VZCZCXRO4158
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR
DE RUEHSL #0048 0331334
ZNY CCCCC ZZH
P R 021334Z FEB 10
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC PRIORITY 0391
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHSL/AMEMBASSY BRATISLAVA 0454

C O N F I D E N T I A L BRATISLAVA 000048 
 
SIPDIS 
 
STATE FOR EUR/CE J. MOORE AND M. LIBBY 
STATE PLEASE PASS TO TREASURY FOR P. MAIER AND L. NORTON 
 
E.O. 12958: DECL:  2/1/2020 
TAGS: EFIN ECON EINV PREL LO
SUBJECT: SLOVAKIA READIES CONSTITUTIONAL LAW CAPPING NATIONAL DEBT 
 
REF: 09 BRATISLAVA 425 
 
CLASSIFIED BY: Keith Eddins, Charge d'Affaires, a.i.. 
REASON: 1.4 (d) 
¶1. (C) SUMMARY: The Slovak cabinet is poised to approve a 
constitutional law capping the public debt at 50% of GDP and 
reforming government accounting in order to limit the ability of 
future administrations to "cook the books."  The proposals are 
an effort by Finance Minister Jan Pociatek to box-in the Slovak 
parliament and force it to confront the country's structural 
budget deficit following elections in June.  A senior Finance 
Ministry adviser tells us that the ministry has already prepared 
a set of tax increases that it hopes will be adopted by the next 
government.  END SUMMARY. 
 
¶2. (C) Pociatek announced his proposals on January 27, and an 
adviser told us that they will be "fast-tracked" and taken 
directly to cabinet without the typical interministerial review 
process.  The adviser told us that he expects both the cabinet 
and parliament to approve the proposals quickly, commenting that 
opposition parties have little choice but to support the 
legislation since they have strongly criticized the Fico 
government for its large budget deficit, which rose to 6.3% of 
GDP in 2009.  The proposals include a number of accounting 
changes in an effort to limit the ability of future governments 
to disguise the full extent of their budget deficits, including 
a shift from a three-year non-binding to a four-year binding 
budget. 
 
¶3. (C) With the public debt having risen dramatically in the 
last two years--from 27% of GDP before the financial crisis to 
an expected 41% by the end of 2010--this amendment will leave 
relatively little room for the next government to maneuver. 
According to the adviser, this is part of the plan--Pociatek, 
and presumably Fico, has little confidence in Parliament's 
willingness to approve difficult spending cuts or tax hikes in 
the absence of such a hard limit. 
 
¶4. (C) The adviser further told us that the Finance Ministry has 
already prepared a proposal for closing the structural budget 
deficit, which he said is about 4% of GDP.  Commenting that the 
state pension plan and healthcare system, which together make up 
the bulk of the budget, are politically off-limits, he told us 
that the proposal will instead focus on increasing state 
revenues.  The proposal would dramatically broaden the tax base 
by moving sole proprietorships (said to number 800,000 in a 
country with only about 3 million working age citizens) into the 
social tax system and extending the VAT to books and medicine, 
which are currently exempted.  The VAT would also be raised by a 
percentage point to 20%. 
 
 
COMMENT 
 
¶5. (C) Pociatek's tactical approach to the deficit is 
politically revealing.  Until now, Fico has been able to impose 
slashing cuts on his ministers with barely a whimper of protest, 
and he is more broadly seen as enjoying a dominant political 
position.  Why, then, would he feel the need to corral 
Parliament with a constitutional debt ceiling?  It could be that 
he is looking to make cuts in social programs--although doing so 
would be to cut to the core of his populist "socially 
responsible" ideology.  More likely he is looking for political 
cover for a higher tax rate and possibly for a more radical 
restructuring of taxes and tax collection (reftel).  Certainly 
he will need the cover if he intends to go after the popular 
exemptions for sole proprietorships, which constitute perhaps 
the biggest--and certainly the most widespread--tax dodge in the 
country. 
 
EDDINS