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Tusk Says Polish Fiscal Strategy Rejects `Radical' Tax Rise, Budget Cuts
Poland doesn’t need “radical” tax increases or cuts in benefits to reduce its budget deficit, Prime Minister Donald Tusk said today as he pledged to meet the criteria for joining the euro by 2015.
Tusk didn’t give details on spending and revenue plans, except to say value-added tax rates may rise by 1 percentage point. The Finance Ministry’s draft four-year plan caps the central government deficit at 45 billion zloty ($14.7 billion) next year, a reduction equal to 0.5 percentage points of gross domestic product, PAP newswire reported yesterday. The strategy is under discussion and will be approved Aug. 3, Tusk said.
“I realize many observers expected more radical steps,” Tusk told reporters in Warsaw. “We’re here not to inflict pain on the public but to limit it as much as possible.”
Tusk’s comments come after Hungary’s new government roiled markets by seeking to back away from budget commitments after Greece’s ballooning deficit sparked investor concern about European sovereign debt. The European Union and International Monetary Fund suspended a review of Hungary’s 20 billion-euro ($20 billion) bailout program July 17, saying the government had to make “tough decisions” on spending.
Poland is choosing a “middle-of-the-road” strategy that rejects a “drift” scenario that could trigger a debt crisis or a “radical reform” that would hurt ordinary Poles.
“We don’t need the kind of action taken by Greece or Hungary,” he said. “Poland needs time, two or three years of security, not a revolution.”
Euro Targets
The government plans to step up asset sales, including additional stakes in state-controlled lender PKO Bank Polska SA and insurer PZU SA, to reduce debt sales and win “breathing space for public finances,” Tusk said.
The global financial crisis has also taught Poland to be cautious about its euro aspirations, Tusk said. While the country plans to meet by 2015 all eligibility criteria for adopting the euro, it isn’t setting a target date, he said.
The European Commission forecasts that Poland’s general government deficit will narrow to 7 percent of GDP next year from 7.3 percent in 2010, more than double the EU limit.
The deficit may top 8 percent this year and next, Ernest Pytlarczyk, head of financial markets research at BRE Bank in Warsaw, said in a research note today. An “expansive” 2011 budget may spark concern at credit rating companies, he said.
Risk Premiums
“We think that the Finance Ministry may be proved wrong in betting” that Poland will look good when compared with “exploding deficits in Spain and Portugal,” Pytlarczyk said, As Poland’s budget figures “diverge from those in the euro area,” Pytlarczyk said, “investors may also demand higher risk premiums on Polish debt.”
The zloty rose to 4.0091 against the euro by 4 p.m. in Warsaw from 4.01 yesterday. Yields on two-year bonds rose by 5 basis points to 4.75 percent.
On July 13, the government approved a preliminary 2011 budget plan that would freeze the average wages of government workers. The plan assumes Poland’s economy will grow 3.5 percent next year and consumer prices will rise 2.3 percent.
According to the draft four-year strategy cited by PAP, existing VAT rates will be increased by one percentage point to 23 percent, 8 percent and 6 percent, while the tax on unprocessed foods will rise to 6 percent from 3 percent.
Tusk told reporters today that the VAT increase would raise 5 billion zlotys to 5.5 billion zlotys a year.
To contact the reporter on this story: David McQuaid in Warsaw at dmcquaid1@bloomberg.net
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