US embassy cable - 05PRAGUE707

UNCLAS SECTION 01 OF 03 PRAGUE 000707 
 
SIPDIS 
 
STATE FOR EUR/NCE 
COMMERCE FOR 4232/ITA/MAC/MROGERS 
 
E.O. 12958: N/A 
TAGS: PGOV, ECON, EZ 
SUBJECT: THE ODS: HOW TO SELL THE DISMANTLING OF THE SOCIAL 
STATE? 
 
1.  Summary:  The Czech Civic Democratic Party (ODS) program 
for the next elections promises a limited state that costs 
the taxpayer less, but offers less support to citizens and 
companies and demands they take more responsibility for their 
own futures.  Although the party benefits mightily from the 
current troubles of the Social Democrats (CSSD), the 
popularity of its program is important to its electoral 
chances.  Whether the average Czech will easily give up the 
social benefits the current system still provides, albeit 
haphazardly and with increasing difficulty, is the question 
the election will answer.  End Summary. 
 
THE CENTER-RIGHT ALTERNATIVE 
---------------------------- 
 
2.  The Civic Democratic Party (ODS) was formed in the early 
1990's by members of the citizens' movement Civic Forum which 
overthrew the Communist government in 1989.  Led by Vaclav 
Klaus, the ODS won the election of 1992 and ruled until 1997, 
when it lost power due to internal dissension, a series of 
corruption scandals and an economic recession.  The ODS 
participated in a de facto coalition with the CSSD under the 
infamous "opposition agreement" from 1998 until 2002.  It has 
been a true opposition party since the 2002 elections.  Since 
1989, the party has evolved a center-right political ideology 
under the guidance of Klaus, favoring low taxes, reduced 
reliance on government transfers and services, and limited 
regulation.  The party maintains close ties with conservative 
economic think tanks in the United States and considers 
itself a natural partner of the Republican Party.  The ODS 
currently attracts 33 percent of the electorate in opinion 
polls, compared to only 12% for the ruling CSSD.  It benefits 
from the voters' disgust with the circus-like atmosphere of 
the last days of the Gross administration.  But for the first 
time since 1990, it will enter an election, whenever it takes 
place, without Klaus, its charismatic founder and now the 
country's ostensibly non-partisan president.  To win in 2006, 
the ODS necessarily will have to rely on its policy 
prescriptions to carry it the full distance to power, beyond 
the CSSD's unpopularity. 
 
IT'S IN THE BOOK 
---------------- 
 
3.  The ODS is waiting for the slow self-destruction of the 
current Social Democratic Party (CSSD)-led government to 
result in elections.  Sooner or later, formation of a new 
government will give its officials not only their eagerly 
sought prestige and power, but also a chance to realize the 
party's goals for the Czech Republic.  The ODS has spelled 
out its vision for the Czech Republic in its "Blue Book", 
published in December 2004.  The Blue Book consists of 260 
pages of policy formulations that would, if implemented, 
largely dismantle the socialist state that successive ODS and 
CSSD governments have both reformed and preserved since 1989. 
 The questions for the ODS are how much the average Czech 
voter actually knows about its aims, and whether "swing" 
voters will support a party whose policies openly encourage 
more self-reliance in terms of government services, pensions 
and health care. 
 
TOWARD A CHEAPER STATE 
---------------------- 
 
4.  The "basic icons" of the ODS program, according to its 
chairman, Miroslav Topolanek, are "inviolable privacy, a 
cheaper state, a future free of debt and solidarity of 
responsible persons (with society)."  An ODS government will 
seek "savings through necessary societal and economic 
changes" and prides itself on being a bulwark against the 
Communist party, agressive socialist thinking, and "social 
engineering, an ever-growing state and the suffocating of 
individual's activity and freedom."  The party wants to 
increase the motivation to work and to employ, and promises 
"zero tolerance" for any steps that increase the influence of 
the state, redistribution of incomes, growth of bureaucracy 
and corruption.  The main changes the ODS seeks in the Czech 
system are simpler and lower taxes, a cheaper and more 
efficient bureaucracy, and social reforms that will support 
the neediest, but free others to chose what, if anything, 
they will receive from the state in return for what payment. 
 
5.  In the area of public finances, the ODS shadow minister 
of finance, Vlastimil Tlusty, takes credit for the last 
balanced state budget in 1998, just before the CSSD took 
office after six years of ODS government.  If asked to name a 
feature of the ODS program, the one thing the average voter 
could name is the flat, 15% tax on personal and corporate 
incomes.  This would also be the unified rate of VAT, if the 
ODS has its way.  Beyond that, however, the ODS promises 
elimination of investment incentives, that mainly involve tax 
holidays for major investments, both foreign and domestic. 
The ODS desire is to provide across the board tax relief and 
systematic support for investment that would be available to 
all companies.  Expenditures would be limited to a fixed 
percent of GDP, and government accounting would be 
consolidated, eliminating off-budget funds such as those for 
transportation and housing. 
 
6.  Other actions that would have an effect on government 
finances are deregulation of all prices, including rents, 
applying a cost/benefit analysis to rule-making, a reduction 
in the number of parliamentarians and consoldiation of some 
ministries, and replacement of today's welfare system with a 
negative income tax for low-income persons.  Besides a flat 
tax, the ODS plans a "flat pension" (similar to what is in 
force in Ireland and Britain) for younger workers, while 
leaving the current pay-as-you-go system untouched (except 
for a later retirement age) for older workers.  The flat 
pension means a low single benefit for all payers in return 
for a lower tax payment, with freedom to increase personal 
savings to achieve a higher overall retirement benefit. 
Savings from lower tax payments could be invested in bank 
accounts, stocks, or even self-employment. 
 
7.  In place of today's comprehensive health insurance, now a 
state requirement, the ODS would establish a required minimum 
insurance covering the most serious illnesses and injuries. 
Broader coverage would be a choice of the individual.  Part 
of the system would be a source of information about 
available services and prices.  Payments to encourage 
childbirth would be halted, relying upon improved 
educational, employment and housing opportunities to 
encourage larger families. 
 
HANDS OFF BUSINESS. AND NO HANDOUTS EITHER 
------------------------------------------ 
 
8.  The ODS shadow minister for Industry and Trade, Martin 
Riman, promises a number of changes intended to improve the 
climate for doing business. Businessmen rate high taxes as 
the chief impediment to business success, and the 15% flat 
tax would address that complaint.  Otherwise, the ODS rejects 
any formal industrial or export policy in favor of a secure 
environment for property rights.  The state will interfere 
less in business, but on the other hand, companies will not 
be able to rely on government support, either.  The 
parliament will transpose only the minimum of European Union 
legislation required.  In the labor market, the ODS will 
authorize more freedom of contract, including use of 
part-time and temporary labor.  It will do away with the 
minimum wage.  Detailed regulations of the nature of work 
would be repealed, while focusing the law on protection 
against excesses and violations of human rights.  The 
Competition Office in Brno will become less a tool of the 
state to control companies and more of a defender of 
companies against state interference.  Utilities would be 
regulated to increase, not reduce competition. 
 
9.  An ODS government would sell off the remaining few 
state-owned companies, as much to get government bureaucrats 
out of doing business in the real economy as to generate 
government income.  It would go on from there to privatize 
many government services -- public transport, health care, 
schools, social services, cultural venues, and prisons, for 
example. 
 
10.  The ODS's attitude toward foreign investment is that the 
state has no role to decide the kind and place of investment, 
and then to give it above-standard treatment.  More important 
in its view are transparent and enforceable laws, a low level 
of regulation, low taxes and a flexible labor market.  It 
would eliminate the current system of investment incentives 
and keep only non-tax incentives that can be applied across 
the board.  One goal is to prevent discrimination against 
Czech companies in access to incentives, which the ODS 
contends occurs because most Czech investments are too small 
to qualify.  Laws will be reformed to protect ownership 
rights and ensure a secure environment for them.  The 
Ministry of Industry and Trade will be transformed into 
(another) defender of business against government 
interference, and to add an economic dimension to Czech 
foreign policy.  It will have the important role of promoting 
and defending Czech interests as EU legislation is developed. 
 
11.  The functioning of the Czech court system is an 
important issue to American and other foreign investors. 
Jiri Pospisil, the shadow Minster of Justice, promises 
tougher disciplinary proceedings for judges.  An ODS 
government will create a corps of junior judges who can help 
reduce case backlogs in certain areas while gaining important 
experience.  The ability of appeals courts to return cases to 
courts of first instance will be limited.  Subpoena powers 
will be strengthened to ensure the presence of key witnesses 
at the apppointed time.  Execution of judgments will be made 
easier and faster. 
 
READY TO SAY GOODBYE TO THE SOCIAL STATE? 
----------------------------------------- 
 
12.  The official ODS vision for the post-election period is 
certainly that of a leaner state which demands more 
self-reliance than the current post-communist, Social 
Democratic version.  This begs the question of why the ODS 
did not institute such reforms when it was in power from 1992 
to 1997.  One reasonable answer is that the ODS was 
preoccupied with dismantling communism and establishing the 
basics of a modern market economy and a democratic society, 
which are now in place and can withstand further 
liberalization.  In the 1990's Vaclav Klaus made the 
practical judgment that further reforms could not be 
sustained politically, and it has been true since then that 
the realities of coalition politics in the Czech Republic 
discourage radical changes.  The ODS ideal of a self-reliant, 
entrepreneural Czech in a limited state is not that of any 
other viable party -- the CSSD, the KDU-CSL ("conservative" 
in the European, not the American sense of the word), and 
certainly not the Communists. 
 
13.  However, the CSSD and the new Paroubek government have 
tried to steal the ODS's thunder with their own proposals for 
reduction of income taxes, within the current framework of a 
progressive tax system with traditional deductions.  All 
Czech politicians are looking over their shoulders at 
Slovakia, which has already implemented a 19% flat tax, as 
well as reforms of its pension and health care systems, and 
which as a result is beginning to attract increased attention 
from foreign investors.  We recently attended an 
ODS-sponsored conference in Prague, called to showcase its 
tax plans.  The conference was attended by officials from 
Estonia, Slovakia, Russia, and other pioneers of the flat 
tax, all of whom extolled its virtues and praised ODS 
concepts of limited government and entrepreneurial freedom. 
 
14.  To a large extent, implementing the ODS vision as 
outlined in the Blue Book depends on the kind of mandate the 
ODS receives in the next elections.  It is unlikely that the 
ODS will manage a 51 percent majority in Parliament.  The 
closer it comes to that goal, the more of a commitment to its 
program it can demand from a likely coalition partner.  In 
forming a coalition, the ODS will likely make the 15% flat 
tax an absolute condition, but forcing acceptance of the rest 
of its program depends on its mandate.  The elections, 
whenever they come, will be a test of two things: how 
disgusted the electorate is with the meltdown of the CSSD, 
and how ready the average Czech is to jettison the socialist 
certainties of the past. 
HILLAS