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Cablegate: Czech Republic's Ambitious Structural Reform Agenda

VZCZCXYZ0000
RR RUEHWEB

DE RUEHPG #0044 0251513
ZNR UUUUU ZZH
R 251513Z JAN 08
FM AMEMBASSY PRAGUE
TO RUEHC/SECSTATE WASHDC 9986
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS PRAGUE 000044

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV EZ
SUBJECT: CZECH REPUBLIC'S AMBITIOUS STRUCTURAL REFORM AGENDA

REF: A. 07 PRAGUE 973
B. 07 PRAGUE 1222

1. (SBU) SUMMARY AND COMMENT: Czech Finance Minister
Miroslav Kalousek, during a January 24 meeting with the
Ambassador, previewed the next set of planned economic
reforms. Following the 2007 passage of the public finance
reform bill, the government announced its intention to submit
a pension reform plan by the end of last year and a
healthcare reform plan in 2008. The former has been delayed
and Kalousek now hopes both bills will be presented in 2008,
in addition to a package of reform legislation aimed at
"rationalizing and simplifying" the tax system. Given the
evenly-split Czech Parliament, any controversial bill --
economic or otherwise -- is an uphill battle. Despite this
challenging and short-sighted political environment, the fact
that Kalousek is determined to pursue these difficult reforms
is good news for the economy. Reform opponents may not
change their minds, but if the current global financial
turmoil and the talk of economic slowdown becomes reality,
Kalousek may have more cover to pursue these tough reform
goals. END SUMMARY AND COMMENT.

BUDGET NOT SUSTAINABLE WITHOUT PENSION AND HEALTHCARE FIX
--------------------------------------------- -----------
2. (SBU) More individual participation and contribution is
the key underlying principle behind both pension and
healthcare reform initiatives. However, this is highly
unpopular and politicians are loathe to even utter these
words. As Kalousek points out, however, without these
reforms, the Czech Republic cannot even contemplate the
long-term sustainability of the state budget. The planned
pension reform would gradually convert the current
pay-as-you-go system to a fully-funded system, raise the
mandatory retirement age, and offer both opt-out and
supplemental plans for individuals. The proposed healthcare
reforms include offering different types of insurance
coverage for individuals and building on the controversial
fee-for-service concept introduced by the 2007 public finance
reform bill (as of January 1, Czechs pay CZK 30 - or less
than $2 - per doctor visit).

3. (SBU) In fall 2007, Parliament passed the public finance
reform bill, which some believe is as much a political as an
economic achievement, given that its main element, a flat
tax, was one of the Civic Democratic Party's leading campaign
promises. As reported in ref A, the bill mostly addressed
the revenue side of the budget equation with both corporate
and income tax cuts. However, excessive social expenditures
are the primary reason for the persistent fiscal deficit that
is preventing the Czech Republic from adopting the Euro.
Kalousek attributed the better-than-expected 2007 budget
deficit results (1.9%/GDP) solely to better-than-projected
GDP growth, saying "this had nothing to do with the
government reforms."

RATIONALIZING AND SIMPLIFYING THE TAX SYSTEM
--------------------------------------------
4. (SBU) In addition to the much anticipated pension and
healthcare reforms, Kalousek told the Ambassador about
another planned reform package that has not yet been made
public. By mid- to late-February, Kalousek intends to unveil
three bills aimed at the personal income tax system, the tax
process, and financial and customs institutions. Kalousek is
in consultation with the Prime Minister and other economic
Ministers on this "legislative, administrative, and
institutional" tax reform initiative that is intended to
"rationalize and stabilize" the tax system. The underlying
principle of the bill is to change the point at which income
is taxed such that money that is adding value to the economic
system (e.g. in holding companies) would not be taxed whereas
money changing hands (e.g. into consumer's hands) would be
taxed. Kalousek is not in a rush to push this package
through but believes it is important to the transparency and
stability of the tax system. He said that he would welcome
views of American investors and companies once the reform
package is made public.

EURO ADOPTION DATE REMAINS ELUSIVE
----------------------------------
5. (SBU) Kalousek admitted that it was a "mistake" that the
Czech Republic does not have a specific date for Euro
adoption. However, he believes it would be worse to set a
date and then slip on the timeline due to missed fiscal
targets. Therefore, he informed the Ambassador that he would
not/not announce a date for Euro adoption until structural
reforms are approved by Parliament. Currently, the Czech
Republic has identified the 2012-2013 timeframe as the
earliest possible date for Euro adoption (ref B).
Graber

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