Related News:
Poland May Delay Meeting EU Deficit Limit, Meaning `Bad News' for Markets
Poland may delay complying with the European Union’s budget deficit limit, disappointing investors who’re counting on spending cuts, according to a draft four-year financial plan reported last night by the PAP newswire.
The Finance Ministry proposes cutting the public-finance deficit to 3 percent of gross domestic product in 2013, a year later than the government has pledged, PAP reported, citing the unofficial document. The central government deficit won’t exceed 45 billion zloty ($14.7 billion) next year, PAP said.
“A deficit of around 40 billion zloty would basically mean no change from this year, and it would be bad news for markets,” said Jaroslaw Janecki, chief economist in Warsaw at Societe Generale SA. “It won’t support the declared intentions of real fiscal tightening.”
The government will discuss the plan, which outlines the deficit, spending, revenue and borrowing targets through 2014, later today. Prime Minister Donald Tusk’s administration is struggling to close a deficit that swelled to 7.1 percent of GDP in 2009 as it prepares for local and parliamentary elections in the next year.
Hungary has roiled markets by seeking to back away from budget commitments after Greece’s ballooning deficit sparked investor concern about European sovereign debt. The EU and International Monetary Fund suspended a review of Hungary’s 20 billion-euro ($26.2 billion) bailout program July 17, saying the government had to make “tough decisions” on spending.
Spending Cuts
The zloty rose to 4.0055 against the euro by 9:05 a.m. in Warsaw from 4.01 yesterday. Yields on two-year bonds dropped by 1 basis point to 4.698 percent.
The Finance Ministry estimates next year’s revenue from state asset sales will pump 25 billion zloty into the budget. Limiting discretionary spending growth, which accounts for a quarter of expenditure, to 1 percentage point above inflation will allow savings of 17.3 billion zloty, Rzeczpospolita said today, citing unnamed government source.
Poland plans to freeze wages for government workers through 2014 and replace existing value-added tax rates with rates of 6 percent, 8 percent and 23 percent, PAP said. VAT on processed foods will drop to 6 percent from 7 percent, while the tax on unprocessed foods will rise to 6 percent from 3 percent.
“Investors would prefer to see spending cuts rather than income increases,” said Dariusz Lasek, head of debt investments at Union Investment TFI in Warsaw. “What’s important is the way the deficit is reduced because economic growth should be optimized.”
Public Debt
According to the draft plan, public debt won’t exceed 55 percent of GDP through 2014, PAP said. Anything more than 55 percent would force the government to raise taxes and cut spending to narrow the gap within two years under Poland’s public finance law.
Public debt may reach 53.9 percent of GDP this year, according to the European Commission’s spring economic forecasts released in May.
“It’s highly probable that public debt will exceed 55 percent of gross domestic product next year, so the government needs to cut the deficit to tame it,” said Maja Goettig, chief economist at Bank BPH in Warsaw. “Poland needs quick action, and in the short run only tax increases will mend finances.”
Economic Rebound
The budget picture may improve as the economy rebounds. The government forecasts GDP will expand 3.5 percent next year, after growth slowed to 1.8 percent in 2009 as the global recession curbed demand for exports. Wages will rise an average of 3.7 percent, and the unemployment rate will fall to 9.9 percent at the end of next year from 11.6 percent currently, according to government estimates.
The “budget is staggering under the burden of entitlement spending,” Goettig said. “However, due to the election calendar and opposition within the ruling coalition, we are not going to see any concrete solutions in this plan, only an outline, quite optimistic forecasts and some ad hoc measures.”
To contact the reporter on this story: Monika Rozlal in Warsaw at mrozlal@bloomberg.net
Rate These Stories
Rate this Page