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