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The Warsaw Voice » Business » May 20, 2009
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Budget to Be Revised
May 20, 2009 By Andrzej Ratajczyk   
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As the global recession bites, the government is preparing to revise this year's budget.

A revision in this year's budget is unavoidable, Prime Minister Donald Tusk and Finance Minister Jacek Rostowski said in early May.

According to experts, the government is likely to revise the budget in July. It will either increase the budget deficit above the original target of zl.18.2 billion, observers say, or slap a higher excise tax on alcoholic beverages or fuel.

Rostowski said the revision does not mean the budget deficit will increase. But experts say the government will probably decide to increase the deficit because any further cuts in expenditure might prove to be unfeasible, while an attempt to boost government revenue by increasing taxes would antagonize the public.

In the first four months of this year, the annual budget deficit came close to zl.16 billion, which economists say is bad news because the gap for the whole year is supposed not to exceed zl.18.2 billion.

Stanisław Gomułka, former deputy finance minister who is now chief economist at Poland's largest business organization, the Business Centre Club, says an increase in the deficit is inevitable. But for the time being the government is sticking with its initial target, Gomułka says, "so as not to scare away investors and to bring Poland into the eurozone as early as possible."

Other experts say that even a slight increase in the deficit could harm the zloty and delay Poland's adoption of the single European currency.

According to former finance minister Zyta Gilowska, the budget needs to be revised and the government should not wait too long with the move. "The more time it takes, the greater changes will have to be made in the budget and the greater shock it will be to the public," Gilowska said.

Despite the deepening crisis in Europe, the government is still assuming that the Polish economy will grow by 1.7 percent this year. This is despite a May projection by the European Commission under which Poland's GDP is expected to shrink by 1.4 percent this year and grow by 0.8 percent in 2010. In January, the European Commission projected a 2-percent 2009 GDP growth rate for Poland, followed by 2.4 percent next year.

According to the European Commission, the recession in Poland will be relatively mild compared with other countries in the region because foreign trade in Poland accounts for a smaller proportion of GDP. Poland's GDP contraction is expected to be among the smallest in the European Union. The Commission projects that Cyprus will be the only EU economy to see growth this year-by a paltry 0.3 percent. Greece and Malta are expected to fare better than Poland, but their economies are also expected to contract. Latvia, Lithuania and Estonia, on the other hand, are projected to be hit the hardest and contract by 13.1 percent, 11 percent and 10.3 percent respectively. The EU economy as a whole is projected to shrink by 4 percent, and the same goes for the eurozone. In 2010, both the EU economy and the eurozone are expected to contract by 0.1 percent.

The European Commission says the slowdown in Poland this year will be caused by a drop in domestic consumption. Investment is expected to slow down, partly as a result of difficult access to credit and reduced foreign direct investment. But infrastructure projects partially funded by the EU are expected to spur the economy.

Individual consumption, until recently strong, is expected to grow by only 0.5 percent this year. Exports, previously a driving force behind Poland's economic growth, are projected to shrink by 11. percent this year only to increase by 0.2 percent in 2010. Imports are expected to decrease by 10.8 percent this year and 1.5 percent next year.

The European Commission's projection for Poland's debt in 2009-2010 is also pessimistic. The general government gross debt is expected to rise to 53.6 percent of GDP this year and 59.7 percent in 2010, from 47.1 percent last year. The budget deficit is forecast to increase from 3.9 percent of GDP in 2008 to 6.6 percent this year and 7.3 percent in 2010. In January, the Commission had projected 3.6 percent and 3.5 percent respectively. Joaquin Almunia, European commissioner for economic and financial affairs, has said the European Commission will initiate what is known as an excessive deficit procedure against Poland.

The finance ministry's Rostowski said that, despite the European Commission's forecast, the Polish economy still has a chance to grow by more than 1 percent this year. "We disagree with the European Commission's projection," Rostowski said. "We think it is wrong. Our forecasts are more reliable and we still expect the Polish economy to grow." Rostowski added that, unlike in other countries, Poland's industrial output increased in March, which shows that the situation has stabilized.

According to Rostowski, the European Commission's forecast for Poland was influenced by a gloomy outlook for the EU's largest economies, especially Germany, where industrial output and investment are expected to slump. But Poland is in a completely different situation, Rostowski said. "We plan a further increase in public investment this year, especially when it comes to road-building projects," he said. "Under the road construction program, spending will increase by 100 percent, and will be partly funded from EU sources. Next year will see a further increase in expenditure."

Rostowski also disagreed with the commission's projection for Poland's general government deficit. According to him, the European Commission, which put the deficit at 6.6 percent this year, based its calculations on different data than the finance ministry. "Our calculations show that, in the worst-case scenario, the deficit will reach 4.6 percent of GDP. This means it will be considerably lower than the EU average of 6 percent and the eurozone average of 5.3 percent."

Central bank chief Sławomir Skrzypek says the European Commission's forecast is too pessimistic because Poland still has a good chance of achieving a positive growth rate this year.
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