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The Warsaw Voice » Business » July 29, 2009
ECONOMY
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Parliament Approves Higher Budget Deficit
July 29, 2009 By Andrzej Ratajczyk   
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Deputies July 17 approved plans to massively increase this year's budget deficit from zl.18.2 billion to zl.27.2 billion as the government struggles with the effects of a crisis that has dented its tax revenues.

In the final vote, 232 deputies backed the government's revised budget; 186 voted against, and three abstained. The budget revision now goes to the upper house, which has the power to suggest changes that the lower house will have to either approve or reject by an absolute majority.

Under the amended budget, the government's revenue target is now zl.30.1 billion lower than originally planned. Taxes are expected to yield zl.46.6 billion less than previously assumed. The new budget deficit target of zl.27.2 billion is zl.9 billion higher than originally planned.

"If it weren't for the fact that Poland's economy is doing well amid the crisis, the amendment would have had to go much further," said Jacek Rostowski, Poland's finance minister. He added that the international economic crisis turned out to be far deeper than most countries expected.

Rostowski said the government's saving measures are intended "to minimize the impact [of the crisis] on households and families."

Bridging the gap
The government plans to compensate for reduced tax receipts with revenue from other sources. For example, non-tax revenue is expected to be zl.8.3 billion higher than originally planned. This includes revenue from dividends (in the case of which the target was increased by zl.5.3 billion) and income from exchange rate differentials (resulting from a weaker zloty). More than zl.8 billion will come from the European Union and "other sources." Overall, government revenue this year is expected to be zl.272.9 billion, down from the originally planned zl.303 billion.

Experts welcomed the changes to the budget, though some of the proposals got a thumbs down.

Prof. Stanisław Gomułka, chief economist at the Business Centre Club and former finance minister, said the decision to increase the budget deficit to zl.27.2 billion was an "expected and necessary" step in the current economic situation. "There is every chance that this zl.9 billion rise in the deficit will be well received by the market," he said. "It also sends a positive signal to the effect that there are no plans for raising taxes or pension premiums this year. The revenue projection seems to be realistic as long as we don't experience any further external shocks. These, unfortunately, could necessitate another amendment before the end of the year."

Gomułka added that the amendment meets the requirement of caution and conservatism in budget planning. It would be a mistake to increase spending according to the Western European model given the poor effectiveness of Poland's public finances, especially as this would mean a major increase in the deficit, Gomułka said.

The government insists that extra savings inside ministries (zl.3 billion in all) and increased revenue from dividends generated by Treasury-owned companies (zl.5.3 billion), together with the zl.9 billion increase in the deficit, will be enough to offset the zl.46.6 billion tax revenue shortage.

Gomułka says he is worried about the government's plan to reduce subsidies for the Social Insurance Fund even though the Social Insurance Institution's (ZUS) spending increased much faster than its revenue in the first six months of the year-the difference was almost 10 percentage points. Another unsettling proposal, Gomułka says, involves a drastic reduction-by zl.23.5 billion-of government financing for national road construction this year, to zl.7.8 billion. Under the amendment, the costs of public debt service will be lower than last year, even though spending on this purpose grew significantly in the first five months of this year.

'No other option'
According to the Confederation of Polish Employers, the government had no other option but to increase the deficit under the present economic situation. The move should not harm Poland's credibility on international financial markets, the organization says. "However, we are critical of the plan to finance the deficit by increasing the payment of dividends from companies controlled by the Treasury," said Andrzej Malinowski, head of the Confederation of Polish Employers.

The organization says it would be unacceptable for the government to siphon off profits generated by companies co-owned by the Treasury "though the temptation is great." Such a move would mean extra revenue for the government in the short term, but in the long term the economy would lose out, Malinowski warns. "Increased collection of dividends would in practice mean less funding for investment, and therefore also for development. Without new projects companies would find it increasingly difficult to operate," Malinowski said.

The Lewiatan Polish Confederation of Private Employers criticized the government's plan to gain an extra zl.8.2 billion from an immediate conversion of euro-denominated funds received from the EU budget into zlotys even though the money will not be spent until next year. This plan is risky, Lewiatan says, because it is based on the assumption that exchange rate fluctuations will generate that sort of revenue.
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