US embassy cable - 04PRAGUE1846

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