Poland’s Budget May Lack Deficit Cuts for EU Deadline

Poland’s budget proposal will fail to put the European Union’s biggest eastern member on course to meet the bloc’s deficit deadline as the government avoids spending cuts before next year’s election, analysts said.

Prime Minister Donald Tusk’s cabinet will today announce a 2011 deficit target that’s little changed from this year’s, said Malgorzata Starczewska-Krzysztoszek, a member of Tusk’s Advisory Council. This year’s shortfall will be about 35 billion zloty ($10.8 billion), down from the 52.2 billion zloty first announced thanks to increased revenue, Polish daily Parkiet reported today, without saying how it obtained the figure.

The European Commission has given Poland until 2012 to meet its deficit limit of 3 percent of gross domestic product. Poland’s gap swelled to 7.1 percent last year after the global economic crisis depleted government revenue, forcing Tusk to abandon a goal of adopting the euro in 2012.

“A 3 percent deficit by 2012 seems unrealistic,” said Monika Kurtek, an economist at Bank BPH in Warsaw, in a phone interview. “Only a miracle can achieve this.”

The 2011 budget will be based on the government’s assumption of 3.5 percent economic growth in the only EU member that avoided a contraction last year. The deficit will narrow to 7 percent of GDP next year from 7.3 percent in 2010, the European Commission said May 5.

Austerity Programs

Governments across Europe are embarking on the most severe austerity programs in more than four decades to escape the region’s sovereign debt crisis. The yield on Poland’s two-year benchmark note rose to 4.79 percent, compared with 4.73 yesterday and 4.58 percent at the end of April, according to Bloomberg prices. The zloty traded at 4.075 against the euro at 3 p.m. in Warsaw, down from 4.068 late yesterday.

Next year’s general election is undermining Tusk’s commitment to spending cuts, said Marcin Mrowiec, chief economist at Bank Pekao SA.

“The election perspective will limit the introduction of reforms, and threatens to keep the fiscal deficit above 6 percent of GDP next year,” Mrowiec said.

The government won’t allow pension cuts for employees in the army or the courts, police or miners, Starczewska-Krzysztoszek said in an interview. Tusk’s administration will also block efforts to extend the retirement age for women to 65, and won’t limit farmers’ access to contribution-free pensions, he said. Farmers’ pensions cost the state 15 billion zloty annually, or more than a third of the estimated deficit.

Labor Market, Prices

The 2011 budget assumes average wage growth of 1.9 percent, with workers at companies with more than nine employees getting 4 percent, PAP newswire reported. Unemployment next year will reach 9.9 percent by December, while price growth will average 2.3 percent in 2011, PAP said.

About 70 percent of state spending is fixed by law and would require separate legislative sessions to change.

The government will introduce a rule to limit spending growth, allowing discretionary expenditures to increase no more than 1 percent above the inflation, he said.

“Poland doesn’t have a knife to its throat, so spending cuts haven’t taken the form of radical programs,” Starczewska-Krzysztoszek said. “The risk is growing, though, because factors delaying fiscal improvement are piling up -- public finances are in a difficult situation, economic growth is still relatively weak; the government is reluctant to take austerity measures to avoid political risk.”

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