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The Warsaw Voice » Business » October 14, 2009
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Budget Goes to Parliament
October 14, 2009 By Andrzej Ratajczyk   
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The government has approved the 2010 budget bill and sent it to parliament for review. Under the bill, Poland's gross domestic product is expected to grow 1.2 percent next year, up from 0.9 percent this year.

Under the bill, the government's revenue next year is expected to reach zl.248.9 billion and expenditure has been set at zl.301.1 billion. "This budget is cautious and safe from the point of view of both citizens and the levels of government debt and deficit," said Prime Minister Donald Tusk. The government projects that in 2010-2012 the debt-to-GDP ratio will be close to the 55 percent ceiling set by Polish law, without exceeding it.

According to Tusk, when drafting the 2010 budget bill, the government was mainly guided by public interest. "This budget had to offer a 100-percent guarantee to those whose livelihood and pay depend on the budget. This means a stable and secure payment of indexed old-age and disability pensions, and a guarantee of pay raises for teachers," Tusk said. "Of course, we could have drafted a dream budget, but it would have been unworkable."

Poland's 2010 budget will be among the most difficult after 1989 because of unfavorable external conditions that have an impact on the Polish economy, experts say. Both the global economy and the economies of eurozone countries are experiencing their most severe financial crisis in decades.

Hostage to eurozone?
The main risk to the GDP projection is that the recession in eurozone countries, which are Poland's main trading partners, will be longer than expected. A protracted recession could further dampen trade and investment.

Deputy Prime Minister and Economy Minister Waldemar Pawlak says that, although next year's budget will not be easy, it will promote modernization, investment and development processes in the economy. "The bill will help Poland maintain its leading position in the European Union and in the region in terms of economic growth next year," Pawlak said.

The government expects that the country's GDP will grow by 1.2 percent in 2010 and that the economy, driven mainly by domestic demand, will subsequently accelerate to 2.8 percent in 2011, 3 percent in 2012 and 3.4 percent in 2013. Additionally, the labor market should start improving in 2011. The UEFA Euro 2012 soccer tournament to be jointly hosted by Poland is expected to give a major boost to investment.

The 2010 budget bill has attracted much criticism from experts. Various economists have noted that fixed expenditures, that is those that cannot be reduced, account for an excessive proportion of the budget spending plan.

"It is a pity that the government has not made any attempt to reform budget expenditures by preparing a package of draft laws aimed at cutting them," said Stanisław Gomułka, chief economist at the Business Centre Club and former deputy finance minister.

Counting on privatization
Gomułka says he is especially worried by the budget deficit target, which he says is too high. To make things worse, Gomułka says, the government wants to finance the deficit mostly with revenue from privatization. If the privatization plans fail, the country's public finances may easily become destabilized, Gomułka said.

The Polish Chamber of Commerce (KIG) has criticized the 2010 budget bill for what it called an excessive budget deficit coupled with a failure to restructure public finances. "We are aware that the budget bill was drafted at a time of global economic crisis, but this is no excuse for the fact that the budget expenditure under the 2010 bill is zl.24.2 billion, or 8.9 percent, higher than that planned under the amended budget law for this year, said KIG head Andrzej Arendarski. "This amount is definitely too high considering that the GDP is expected to grow by only 1.2 percent."

KIG says it is also worried that subsidies for the Social Insurance Fund would rise to zl.37.9 billion next year. The government's plan to use up to zl.7.5 billion from the Demographic Reserve Fund for this purpose is especially controversial, KIG says.

According to KIG, Poland will be able to keep its economic growth rate above the EU average in 2010 and considerably reduce its budget deficit from the level planned in the budget bill only if the government cuts fixed expenditures by increasing farmers' pension contributions and curtailing excessive pension privileges enjoyed by uniformed services. The only other option would be to raise taxes, KIG says.

Experts from the Confederation of Polish Employers say the government's projection for the consumer price index (CPI) is unrealistic. Under the 2010 budget bill, CPI inflation is projected at 1 percent next year. But in August the CPI was 3.7 percent and is unlikely to go down by the end of the year, the Confederation says. If it were to fall to 1 percent next year, inflation would have to decrease sharply at the beginning of next year and stay close to zero until the end of the year.

According to some experts, the Polish economy may actually grow faster next year than assumed under the budget bill. The latest macroeconomic data show that Poland has been coping better with the crisis than other countries. The Polish economy grew 0.8 percent year on year in the first quarter, 1.1 percent in the second quarter and 1 percent in the first half of the year, according to the government's Central Statistical Office (GUS).

The relatively good performance of the Polish economy has led the European Commission and the International Monetary Fund (IMF) to upgrade their GDP projections for Poland. The European Commission, which in May predicted that the Polish economy would contract by 1.4 percent this year, is now saying that Poland's GDP will grow 1 percent. The IMF has revised upward its growth forecasts for Poland from minus 0.7 percent to 1 percent in 2009 and from 1.5 percent to 2.2 percent in 2010.
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