officials are beginning to admit that 
Slovakia's budget deficit is likely to reach at least 6 percent 
this year.  Revenues are sharply down, and despite a raft of 
announcements about specific cuts (reftel), we have seen no 
solid indication of a comprehensive plan and only slight 
anecdotal evidence of promised cuts actually being implemented. 
By the same token, there has been some recent discussion of 
revenue enhancements but no real plan so far.  If oft-repeated 
statements by PM Robert Fico and his Finance Minister about the 
importance of a balanced budget are to be believed, it appears 
that painful cuts may be in store for 2010, an election year, 
which makes little political sense.  It may also be that PM 
Robert Fico plans simply to defer any serious fiscal planning 
until after next summer's election and blame the results on the 
global recession.  End summary. 
 
 
WEAK REVENUES DRIVING 6 PERCENT DEFICIT 
--------------------------------------- 
 
¶2. (U) In the face of sharply declining revenues and generally 
steady expenditures, the GoS appears to be approaching an 
admission that its deficit for 2009 will substantially exceed 
the Maastricht ceiling of 3% of GDP.  The exact picture is 
anything but clear, since the government has steadily delayed 
revising the budget, despite calls from the opposition and at 
least one coalition partner for a formally presented revision 
for Parliamentary vote.  However, Finance Minister Jan Pociatek 
recently admitted publicly that analyst estimates of around 6% 
deficit are realistic.  The official budget, which is still 
based on 6.5% positive growth, forecasts a deficit 1.7%. 
 
¶3. (U) The causes of the higher deficits are routine news in 
this crisis year: GDP fell at an annual rate of 11.4% in the 
first quarter of the year, industrial production in May was down 
nearly 24% year on year, and unemployment has reached a 3-year 
high of 11%.  The slowdown has dramatically lowered government 
revenues at the same time that it has pushed up social spending. 
 Compared with the same period last year, estimated revenues as 
of June were down 11.19%, tax revenues were down 13.35%, and VAT 
revenues were down an astonishing 18% (a drop caused partly by 
shoppers going to neighboring countries to take advantage of 
their recently weakened currencies). 
 
 
SPENDING: "THEY'VE CLOSED THEIR EYES" 
------------------------------------- 
 
¶4. (SBU) On the spending side, the budget contains a 7.35% 
increase over last year (June to June), though the government 
has announced since late 2008 a mish-mash of cuts: on local 
governments, on defense procurements and staffing, on capital 
spending, and even, most recently, on government purchases of 
paper.  The announcements have been pointedly vague, however, 
and no comprehensive view of how spending might be cut across 
the various ministries has been presented.  There are rumors of 
across-the-board cuts of 10-15%, though whether this could be 
achieved in the one quarter remaining is doubtful at best. In 
response to our question of how the government is managing 
spending for the balance of this year, one person close to the 
Ministry of Finance said simply, "They've closed their eyes." 
Other sources have told us that line ministries are ramping up 
spending now in anticipation of cuts in the fourth quarter. 
 
¶5. (SBU) Pociatek has begun speculating publicly about tax hikes 
to limit the deficit.  Again, though, specifics are lacking.  He 
has mentioned raising taxes on gambling and alcohol, and Prime 
Minister Robert Fico has talked about raising taxes on banks 
(mainly as a threat against bankers reluctant to cooperate in 
proposed consumer loan programs).  Perhaps the most credible 
talk-- confined for the moment to the sub-political level of 
technical experts in the Finance Ministry--is of unifying 
collections to streamline the administration of personal income 
taxes and health and social contributions. Such a measure would 
be a welcome and long overdue broadening of Slovakia's markedly 
narrow tax and contributions base, and a simplification of a 
thicket of different assessment bases, ceilings, exclusions, 
etc.  But it can hardly be done overnight, and probably not in 
time to affect 2010 revenues. 
 
BRATISLAVA 00000316  002 OF 002 
 
 
 
 
COMMENT: PUZZLING POLITICS 
-------------------------- 
 
¶6. (SBU) Behind the opacity in the budget situation is the 
interesting question of why Fico's government is being so cagey. 
 Politically, Fico is on top of the world now.  He could easily 
get Parliament to swallow a revised 2009 budget showing a 
monstrous deficit--not that 6% is monstrous these days--and 
simply ignore any criticism from the opposition or the press. 
He could start the inevitable cuts in government spending now 
(though that would certainly be procyclical) in order to 
minimize the pain in 2010, an election year.  (Note: Though the 
GoS has held internal budget cut talks and announced various 
cuts, both public documents and our sources within government 
have indicated that very few cuts have been implemented.  End 
note.)  He is taking none of these options, and in doing so will 
make 2010 fiscally more precarious.  His finance minister has 
made a dogma of the notion that tiny Slovakia cannot afford to 
signal the market that it has lost control over its spending 
(otherwise markets will demand higher return for the higher 
risk), and Fico--so far--has consistently preached the doctrine 
of limited deficits.  Pociatek has described the cuts that will 
be necessary in 2010 as "drastic." 
 
¶7. (SBU) Fico may be planning to hunker down until after the 
elections, talking as little as possible about budget issues and 
simply hoping that the average voter won't care about the 
country's fiscal condition, which he will likely blame on the 
global recession.  He is adamant in declaring that he will not 
touch social spending, yet he has so far been nearly as 
insistent on moving toward a balanced budget.  The arithmetic 
doesn't square,  but it seems that admitting this, and working 
on it, is to concede points to the opposition, which owns the 
fiscal-responsibility message. 
BALL