VZCZCXRO9795
PP RUEHSL
DE RUEHSL #0425/01 2750628
ZNR UUUUU
P R 020628Z OCT 09
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC PRIORITY
INFO RUEAIIA/CIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUEHSL/AMEMBASSY BRATISLAVA

UNCLAS SECTION 01 OF 02 BRATISLAVA 000425 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/CE J.MOORE 
STATE PLEASE PASS TO TREASURY FOR P. MAIER AND L. NORTON 
 
TAGS: EFIN ECON EINV PREL LO
SUBJECT: SLOVAKIA'S BUDGET SEASON BEGINS 
 
REF: BRATISLAVA 316, BRATISLAVA 413 
 
SUMMARY 
------- 
 
¶1. (U) The draft 2010 budget was approved by the Slovak Cabinet 
on 30 September; it now goes forward to further negotiation 
before passage in final form at year end.  The budget reduces 
the deficit to 5.5% of GDP through a series of spending cuts 
aimed at ministries that do not directly touch the public, most 
notably the defense ministry.  At the same time, social and 
infrastructure spending increase, and overall spending increases 
15%. 
 
¶2. (SBU) We expect most of the real negotiation to occur among 
the three coalition partners, despite the weak bargaining 
position of the two junior partners.  This means the final 
budget will reflect political expediency--a division of spoils 
among competing fiefdoms--more than government priorities. 
Still, the deficit reduction ambitions appear to be real, and 
the Ministry of Finance is preparing some revenue-side measures 
to help bring the deficit down to 3% by 2012.  End summary. 
 
 
The Road of Blood and Sweat 
--------------------------- 
 
¶3. (SBU) After months of hedging on a budget revision for 2009 
(ref A), and unusual silence during the drafting of next year's 
budget, Finance Minister Jan Pociatek finally submitted a draft 
to the government on September 30.  The Cabinet approved the 
draft on the same day, and the bill now moves to 
behind-the-scenes negotiations leading up to the required three 
readings in Parliament.  The budget delivers deep cuts in 
virtually every ministry that does not directly touch the public 
and hefty increases for those that do. Ministry of Finance State 
Secretary Peter Kazimir described the budget as a "road of blood 
and sweat," following on months of promises from Pociatek and 
other senior officials that the budget would be ambitious on 
consolidation. 
 
¶4. (U) The big losers are the ministries of defense (down 21% 
from 2009), foreign affairs (18%), interior (10%), and culture 
(10%).  The biggest loser proportionally is, interestingly, the 
Constitutional Court, with a nearly lethal 49% reduction in its 
meager EUR 5.7 million budget (ref B).  The winners are the 
ministries of agriculture (up 19%), construction (29%), health 
(10%), and education (8%).  Again, these priorities reflect PM 
Robert Fico's long-standing pledge to cut the deficit 
aggressively while augmenting--or at least not cutting--social 
services.  In addition to the ministry-by-ministry cuts, there 
is rumored to be an across-the-board mandate to cut purchases of 
outside goods and services by 20% and capital expenditures by 
70%. 
 
¶5. (U) If the bottom line holds through negotiations, the 
deficit would drop from 2009's projected 6.3% of GDP (EUR 4 
billion)  to 5.5% (EUR 3.7 billion)--an ambitious cut indeed in 
a year when unemployment is expected to creep up from today's 
11% to 13.5%.  The total budget is EUR 16.3 billion, a 15% 
increase in spending over this year's EUR 14.1 billion. 
 
 
A Serious Proposal? 
------------------- 
 
¶6. (SBU) The main question now is whether the draft is a 
realistic budget or simply an exaggerated opening position for 
horse-trading to come.  The way the Ministry of Finance (MoF) 
has chosen to handle the political run-up to the formal budget 
submission suggests the latter.  Before the formal submission, 
the government is supposed to consult in detail with the 
"tripartite,"  a group comprising government, labor unions, and 
employers.  This year, the MoF circulated a single-page 
spreadsheet to the tripartite a couple of hours before the 
scheduled consultation.  Both the employers and the unions (the 
latter being a strong Fico constituency) complained bitterly 
that negotiating was impossible given so little information so 
late. 
 
¶7. (SBU) Most of the battle over budget priorities--if there is 
a battle--will not happen between the opposition and the 
governing coalition.  Once the coalition has agreed, party 
discipline will prevail, and the vote will be a pro-forma 
exercise.  The real contest will be among coalition members, who 
tend to view their ministries as fiefdoms to be run for 
political and material profit.  The minority SNS and HZDS, both 
of which are unabashedly corrupt, know the coalition is drawing 
 
BRATISLAVA 00000425  002 OF 002 
 
 
to a close.  (The final budget is due on the day the coalition 
agreement expires, and passage of a pre-election budget is 
usually seen as the last act of Slovak coalitions.) They will 
certainly want to lock in their revenue opportunities by 
fighting for the biggest possible slices of the budget pie.  As 
we understand it, the important conversations in budget 
negotiations are among party leaders rather than Cabinet 
ministers, so the final allocation of funds is likely to reflect 
political expediency more than social priorities.  Given the 
recent public disagreements among the three coalition leaders, 
there could be a fight. 
 
 
Puzzling but Real Fiscal Conservatism 
------------------------------------- 
 
¶8. (SBU) Advisors in the MoF have told us that both Pociatek and 
Fico really do want to drop the deficit now and in out-years, 
with the goal being to achieve a 3.0% deficit in 2012.  This 
goal may seem strange coming from an emphatically "socially 
oriented" Prime Minister.  We understand that his fiscal 
conservatism is based on the belief that, euro adoption 
notwithstanding, financial markets will deal Slovakia swift and 
severe punishment at the first sign of profligacy.  This belief 
is nearly universal in Bratislava, despite the fact that this 
year's refinancing exercise produced the lowest rates in 
Slovakia's brief history (less than 200 basis points above 
Germany). 
 
¶9. (SBU) The deficit reduction in the 2010 budget derives 
entirely from reconfiguring expenses.  The MoF is trying to 
develop a couple of revenue aces in the hole for 2011, some of 
which may be possible to achieve in 2010.  One is a streamlining 
of tax administration to a single agency and possibly pulling 
some health insurance contributions into the tax system, which 
would involve raising the flat tax from the current 19%. Another 
measure may be to reduce the contribution ceiling to the second 
(private) pension pillar, which would force more social 
contributions into the money-losing first pillar.  Finally, a 
hike in property taxes is being considered, probably in the form 
of a revised assessment basis. 
 
 
COMMENT 
------- 
 
¶10. (SBU) It is hard to know how the budget conversation will 
proceed among the members of a distinctly cracked coalition. 
Vladimir Meciar's HZDS is widely thought to be moribund already, 
with little chance of breaking the 5% floor to win seats in 
Parliament.  Fico has openly broken with SNS, taking two senior 
positions away from the party in recent months and saying that 
he no longer cares whether the coalition agreement holds.  This 
leaves both minority partners with almost nothing to bargain 
with and nothing to lose.  Still, although Fico shows signs of 
viewing his partners as disposable, he needs to keep his 
government from blowing up as the 2010 election approaches, and 
the partners know it.  So deals will be struck, and the budget 
will likely look less severe, though not necessarily more 
rational, by the end of the year. 
BALL