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Cablegate: The Oecd Budget: Getting to Zero

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Lucia A Keegan 07/31/2006 10:31:46 AM From DB/Inbox: Lucia A Keegan

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UNCLAS SENSITIVE PARIS 05110

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cxparis:
ACTION: AMBO
INFO: POL OECD SCIO ECSO ECON TRDO ENGO AID ESCI FCSO
MGT LABO IPCO DCMO ECNO

DISSEMINATION: OECDALL /1
CHARGE: ICAS

VZCZCFRO042
PP RUEHFR
DE RUEHFR #5110/01 2090652
ZNR UUUUU ZZH
P 280652Z JUL 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC PRIORITY 9868
INFO RUCPDOC/DEPARTMENT OF COMMERCE WASHDC PRIORITY
RUEAUSA/DEPARTMENT OF EDUCATION WASHDC PRIORITY
RUEAUSA/DEPARTMENT OF HHS WASHDC PRIORITY
RUEHRC/DEPARTMENT OF AGRICULTURE WASHDC PRIORITY
RUEATRS/DEPARTMENT OF TREASURY WASHDC PRIORITY
RUEHFR/OECD COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 03 PARIS 005110

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SENSITIVE

FROM USOECD PARIS

STATE PASS TO USTR

E.O. 12958:N/A
TAGS: AMGT EFIN AORC OECD FR
SUBJECT: THE OECD BUDGET: GETTING TO ZERO

REF: A)State 15194 B)OECD Olisnet document C(2006)106

C) State (July 13 Council instructions)

1. (SBU) Summary: The ambitious budget proposals by the new OECD
Secretary General for the 2007-2008 biennium exceed the guidelines

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of the United States and other major contributors, resulting in a
proposed increase in member contributions of 4.35 percent for 2007
that is simply unrealistic. In order to bring the current draft
proposal into line with budget realities, we recommend a series of
measures for Washington agencies' consideration, including (1)
cutbacks in the "base" budget carried over from 2006 for several
output areas, (2) reducing funding for the Secretary General's new
health proposal, (3) disapproving the proposal for doubling the
SYG's "allocation fund," (4) careful scrutiny of the salary increase
of 4.9% that may be recommended for 2007, and (5) encouraging the
Secretariat to find more savings in the budget of the Executive

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Directorate, which now takes 40% of all OECD spending.

2. (SBU) At the same time, we recommend continued support, including
slight increases in funding, for output areas of high priority to
the United States, for including export credits, consumption tax,
statistics, structural indicators, a new EU desk and the Committee
for Business and Entrepreneurship. End summary

A BUDGET TOO FAR

3. (SBU) New Secretary General Gurria's assumptions for the next
OECD budget biennium (Ref. B) call for a 4.35 % increase in Members'
contributions for 2007 and an additional 2.22% increase for 2008.
The current USG position is to support zero nominal growth (ZNG) in
the budget - which, given inflation of about 2.1 % this year, means
negative real growth - a shrinking of the Program of Work at the
outset of the biennium. Even if the United States decided to go a
step further and approve zero real growth (ZRG), to account for
inflation, the Secretary General's proposal would still leave a gap
of over 2% for the first year of the biennium, with the difference
widening slightly (about a tenth of a percent) above ZRG for 2008.
Japan, Germany, and the UK (the leading budget contributors after
the United States) share our view that 4.35 percent is off the
table, though only Germany joins us in advocating ZNG; the other
major contributors could accept zero real growth (ZRG).

4. (SBU) Whether we support zero nominal growth or zero real
growth, we need to consider carefully what we should recommend to
the OECD in order to whittle down the ambitious proposals of a
Secretary General whose election the United States strongly

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supported. To achieve a ZNG target, nearly 7 million euros (ME) in
proposed expenditures would need to be eliminated to keep Members'
contributions at the 2006 level of some 157 ME. The Mission sets
out below for Washington agencies' consideration possible ways to
deal with the budget proposal.

CUTS IN THE BASE BUDGETS FOR LOWER PRIORITIES

5. (SBU) Getting agreement on cuts will not be an easy task, even
with the use of Qualified Majority Voting (QMV) -- budget debates
were long and sometimes acrimonious in the run-up to the current
biennium, despite the availability even then of QMV. In any case,
the entire 2007-2008 budget must ultimately be approved by
consensus. We can propose either across-the-board cuts in some or
all output areas, or differentiated cuts, taking into consideration
the importance of the area and the concerns of other member
countries. The most obvious candidates for cuts would be those
output areas which the United States and other member countries
low-ranked in the latest Medium Term Orientations survey (Refs A and
C). across-the-board. On this basis, here are possible cuts from
the Part I budget (funded through mandatory contributions from all
Members) that the United States could propose. The numbers (e.g.,
1.2.4) indicate the specific Output Area of the PWB.

-- 1.2.4 Tourism: The Secretary General has already proposed moving
Tourism from Part I to Part II (Part II is funded by interested
members only). Tourism received only a modest 35,000 euros in Part
I funding in 2006, but the SYG's proposal has been strongly opposed
by Portugal (in the lead) and several other countries.
Realistically, shunting Tourism to Part II gains little in euro
terms, and the symbolic benefit from streamlining could be offset by
the political cost of trying to make this happen. This would be a
very hard sell, even with the use of QMV (where at least 65% of
Members would need to support the proposal, and three or more
Members representing at least 25% of the budget can block). US
agency: Department of Commerce.

-- 2.1.3 Educational system policies and practices: In the MTO, we
recommended decreased funding, with the comment that little of the
work done in this area is of interest to the USG. By Member votes,
it ranked #19; on a share-of- contributions basis it was near the
bottom. There was a Part I base budget of 454,000 euros in 2006.
It may not be easy to convince other members to reduce the base
unless it is part of a package of across-the-board cuts. US agency:
Department of Education.

-- 2.2.3 Welfare and Social Inclusion: The United States and one
other country recommended in the MTO reduced funding for this area,
which had a 2006 base of 1.5 ME. Five countries advocated increased
funding; the rest wanted no change. This might be a hard sell but
could be a target if we advocated an across-the-board cut. US
Agency: HHS/Department of Labor.

-- 2.3.4 Decoupling Environmental Pressures from Economic Growth:
Low-ranked by the United States and by other countries in the MTO;
the United States recommended reduced funding. The 2006 base is 1.3
ME. We recommend proposing a reduction in the base. US agency:
EPA.

-- 3.1.2 Stakeholder Bridge Building: Here, in his only proposal for
a reduction aside from that related to Tourism, the Secretary
General calls for slashing the 2006 base budget (1.4 ME) by nearly
half, by 600,000 euros. We applaud the principle of reallocating
funding from lower to higher-priority areas, but believe the pain
should be shared by other low-ranked output areas -- such as those
set out above and below. The United States supported in the MTO
cutting funding for Stakeholder Bridge Building, but in order that
the funds could be allocated to other Trade output areas. The Trade
Directorate currently receives a very small share of Part I funding
-- 3% -- and is last among the Directorates in terms of number of
staff, making it relatively less able to take a substantial cut
without serious repercussions for all its work. The Doha
negotiations may be on hold, but the OECD still has important work
to do in advocating for trade liberalization. Lead US agency:
USTR.

-- 4.3.3 Tax Administration: In the MTO, the United States
recommended reduced funding for this Output Area. In terms of
number of Members responding, it was mid-ranked; by share of budget
contribution, it ranked near the bottom. The Secretary General is
proposing upping funding by 113 KE annually, with the additional
money to come from the Central Priorities Fund. (The total CPF has
been set at 2.3 ME per year for 2007-08.) We recommend not
supporting the CPF bid plus a cut from the 2006 base of 515,000
euros. US agency: Department of Treasury.

-- 4.2.2 Finance, Insurance and Pensions: The United States voted
in the MTO to reduce funding for this Output Area. It was
mid-ranked by Members. Last year's base budget was large: 1.9 ME.
This should be a prime area for a reduction in the base. The
Secretary General, however, has proposed a reallocation of 113 KE

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annually, an increase, for this area as a reallocation for an
increase in staff. (Separately, he has also proposed the CPF 260 K
(2007) and 291 (2008) short term funding for development of
"financial literacy guidelines.") We can support cuts in that large
2006 base and still endorse the separate, short-term CPF proposal.
Lead US agency: Department of Treasury

CUTS IN THE SECRETARY GENERAL'S PROPOSED INCREASES

6. (SBU) The Secretary General has proposed doubling his current
"allocation fund" from 600,000 euros annually to 1.2 ME. How these
funds are spent is completely at the SYG's discretion: no approval
from or consultation with Council is needed (though in practice, he
takes into account Council views). The Secretary General's
Allocation Fund is intended allow the Secretary General to respond
quickly to emerging issues. In a very tight budget biennium, we
believe doubling the fund sends the wrong signal, and recommend
opposing any increase in the fund, whether as a reallocation or as
new funding.

7. (SBU) The Secretary General's proposed long-term re-allocations
are all increases since they do not specify any Output Area from
which funds are being reallocated. Long-term allocations, once
approved, become part of future base budgets.

-- In particular, the Health proposal of 791,000 euros annually (to
be shared by 2.4.1 Monitoring Health System Performance and 2.4.2
Achieving High Performance Health Systems) needs careful
examination. It is the largest single proposed "reallocation," and
one of the Secretary General's announced personal priorities. We
have given qualified support to the proposal, pointing out that the
United States believes that, in health, OECD's core strengths lie in
collecting valid, comparable, and relevant data, and in developing
useful quality indicators that permit comparisons of health care
across countries -- rather than in comparing policies among
countries. In light of the tight budget, we should consider
whether to support it for a lesser amount. US agency: HHS

SALARY CUTS AND POST SUPPRESSIONS

8. (SBU) Salaries account for 80 % of the OECD's budget. The
Secretariat estimates that the Coordinating Committee on

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Remuneration (CCR), the international organization tasked to
recommend salary adjustments for the OECD, will recommend an
across-the-board increase of 4.9 percent for 2007, including (within
the CCR methodology) a purchasing power parity adjustment of 2.0%.
The OECD legal counsel has given his view that the OECD would be
legally obligated to pay the CCR recommendation. Nevertheless, we
recommend careful scrutiny of the recommendation and its methodology
when it is made later this year. In addition, the CCR does not
purport to instruct the OECD on how many employees it must hire; it
only recommends what the pay increase should be for the employees on
the rolls. As needed, the OECD can simply increase the vacancy
rate, hold off hiring new employees, or, ultimately, suppress
positions. (It should be borne in mind that all three options would
negatively affect the work of the Organization and that any savings
from the last would be reduced by the need to pay indemnities to
employees dismissed, so-called "LOEs.") The OECD might also find
savings outside the personnel area.

SAVINGS IN THE EXECUTIVE DIRECTORATE

9. (SBU) The Secretary General's proposal notes that his strategy
is to finance reallocations "from savings from the corporate
services area, " adding that "I have asked that all operational
service budget pressures arising for 2007-2008 should be met, to the
extent possible, within the currently available resources of the
Executive Directorate (output group 6.3). We should endorse this
principle and ask for more details than are now presented in the
budget document. The largest single savings presented, however, is
significant: 2.07 ME as a result of the end of a "Special Departure
and Renewal Programme" (repayments to reserves for funds used in the
late 1990s to finance staff departures). There are no cuts in staff
or procurement proposed; given the Executive Directorate's large
share of the Part I budget (39%) and the large number of staff
(29%), we should consider whether to propose reducing its base
budget.

US PRIORITIES: FULL STEAM AHEAD

10. (SBU) The US should continue to press for its priority work at
the OECD (reftel C, para. 11). This includes increased or new
resources for export credits (3.1.4), consumption tax (3.3.1)
statistics (6.2.1), an EU desk in the Economics Department (1.1.2),
support for the Committee on Business and Entrepreneurship (1.2.1)
and for the Board of Auditors. We have already requested in
addition consideration for a long-term reallocation to support aid
effectiveness. Regarding Central Priority Fund and other short-term
funding proposals, we have supported the proposal to strengthen the
OECD website. We also support the Secretary General's initiatives
on Global Relations, including an increase in staff for the Center
for Cooperation for Nonmembers, and specified investment and
regulatory reviews for major nonmembers, Russia, China, and India.

11. (U) Action requested: We ask that affected agencies carefully
consider the draft PWB and provide reactions to EUR/ERA and post in
August. The next Budget Committee meeting at the OECD is scheduled
for September 14. The current OECD budget expires on December 31,
2006, so the entire PWB process is aimed at producing a consensus
budget by that deadline. MORELLA

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