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The Warsaw Voice » Business » October 1, 2010
Business & Economy
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Budget ‘Satisfactory’ But No Breakthrough
October 1, 2010   
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The Polish economy is expected to grow 3.5 percent next year, slightly faster than this year, under the government’s budget bill.

Under the budget targets, approved by the government in early September, the government’s revenue next year will be zl.273.27 billion and expenditure will be no higher than zl.313.47 billion, leaving a deficit of no more than zl.40.2 billion, against zl.52.2 billion planned for this year.

In order not to overshoot its 2011 deficit target, the government plans to increase revenue by raising value-added tax (VAT) rates. The move is supposed to generate an additional revenue of zl.5 billion. Belt-tightening in individual ministries is also planned. A special expenditure rule will be introduced whereby ministries will be allowed to raise their spending by no more than 1 percentage point above the inflation rate.

The government projects that the country’s gross domestic product (GDP) will grow by 3.5 percent in 2011, with average annual inflation at 2.3 percent and unemployment not exceeding 9.9 percent at the end of the year. The target for privatization revenue is zl.15 billion, down from zl.25 billion planned for this year. The government’s net borrowing needs are projected at zl.57.1 billion, against zl.79.1 billion this year. The average monthly wage is expected to rise by 1.4 percent in real terms. But there will be a freeze on wages in the public sector, except for pay raises for teachers.

According to central bank chief Marek Belka, the 2011 budget bill is “satisfactory,” but does not mark a breakthrough. “I did not expect more of this budget,” Belka said. “Of course, I am happy that the government has decided to reduce the deficit by several billion zlotys. I hope the revenue will be at least as high as planned by the government in the budget bill. I also hope the government will succeed in curbing the deficit next year.”

Gov’t under fire
Andrzej Ka¼mierczak of the rate-setting Monetary Policy Council criticized the budget policy makers for keeping the public finance deficit-to-GDP ratio at what he described as a high level. “As regards the decision to reduce next year’s budget deficit, it is surely a step in the right direction, but the bill as a whole can hardly be regarded as satisfactory,” Ka¼mierczak told the Polish Press Agency. “The public finance deficit-to-GDP ratio will still be high next year. It will stand at around 6 percent and will be two times higher than required by the Maastricht criteria. More radical measures should be taken to reduce this deficit. Moreover, the public debt-to-GDP ratio will be hovering slightly below 55 percent; any exchange rate fluctuation could lead to this level being breached.”

Business cautious
Business organizations have also expressed reservations about the budget bill. “The government has managed to reduce the deficit without reforming public finances,” said Ma³gorzata Starczewska-Krzysztoszek, chief economist at the Lewiatan Polish Confederation of Private Employers. “Let’s hope the government does not become complacent and does not give up comprehensive public finance reforms.”

According to Starczewska-Krzysztoszek, the 3.5-percent economic growth rate projected in the budget bill is a cautious assumption. Inflation may prove to be higher than the 2.3-percent target, she said, especially if the economy accelerates. Besides it may be difficult to bring the unemployment rate down to 9.9 percent, Starczewska-Krzysztoszek added. The assumption that the government’s 2011 revenue will increase by 9.2 percent from 2010 is too optimistic, she said. In her opinion, the plan to generate zl.15 billion in revenue from privatization could easily backfire unless privatization projects are carefully prepared and there is a welcoming atmosphere on financial markets.

“The plan to inject more than zl.9 billion into the state coffers from dividends means that the government expects that state-owned companies will have very high profitability,” Starczewska-Krzysztoszek said. “Data by the Central Statistical Office (GUS) show that the total net profit of the public sector came to zl.8 billion in the first six months of 2010. Dividend payments exceeding zl.9 billion would mean draining state-owned companies. But if everyone is supposed to contribute to help public finances and prevent the government debt from crossing the threshold of 55 percent of GDP, then this move will probably be necessary. The plan to transfer zl.1.7 billion from the profit of the National Bank of Poland (NBP) also raises doubts. The problem is not so much the size of the transfer as the very fact that, instead of reducing the debt, the NBP’s profit is treated as one of the items in planned revenue. The rule should be that receipts from the NBP’s profit are set aside for debt repayment rather than being treated as receipts for the budget which can be used to cover current expenses.”

Cause for optimism
Meeting the budget targets will depend on whether Poland manages to maintain a fast rate of growth. For the time being, the economy is doing well. Poland’s GDP growth accelerated to 3.5 percent in the second quarter of this year, from 3 percent in the first quarter, according to GUS data. Projections for the coming months are also optimistic. In its September projection, the European Commission said that Poland’s economic growth will be faster than predicted earlier, at 3.4 percent this year. The Commission expects that Germany will have the same rate of growth, an improvement that is expected to benefit all European Union countries.

The Polish economy is being driven by manufacturing and exports, which have returned to their pre-crisis levels thanks to a recovery in the global economy. A slight increase in household spending has boosted domestic demand, which, according to the Commission, proves that consumers have more confidence in the economy.

Other institutions are also confident about the Polish economy. The Morgan Stanley bank has revised upward its 2011 GDP growth projection for Poland by 1 percentage point to 4.4 percent year on year. The bank’s preliminary projection for 2012 is 3.8 percent.
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