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The Warsaw Voice » Business » August 26, 2010
Business & Economy
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Gov’t Financial Plan Under Fire
August 26, 2010   
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Economists and business associations have criticized the government’s four-year financial plan, saying it falls short of comprehensive public finance reform.

Under the four-year financial plan approved by the government at the beginning of August, from January next year Poland will have three value-added tax rates of 5 percent, 8 percent and 23 percent. The basic VAT rate, which is now 22 percent, will be raised by 1 percentage point.

“A 5-percent tax rate will be levied on staple foods like bread, flour, eggs and dairy products,” said Prime Minister Donald Tusk. “Goods which do not directly influence family living expenses will be subject to an 8-percent rate.”

According to Tusk, the new VAT rates will increase the living expenses of the average Polish household by less than zl.0.20 a day. The government estimates that its revenue from VAT will rise by anywhere from zl.5 billion to zl.5.5 billion thanks to the introduction of the new rates.

VAT at 25%?
The government plans to keep the higher rates for three years, but further increases are not ruled out. If the public debt continues to grow fast the government said it will increase the basic VAT rate by another 1 percentage point in July next year. And if the situation continues to be bad a maximum rate of 25 percent will be introduced in Poland for three years in July 2012. The remaining VAT rates will be raised to 7 percent and 10 percent.

Under the government’s financial plan, revenue from privatization is supposed to reach zl.50 billion by the end of 2013. Most of the money would come from the sale of state-owned stock in the PZU insurance company and the PKO BP bank. Meanwhile, new expenditure rules adopted by the government are expected to deliver zl.3 billion in savings. All these measures are supposed to prevent the public debt from overshooting 55 percent of the gross domestic product.

According to Tusk, no speedy reduction in the budget and government deficits should be expected. The budget deficit is expected to be brought down to 3 percent of the GDP, a level required by the European Commission, in 2013.

“The decisions we are making are designed to bring down the deficit to the Maastricht criteria level in the long term,” Tusk said. “And so in 2011 we do not expect to solve the deficit problem in a radical way.”

Under the financial plan, the budget deficit is expected to be no higher than zl.45 billion next year, zl.40 billion in 2012 and zl.30 billion in 2013.
Most economists are disappointed with the government’s plan. They say that the VAT rate increases will not solve the problem as far as Poland’s public finances are concerned.

“Compared with countries at a similar level of development, Poland has high fiscal burdens, so the government-proposed increase in VAT is not a good idea,” said Andrzej Rzońca of the interest rate-setting Monetary Policy Council.”

Leszek Balcerowicz, former finance minister and ex-central bank governor, said the government should cut spending rather than increase taxes. The state of Poland’s public finances has a detrimental impact on the country’s economic development, Balcerowicz said.

Employers are also critical of the government’s plans. They argue that public finance reform should primarily involve spending cuts rather than tax increases and that the measures proposed by the government will not solve budget problems.

Henryka Bochniarz, president of the Lewiatan Polish Confederation of Private Employers, said the government’s proposals do not represent “an ambitious financial reform” but are a case of taking “small steps.” The proposed changes only postpone the problems and are bound to have negative consequences for the country’s economic development in the medium and long term, according to Bochniarz.

Lewiatan experts say the government is not interested in carrying out a thorough public finance reform, adding that its aim is to avoid the possible consequences of the public debt exceeding 55 percent of the GDP next year. The government also wants to show financial markets that it has taken measures to curb the budget deficit in 2011 and 2012 and to reassure European Union officials in Brussels that Poland is on a path toward reducing its budget deficit to 3 percent of the GDP. The experts say the measures proposed by the government only postpone the risk of a collapse in public finances.

Employers argue that, in its efforts to reduce the public deficit, the government should focus on spending cuts rather than merely trying to increase revenue for the budget by raising taxes. Early retirement privileges for uniformed services, judges and prosecutors should be removed, according to employers, subsidies for miners’ old-age pensions should be reduced and stricter eligibility criteria for disability pensions should be introduced.

According to Lewiatan, the government should cut costs of business operations, reform the law-making process and make public administration more efficient. If the government fails to do that the economy will drift aimlessly instead of exploiting its growth potential, Lewiatan said.

'Not enough’
Other business associations agree that the government’s proposals do not go far enough to improve the country’s public finances. “In order to reduce the public deficit and bring the government debt to the level required by the EU and one that poses no threat to Poland’s stable economic growth, the government should not limit itself to merely increasing revenue for the budget by raising taxes,” reads a statement issued by an association called the Enterprise Congress. “[The government] should focus first of all on spending cuts, including the removal of retirement privileges and a reform of the disability pension system.”

The Enterprise Congress says that it is impossible to repair public finances by merely cutting spending. Such savings would not be enough to reduce the budget deficit and government debt in the coming two or three years because abolishing retirement privileges, for example, could only generate significant savings later in time. “This explains why the government should come up with a comprehensive reform plan for budget expenditure and revenue, with the VAT increase being only one of many measures undertaken to improve the country’s public finances. We expect that the government will first unveil proposals to reduce spending and cut public administration costs and only then propose measures aimed at raising revenue for the budget,” the Enterprise Congress said.
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