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The Warsaw Voice » Business » October 27, 2011
Business & Economy
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Budget Criticized as ‘Unrealistic’
October 27, 2011   
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The government has completed work on the country’s 2012 budget and sent the bill to the lower house of parliament for review. The government is banking on Poland’s gross domestic product growing 4 percent next year, and forecasting that average 12-month inflation will be 2.8 percent.

The government’s revenue next year is expected to reach zl.292.81 billion and expenditure has been set at zl.327.81 billion, with the resulting deficit at zl.35 billion.

The main assumptions of the budget bill are in line with targets approved by the government in May.

The prices of consumer goods and services for households and pensioners are expected to rise by 3.1 percent next year, with no increase in government-sector wages. The average gross monthly wage in the economy is projected at zl.3,624.

The target for revenue from dividends was increased to zl.4.15 billion, from zl.2.15 billion initially approved in May. The target for privatization revenue remained unchanged at zl.10 billion, against zl.15 billion planned for this year.

The public debt-to-GDP ratio is expected to shrink to 51.7 percent next year, from 53.8 percent this year. Last year the figure was 52.8 percent.

“It is assumed that, in nominal terms, public debt will increase by zl.69.1 billion in 2011 and by zl.19.8 billion in 2012,” the budget bill reads. “The debt-to-GDP ratio, after a rise to 53.8 percent in 2011, is expected to fall to 51.7 percent in 2012. The main reason for the increase in debt in nominal terms will be, as in previous years, the financing of the net borrowing requirements of the state budget by incurring liabilities in the domestic and foreign markets.”

In previous forecasts contained in the Long-Term Financial Plan of the State for 2011-2014, the Finance Ministry projected that public debt would reach 52.7 percent of the GDP this year, followed by 51.9 percent in 2012. The Finance Ministry also assumes that changes in the price of the zloty will add to zloty-denominated public debt at the end of 2011, while contributing to a reduction in it by the end of 2012.

“As in previous years, in 2012, Treasury debt will account for the vast majority (over 90 percent) of the public debt,” the government said. “After a dynamic increase in local government sector debt in the 2009-2010 period, the rate of this increase is expected to decelerate due to factors including the introduction of the mechanisms provided for in the Public Finance Act.”

Slower growth?
According to many leading Polish economists, the country’s economic growth next year will be below the 4 percent target set by the Finance Ministry.

Prof. Stanisław Gomułka, chief economist at the Business Centre Club (BCC), predicts that Poland’s GDP will grow by 3 percent next year and then a similar rate will be recorded in 2013. “The general government deficit will be brought down to 4 percent in 2012, rather than the 2.9 percent announced by the Finance Ministry, followed by about 3 percent in 2013,” Gomułka said.

According to Gomułka, a slight revision of the 2012 budget law is possible. He expects a significant reduction in public investment next year and in 2013. “This reduction will be an important part of the program for reducing the general government deficit,” he said.

Janusz Jankowiak, chief economist at the Polish Business Council (PRB), said Poland will have huge gross borrowing requirements in 2012, at close to 12 percent of the GDP. “If there is a significant slowdown in the fiscal adjustment process in Poland and if the deficit rises to 3.6-3.8 percent of the GDP in 2012 instead of 2.9 percent, this could meet with punitive measures from financial markets,” Jankowiak said.

The 4-percent economic growth target adopted by the Finance Ministry is “unrealistic”, Jankowiak said. He added that Poland’s economy will probably grow by 2.5-3 percent next year.

Maciej Krzak, head of the macroeconomic team at the Warsaw-based Center for Social and Economic Research (CASE), also expects that Poland’s economic growth next year will be around 3 percent. “In [Finance] Minister [Jacek] Rostowski’s place, I would draft another budget with a lower rate of economic growth, perhaps even excessively low,” he said. “It’s good psychology for the finance minister to be more conservative than most economists.”

Andrzej Sadowski, vice president of the Adam Smith Research Center, a Warsaw-based think-tank, said, “The targets are realistic, but on one condition—that the future government carries out fundamental changes in Poland, as profound as the change of the system in the late 1980s and early 1990s. Such radical changes are needed because, in an administratively inefficient government infrastructure and bureaucracy, in the absence of a fair and reasonable deregulation law, businesspeople will be unable to meet the requirements of the Polish government, which wants 4-percent GDP growth.”

Finance Minister Jacek Rostowski, the chief architect of the budget, commented on these views in a statement for the Polish Press Agency (PAP). “When it comes to economic growth, projections vary,” Rostowski said. “The most pessimistic forecast I know of says that economic growth next year will be 2.9 percent, but there are also several projections that growth will reach 4 percent, just as we expect. Even with 3-percent real GDP growth, revenues next year should be as we forecast in the budget. That’s why the key targets of the budget, the most important ones—the budget deficit or [government] revenue—should not be at risk, according to what we know at present.” Rostowski added that the Finance Ministry will keep track of the situation and if something changes, it will be ready for action. “For now, however, there are no strong reasons to change these projections,” he said.

Opposition unhappy
Opposition politicians have lashed out at the budget. Beata Szydło, deputy head of the Law and Justice party (PiS), said the budget bill is “unrealistic” and “detached from the present situation.”

“All major economists are saying the budget targets are simply impossible to achieve next year,” Szydło said. “This is the same document that was drafted in May, with some cosmetic changes.”

PiS leader Jarosław Kaczyński said the 2012 budget targets are “very optimistic,” but could easily prove to be unworkable. “Can this work? I hope the situation will change after the elections and people with more expertise than the current finance minister will look at the state of public finances in Poland and we’ll see if it’s realistic,” Kaczyński said.

Grzegorz Napieralski, leader of the Democratic Left Alliance (SLD), said “this budget will end up in the trash the way it happened in previous years. When I hear optimistic assumptions about inflation and GDP growth today, I know that this is pure fiction... The finance minister says one thing before the elections and another after the elections.”

Labor unions are also critical of the budget. Zbigniew Kruszyński of the Solidarity trade union told PAP that the government’s policy boils down to reducing the deficit at the expense of the poorest people. “Changes in the 2012 budget bill concerning social issues are minimal,” Kruszyński said.

The new parliament, elected on Oct. 9, has four months to complete its work on the budget.


EBRD Revises Forecasts
The European Bank for Reconstruction and Development (EBRD), which assists countries in transition, has sharply revised its economic forecasts downward, including for Poland.

The bank’s 2012 GDP growth projection for postcommunist countries was revised down in mid-October from 4.4 percent to 3.2 percent as a result of worse growth prospects for Central and Southeastern Europe. Russia and the Commonwealth of Independent States (CIS) are still expected to fare relatively well next year, with Russia’s growth rate estimated at 4.2 percent.

The main reason behind the downward revision for Central Europe is the continued debt crisis in the eurozone, the EBRD said.

The bank projects that the Polish economy will grow by 3.7 percent this year and just 2.2 percent next year. Estonia’s growth is expected to slow sharply from 7.5 percent this year to 2.6 percent next year, while Hungary’s GDP is expected to grow by a mere 0.5 percent in 2012. The biggest downward revision in the economic growth forecasts is for Slovakia. In July, the EBRD projected that the Slovak economy would grow by 4.1 percent in 2012; now the expected growth figure is a mere 1.1 percent. Alongside Hungary, Slovakia is the country most vulnerable to the crisis in the eurozone, according to the EBRD.

Slovakia’s exports to the eurozone account for 34 percent of its GDP, while the figure for Poland is only 17 percent. Additionally, Slovakia’s debt owed to other eurozone countries accounts for 34 percent of its GDP, while foreign investment from these countries accounts for 50 percent of Slovakia’s GDP.

Poland’s economy, in turn, strongly relies on domestic demand and has consequently been more resistant to the slowdown in the eurozone, according to EBRD economists. After the October elections, additional measures need to be taken in Poland to reduce the government deficit, the EBRD says. The Polish government wants to reduce the deficit to 2.9 percent of the GDP next year. Last year, the deficit stood at 7.9 percent of the GDP.
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