Poland Wins `Breathing Space' With 4-Year Fiscal Plan

Polish Prime Minister Donald Tusk won “breathing space” with a four-year fiscal plan that uses as much as 36 billion zloty ($11.9 billion) of asset sales and cash management savings to defer tax increases and spending cuts.

The plan, discussed yesterday in parliament, will bolster confidence in government finances for another year by reducing chances public debt will exceed the legal maximum of 55 percent of gross domestic product, said Marcin Mrowiec, chief economist at Bank Pekao SA in Warsaw. The European Commission forecasts Poland’s debt will rise to 53.9 percent in 2010.

“Investors see the limit as the financial stability guarantee and as long as Poland stays below it, they are inclined to tolerate political-fiscal twists and turns,” Mrowiec said. Still, Tusk’s calculations are based on accelerating economic growth and any slowdown “may seriously increase risk on financial markets.”

The government, which faces parliamentary elections next year, is struggling to narrow the budget deficit as its maturing bonds are set to rise to 103.2 billion zloty in 2011 from 32.2 billion zloty this year, according to data compiled by Bloomberg. The shortfall widened to 7.1 percent of gross domestic product last year when economic growth slowed to 1.8 percent, the lowest in almost a decade, denting revenue.

Tusk’s government, which had pledged to bring the shortfall in line with the European Union limit of 3 percent by 2012, now says meeting that goal may take another year.

The new fiscal plan will reduce debt sales and win “breathing space for public finances,” Tusk said July 30.

‘Middle Course’

The government is seeking a “middle course” to curb the deficit while avoiding budget cuts that would hurt taxpayers and infrastructure investment needed to spur economic growth, Tusk said during yesterday’s parliamentary debate.

“What we’re proposing is a kind of pact,” he said. “We will show restraint on spending, continue to invest and refrain from imposing excessive burdens on Polish families.”

The government’s plan for controlling public debt supports Poland’s credit rating, Trevor Cullinan, an analyst at Standard & Poor’s in London, said Aug. 3, after elements of the plan were leaked to local media. S&P rates the country’s debt A-, the fourth-lowest investment grade.

“The government’s multiannual framework basically fits within our expectations,” Cullinan said.

The zloty gained 0.5 percent against the euro yesterday as parliament debated Tusk’s proposals. The polish currency fell rose 0.1 percent to 3.9821 per euro as of 1:44 p.m. in Warsaw.

While the government hasn’t released its full fiscal plan, Tusk yesterday outlined proposals to accelerate state asset sales, increase the value-added tax by 1 percentage point to 23 percent and limit spending growth to 1 percentage point more than inflation.

Asset Sales

The government also plans to raise about 20 billion zloty from state asset sales next year and save as much as 16 billion zloty by using better cash management to reduce the need for debt sales to finance spending.

Government agencies keep as much as 80 billion zlotys on account at any given time, according to figures compiled by the central bank. The Finance Ministry plans to tap idle funds to borrowing, according to government proposals.

While the projected 16 billion zloty in savings aren’t “realistic,” the government may need only about 6 billion in savings because of the asset sales, said Janusz Jankowiak, an economist at the Polish Business Council in Warsaw. In addition, he estimated that this year’s deficit will be about 5 billion zloty less than planned, helping to trim borrowing needs.

In coming years, the government will need to implement spending cuts to ensure Poland’s financial health, he said.

“The most serious risk factor for Poland’s economic growth is still a lack of a credible fiscal adjustments path that would be welcomed by financial markets and politically feasible at the same time,” Jankowiak said.

Budget Deficit

The Cabinet will probably publish the final plan tomorrow, with few changes from proposals that have already be released, said Pawel Arndt, chairman of the public finance committee in the lower house of parliament.

The central government deficit will be 45 billion zloty next year, dropping to 40 billion zloty in 2012 and 30 billion zloty in 2012, Arndt said yesterday. Tusk said the 2010 shortfall will be less than the planned 52.2 billion zloty.

Investors didn’t expect “ambitious” spending cuts because the government faces local elections later this year and general elections in 2011, said Gabor Ambrus, a strategist at London- based 4Cast Ltd., which provides financial analysis for investors.

Markets will become more critical about the Polish budget when threats for the economy appear.

“With a much worse sentiment, the fiscal risk would be higher,” said Marcin Szczurek, an economist at ING Bank Slaski in Warsaw. “But this is not being indicated in the near term.”

To contact the reporter on this story: Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.net

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