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Cablegate: Czech Parliament Passes 2005 State Budget

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS PRAGUE 001846

SIPDIS

STATE FOR EUR/NCE, EB/IFD/OMA AND EUR/RPM
COMMERCE FOR 4232/ITA/MAC/MROGERS
TREASURY FOR OIA

E.O. 12958: N/A
TAGS: ECON EFIN EZ GOV
SUBJECT: CZECH PARLIAMENT PASSES 2005 STATE BUDGET

REF: PRAGUE 1426

1. By a 101-99 vote, the Czech Parliament approved on
December 15 the 2005 state budget with a Kc 83.6 billion
($3.7 billion) deficit -- essentially as presented to it by
Prime Minister Stanislav Gross. (The state budget differs
from the overall public budget in that it excludes certain
off-budget funds and local government.) The budgeted deficit
is less than 2003's expected Kc 114 billion actual state
budget deficit. The government reportedly expects to take in
Kc 71 billion ($3.1 billion) more in taxes than in 2004,
mainly due to increases in VAT receipts. VAT rates increased
this year, and consumption is growing along with GDP.
Without a determined approach to containing expenditures,
however, the deficit is unlikely to change much.

2. Defense expenditures are slated to increase slightly from
2004 to Kc 52.9 billion ($2.35 billion), about 1.8% of
projected 2005 GDP. See reftel for a review of spending
priorities in the budget.

3. The only serious issue at the end of the budget debate
was what to do with savings from a delay in the scheduled pay
increase for police and firemen. KDU-CSL leader Miroslav
Kalousek -- who had fought the police pay increase and been
the leading proponent of budget austerity -- wanted to steer
more than half of the money into agricultural subsidies,
benefiting a major KDU-CSL constituency. He failed to
overcome the opposition of the CSSD members of parliament,
supported by the Communists. At first the Communists wanted
to pay for the increase by cutting the defense budget, and
many CSSD deputies agreed with that idea. However, the small
Freedom Union party (a coalition member) objected, and a
compromise was worked out. Farmers will receive their
payments from the off-budget agricultural fund. The savings
from the police pay increase will be partly held in
government reserves and partly spent on various current
expenses, leaving the deficit as is. This outcome satisfied
PM Gross, who was pleased that "no one will be able to go
around the rural areas and claim they got them money" -- a
barb aimed at Kalousek.

4. As expected, the budget debate presented only a
manageable threat to survival of the CSSD-KDU-Freedom Union
coalition. Next year's debate over the budget may be more
contentious, and there is speculation that the KDU-CSL's
Kalousek may foment differences with the CSSD to provide an
excuse for leaving the coalition in advance of new elections.
In the meantime, the real challenge for the government is
finding the political will to reform the pension and health
systems in order to gain control of continuing high deficits
and growing government debt. The debt is expected to reach
25% of GDP this year by GOCR calculations and even more if
calculated in accordance with the European Union's ESA 95
standards.
CABANISS

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