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The Warsaw Voice » Business » July 1, 2009
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Government Approves Budget
July 1, 2009 By Andrzej Ratajczyk   
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The Polish economy is expected to grow a modest 0.5 percent next year, under a budget bill approved by the government in June. Economists and businesspeople say the projection is conservative and cautious.

The 2010 budget is one of the most difficult since 1989, according to the Government Information Center (CIR). This is due to external conditions that have had a negative impact on Poland's economy. The global economy and euro-zone economies are experiencing their most severe financial crisis in decades. The outlook for the Polish economy is also uncertain, as shown by macroeconomic indicators recorded this year, the Government Information Center said. "In this situation, the government has decided to come up with a cautious projection, forecasting a possibly safe level of economic growth for 2010 and taking into account the adverse consequences of the financial crisis in Europe and the world," the Center said in a statement.

The recession in euro-zone countries that are Poland's main trade partners is the main risk, the center says. A prolonged recession could seriously hurt trade and investment.

1% inflation, 13.8% unemployment?
The government projects that Poland will have average annual inflation of 1 percent next year and unemployment at 13.8 percent.

According to Małgorzata Krzysztoszek, an expert with the Lewiatan Polish Confederation of Private Employers, "the government has adopted very conservative guidelines for the 2010 budget. It has taken a very conservative approach, assuming that the crisis would reach its peak next year rather than this year."

Janusz Zieliński, an expert with the Business Centre Club (BCC), said that the government's cautious approach is justified because it is impossible to accurately predict further consequences of the global financial crisis. "The 0.5-percent GDP growth rate means in fact an end to economic expansion," Zieliński said. "This will result in a rise in unemployment. The government's 13.8-percent projection for unemployment at the end of the year seems realistic. But one may doubt whether average annual inflation can be brought down to 1 percent."

Spending cuts needed
Experts note that, in view of the projected macroeconomic indicators, government revenue is unlikely to increase markedly. Instead, cuts in expenditure will be necessary, they say. The prospect of a large deficit will require new and more flexible privatization measures. Bold steps should also be taken to reform public finances and rationalize budget expenditure. But these measures should not be combined with tax increases. According to the BCC, a possible increase in excise tax and VAT should be limited, well thought out and introduced for a strictly defined period of time-for example for two years. Such a budget would not hurt public finances and would help Poland come out of the economic crisis faster, the BCC says.

Adam Ambrozik, an expert with the Confederation of Polish Employers (KPP), says the government's projection for 0.5-percent GDP growth in 2010 is based on a "pessimistic and conservative" scenario. According to him, the anti-crisis plan adopted by the government and the effective use of EU funds available to Poland may improve economic trends in the country. As a result, Poland's GDP may grow by 1-1.5 percent next year.

According to the KPP, limited access to funding may hamper economic growth next year. Data supplied to the central bank by 30 leading commercial banks with a combined 84-percent share in the country's total business-loan portfolio show that banks tightened their lending policies in the second quarter. As a result, around 50 percent of businesses have reduced their borrowing. Consequently, investment has slowed and exports are expected to decline by 10-20 percent this year.

The 2010 budget guidelines may still be revised, for example after the planned amendments to this year's budget law in July. Only then will it be possible to estimate government revenue, expenditure and budget deficit in 2010, experts say. Further changes to the budget guidelines may also be needed due to fast changes in the external environment and their adverse impact on the Polish economy.

The 2009 budget law set the GDP growth rate at 3.7 percent, even though finance ministry officials say the economy will grow a mere 0-1 percent this year.

Meanwhile, the International Monetary Fund, European Commission, the World Bank and leading investment banks project that Poland's GDP will grow by 1-2 percent next year. The latest macroeconomic data suggest that this rate of growth is feasible because Poland is coping with the crisis better than many other countries, experts say. According to the Central Statistical Office (GUS), in the first quarter Poland's GDP grew by 0.8 percent compared with the first quarter of last year. Experts say this was an excellent result because Poland, Cyprus and Greece were the only European countries that reported positive economic growth during this time.
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