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Cablegate: Czech Public Finance Reform: The Next Parliamentary

VZCZCXRO8852
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHPG #0939/01 2251417
ZNR UUUUU ZZH
P 131417Z AUG 07
FM AMEMBASSY PRAGUE
TO RUEHC/SECSTATE WASHDC PRIORITY 9486
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 PRAGUE 000939

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PGOV PREL EZ ECON EFIN
SUBJECT: Czech Public Finance Reform: The Next Parliamentary
Battle

Ref: A. Prague 698, B. Prague 359

1. (SBU) Summary: PM Topolanek's government faces a key challenge
this week, when its public finance reform bill undergoes second
reading in the lower chamber of the parliament. Topolanek will have
to bring order to his fractious coalition government and to his own
party, the ODS, which remains split between supporters of the
government reform proposal, and those pushing for more radical
reforms. Since Topolanek has done little after the bill's first
reading on June 7 to forge a consensus within his government, this
week's negotiations in the parliament, and especially in the
backrooms, will be decisive. Although Topolanek seems to have
stepped back from an earlier pledge to tie his government's future
to the reform bill's passage, the bill's failure would increase
pressure on the fragile coalition and undermine Topolanek's hold on
power. End Summary.

2. (U) The government reform package as submitted to the Chamber of
Deputies in late May and passed in the first reading is a
comprehensive bill, which would modify 43 existing laws and abolish
two. With its primary aim of balancing public finances, the reform
package focuses on three main fields - taxes, social benefits and
health care. Another big issue - the pension system - would be
addressed in a separate bill, which the government promised to
submit by the end of November. The specific contents of the reform
package are significant on their own merits, but even more so when
considered in the context of Czech aspirations to join the eurozone.
The new public finance reform package seeks to reinstate fiscal
discipline and push the deficit down to 2.9% in 2009 (ref A).

3. (U) The reform bill passed in the parliament's first reading on
June 7. On August 8, the Budget Committee met to discuss the reform
bill. Due to the absence of one ODS MP, who was on vacation, the
bill failed to win the committee's approval. The decision by the
Budget Committee is not binding, but it strikes a psychological blow
to the coalition and raises more questions about ODS party
discipline. This is ironic, since the driving force behind the
reform package is the right-wing ODS. Calls for tighter public
spending and a thorough reform of the taxation, social and pension
systems, as well as health care were core elements of the ODS
program and election campaign before the 2006 parliamentary
elections. However, having formed a coalition government with two
junior parties of a more centrist orientation and relying on two
votes of Social Democratic renegades, the ODS has had to compromise
and make several concessions on its reform ideas. Led by the ODS MP
Vlastimil Tlusty, former minister of finance, some of the ODS
parliamentarians have rejected the concessions and have called for
more radical changes which would be more in line with the party
program. In June, they stated their disapproval with the government
bill criticizing mainly the proposed tax reform. While they
supported the government reform bill during the first reading in
early June, they conditioned their support in the next two readings
on the government's acceptance of their position.

4. (U) While the ODS rebels criticize the reform package as too
soft, some members of the junior coalition party KDU-CSL criticize
it for being too harsh and insensitive to the needy. For example,
some members of the party are pushing for an exemption from the
proposed medical co-payments for children below 15 years and
pregnant women, and change the structure of parental benefits.
However, many observers speculate that KDU-CSL deputies will support
the coalition and vote for the reform package now that the KDU-CSL
chairman and DPM Jiri Cunek has been cleared of bribery charges.
Opposition leaders and some political commentators allege that
Topolanek secured KDU-CSL support by influencing the judicial
process in Cunek's favor.

5. (U) The only coalition partner without any substantial internal
opposition to the government draft are the Greens, who are more or
less satisfied with the reform bill. They would like to see
ecological taxes in the draft, but this will not be a show-stopper
for the party. Even if the government coalition gets the votes of
all its deputies, it will still need at least one more vote from the
opposite side since the coalition controls only 100 out of 200 seats
in the lower chamber. It is widely assumed that both Social
Democrats who have thus far enabled the government to remain in
power, would vote for the reform bill provided that some of their
suggestions were adopted.

6. (SBU) Hence the main problem remains inside the ODS. PM Topolanek
will not meet with the ODS parliamentary caucus, however, until
August 13, the evening before the opening of the extraordinary
plenary session of the parliament. ODS MP Jan Schwippel, who belongs
to Tlusty's faction, told Emboffs that it might be Topolanek's
intention to push the rebels into a corner and limit their
maneuvering space. While its leader Vlastimil Tlusty has not
revealed his intentions, others are seeking to hammer out a
compromise. Last week, another member of the Tlusty group, MP Michal
Doktor offered a proposal, which essentially splits the difference
between the government and Tlusty's versions. According to the
media, PM Topolanek supports Doktor's proposal and is trying to sell

PRAGUE 00000939 002 OF 002


it to coalition deputies, and especially the Tlusty faction within
the ODS. Tlusty's own decision before the plenary will be vital
because the group will very likely follow his lead in the voting.
Many observers believe that Tlusty would vote for the compromise
proposal, but only if he scores some victory to save face before the
voters.

7. (SBU) Comment: The real battle will take place at the plenary
session over the next two weeks and in the parliament's backrooms,
as Topolanek works to hold off opposition attacks and to line up
support for the reform bill and his government. If the reform
package passes, the government would be able to submit a budget in
September that meets its EU obligations and tackles the
deteriorating public finance situation. More importantly, the
government would score an important political victory, in what will
be one of the first significant legislative fights it has faced
since winning the vote of confidence in January.

8. (SBU) Comment Continued: If it fails, the Topolanek government
would face an uncertain future. While the original declaration that
the government would resign if the package were not approved quietly
disappeared in the course of time, opposition pressure on this
government would no doubt increase. Although not fully ready for a
political takeover, the CSSD has intensified lately its efforts to
change its image and reform its structures with the aim to appeal to
young and educated voters. Moreover, the ODS rebels would likely
call for an extraordinary party congress, and the reelection of
Mirek Topolanek as chair would be highly improbable. The possibility
of a grand coalition could once again resurface. Many Czechs have
bad memories of the last time the two largest parties cooperated.
The opposition agreement of 1998-2002, during which ODS supported a
CSSD-led minority government, was a time when many Czech voters lost
trust in their political leaders, who were all too willing to engage
in backroom deals and outright bribery. ODS MP Jan Schwippel told
Emboffs that a grand coalition might not be such a bad thing because
it would "assure the reelection of Vaclav Klaus as president and
approval of the radar in the Czech Republic," two key priorities for
many ODS members. Schwippel was therefore confirming, perhaps
unwittingly, that backroom deals would also be at the foundation of
any new grand coalition.

THOMPSON-JONES

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